Fund managers at Milken eye fixed income as stocks, real estate lose luster

BEVERLY HILLS, May 2 (Reuters) – Prominent investors including hedge fund and private equity managers at a major industry conference say they are shying away from stocks and real estate amid uncertainty over interest rates, fears of a recession, and the threat of a US debt default.

Instead, fixed income, which was unpopular when rates were low, is back in favor and seeing strong capital flows into products like bond funds, said fund managers at the Milken Institute Global Conference this week.

Until now, investors made decisions on how to allocate their money based on models that looked at correlations between asset classes, statistics, returns, and volatilities over the past 20 years, said Elizabeth Burton, a managing director and client investment strategist at Goldman Sachs.

“Things are very different now,” she said.

The shift in focus has been quick and is forcing investors to move away from some assets that had been popular recently. Six months ago, real estate was seen as the “savior asset class” but that is no longer the case, Burton said.

Hedge fund and private equity fund managers plus top banking executives gathered at the conference that began Sunday with debates on how much more the Federal Reserve should raise interest rates and when rate cuts might begin.

Attendees also discussed whether federal regulators should raise FDIC deposit insurance after First Republic Bank was seized and sold to JPMorgan, and how markets will react to even higher interest rates and potentially more market volatility.

With the S&P 500 up 7.5% since January after a brutal 2022 when the index tumbled nearly 20% and bonds also fell, fund managers are hoping for more gains – though some at the conference said that smacked of rose-colored glasses.

“You get a good sense of consensus at these conferences,” said Katie Koch, president and CEO of investment firm TCW. “And I think people are still feeling a little too good. People are too happy.”

But some also worried that big companies like Microsoft (MSFT) and Apple (AAPL) which helped pull the S&P 500 index higher this year may be overvalued.

“I don’t like equities because of the uncertainty,” said Anastasia Titarchuk, chief investment officer at the New York State Common Retirement Fund.

Others warned that companies will soon have to refinance their debt at higher rates, making them less attractive.

Instead, thanks to higher interest rates, fixed income is once again playing a bigger role in portfolios.

“The Fed has helped us put the income back in fixed income,” said Anne Walsh, Chief Investment Officer for Guggenheim Partners Investment Management.

“As a result, we’re actually able to capture at least in the short run some very nice yields.”

Other investors also said secondary private equity funds that purchase assets from primary private equity investors could also become attractive as demand for liquidity rises sharply.

Some investors have not given up on equities, though they caution that portfolio selections need to be made carefully.

“Bottom-up fundamental investing, including crunching the numbers, is coming back as the risk-free rate has climbed,” said Alexander Roepers, chief investment officer of investment firm Atlantic Investment Management, referring to the interest rate investors can expect on an investment that carries zero risk.

As investors mulled what lies ahead for markets, the mood was more downbeat than in previous years – though at the conference at least, a wellness area for participants with hug-worthy puppies and massages offered some respite.

(Reporting by Svea Herbst-Bayliss, editing by Deepa Babington)

Gold advances on fresh banking jitters as Fed verdict looms

May 2 (Reuters) – Gold extended gains on Tuesday and was on track for its biggest daily rise in a month, as yields dropped on renewed fears of contagion in the US banking sector, ahead of the Federal Reserve’s widely anticipated decision to hike interest rates.

Spot gold jumped 1.5% to USD 2,012.19 per ounce by 2:00 p.m. EDT (1800 GMT) after touching its highest since April 14 at USD 2,019.37 earlier.

US gold futures settled 1.6% higher at USD 2,023.30.

“The banking concerns are back… it’s really removing that risk that the Fed was going to possibly be considering a June rate rise,” said Edward Moya, senior market analyst at OANDA.

Shares of US regional lenders plunged, while Treasury yields fell as the collapse of First Republic Bank (FRC) triggered investor concerns about the health of other mid-sized lenders. US/

Regulators seized First Republic Bank and sold its assets to JPMorgan Chase & Co (JPM) on Monday, in a deal to resolve the largest US bank failure since the 2008 financial crisis.

The Federal Open Market Committee kicked off its two-day meeting, where it is mostly expected to raise rates by 25 basis points.

Markets priced in about 15% odds of a rate cut in June, seeing no chances of another hike.

While gold is considered a hedge against economic uncertainties, rising rates hurt demand for the zero-yielding asset.

Gold has also been supported by some safe-haven demand from resurgent worries over the banking sector’s health and US debt ceiling uncertainty, Bank of China International analyst Xiao Fu said.

US President Joe Biden on Monday summoned four top congressional leaders to the White House next week after Treasury Secretary Janet Yellen warned the government could run short of cash to pay its bills by June.

Spot silver rose 1.1% to USD 25.25 per ounce, platinum gained 1.2% to USD 1,061.99, while palladium fell 1.5% to USD 1,429.47.

(Reporting by Deep Vakil and Arundhati Sarkar in Bengaluru; Editing by Shinjini Ganguli, Shailesh Kuber and Maju Samuel)

Hedge funds bet consumers will rein in US spending – Goldman Sachs

LONDON, May 2 (Reuters) – Global hedge funds’ bearish positions reached year highs in April, largely aimed at companies selling non-essential consumer products, in a bet that harsher economic times will curtail excess spending, said a Goldman Sachs note on Monday.

Hedge funds trading the stocks of US consumer discretionary companies offering flat-screen TVs and family vacations saw the largest notional net selling since October 2022, the note, released on Monday and seen by Reuters, said.

Bets on the stock prices of these companies falling outpaced bullish positions almost two-to-one, the note added.

Automobiles, software, hotels, restaurants and leisure, specialty retail, interactive media and entertainment were among the most net sold US industries, said the note.

Single US company names drew focus and short selling in North America reached a year high, Goldman said.

US consumer spending plateaued in March, a sign that Americans may have become more averse to higher prices, data released last week showed.

“The consumer will eventually hit a wall due to the toxic mix of high inflation, higher rates and high energy prices,” said Patrick Ghali, managing partner of hedge fund advisory firm Sussex Partners.

Eventually savings will dry up and consumers will have to make harsh choices. Spending might slow more quickly than anticipated so hedge fund positioning for this made sense, he said.

In Europe, stocks saw net buying by hedge funds for a fourth straight month in April, driven mainly by hedge funds buying to exit short positions in macro-economic sectors, the Goldman Sachs note said. A short position reflects investors betting on future weakness in an asset price.

Goldman added that developed markets in Asia, especially Japan, saw net buying from hedge funds.

Japanese stocks saw net buying by hedge funds for a fourth straight month and the largest level of notional net buying in two years, the note said.

Global hedge funds that focus on buying and selling stocks posted a 0.58% increase in asset weighted returns, said the note. These failed to outperform MSCI’s World Stock Index, which rose 1.36% in April.

(Reporting by Nell Mackenzie; Graphics by Stephen Culp; Editing by Alexandra Hudson)

European shares close at one-month low as oil stocks slide, Pearson plummets

May 2 (Reuters) – Europe’s STOXX 600 index closed at its lowest level in nearly a month on Tuesday at the beginning of a shortened week packed with high-profile central bank events as energy stocks slumped and Pearson led falls among media companies.

The pan-European STOXX 600 index fell 1.2%, closing at its worst level since early April.

Oil and gas shares plunged 4.5%, recording their lowest close in over one month, tracking oil prices lower on worries about a US bond default, weak economic data from China, and expectations the US and Europe will raise interest rates again this week.

BP Plc (BP) dropped 8.6%, after the company pared a share buyback plan but made a USD 5-billion profit in the first quarter of 2023.

Investors were also refraining from risk-taking ahead of the Federal Reserve’s policy decision on Wednesday, which is likely to push the US central bank’s benchmark overnight interest rate to its highest level in nearly 16 years.

“Nerves are rising about the debt ceiling standoff in the US, with the prospect that a default could shake the global economy, just as worries about further banking repercussions have been calmed for now,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Markets also keenly awaited a rate decision by the European Central Bank (ECB) on Thursday, where it is widely seen hiking by 25 basis points. Derivatives markets also see rates peaking at around 3.7% in November.

Boosting the case for a smaller interest-rate increase, data showed eurozone banks are turning off the credit taps and a key gauge of inflation is finally falling.

“The data are finally in, and they suggest the ECB can slow down the pace of tightening from 50 to 25bps. That said, this does not need to be a dovish 25bp hike,” said Davide Oneglia, senior economist at TS Lombard.

“The bigger question remains where the ECB will stop. The answer depends mostly on a mid-year US recession materializing and on the Fed response to it.”

European media stocks shed 4.2%, clocking their worst session since late January 2022 after online education firm Pearson Plc (PSON) tumbled 15.0% following US rival Chegg’s (CHGG) forecast of an unexpected decline in revenue as students begin to use ChatGPT.

HSBC Holdings Plc (HSBA) gained 3.5% on better-than-expected quarterly profit.

Logitech (LOGN) climbed 7.0% to the top of the STOXX 600 index after the computer peripherals maker reported better-than-expected quarterly results.

(Reporting by Shreyashi Sanyl in Bengaluru; Additional reporting by Shubham Batra; Editing by Varun H K, Rashmi Aich, Alexandra Hudson)

Euro zone bond yields rise ahead of inflation data

LONDON, May 2 (Reuters) – Euro zone government bond yields rose sharply on Tuesday, playing catch-up with US Treasuries as markets reopened after a holiday and traders waited for inflation data for the bloc.

US yields rose on Monday, in a sign of relief about JPMorgan’s takeover of ailing US lender First Republic and after strong economic survey data suggested the Federal Reserve might need to raise interest rates further to tame inflation.

Germany’s 10-year yield, the benchmark for the bloc, was up 6 basis points (bps) at 2.375% on Tuesday, having risen more than 10 bps early in the session. Yields move inversely to prices.

It followed a 12 bp rise in the US 10-year Treasury yield on Monday, which was last down 4 bps at 3.538% on Tuesday.

“The key point is what happened yesterday with the ISM report and the fact that potentially you have some contagion from the US situation on the Euro situation,” said Florian Ielpo, head of macro at Lombard Odier, referring to Monday’s US survey data, which showed some signs of inflationary pressures.

Global bond yields fell sharply when cracks began to show in the banking system in mid-March, yet have since rebounded somewhat as central banks have made clear that fighting inflation is a priority.

The euro zone’s latest inflation figures, for April, are due at 0900 GMT and will be a key data point ahead of the European Central Bank’s monetary policy decision on Thursday.

Lombard Odier’s Ielpo said yields could fall in the coming weeks if US and European inflation cools faster than expected and banking problems continue.

Germany’s 2-year bond yield, which is sensitive to interest rate expectations, rose 7 bps to 2.798% on Tuesday.

Italy’s 10-year bond yield was up 8 bps at 4.262%. That pushed the gap between German and Italian 10-year borrowing costs – a closely watched a gauge of investor sentiment towards the euro zone’s more indebted countries – up slightly to 188 bps.

Also on investors’ radars will be the ECB’s quarterly bank lending survey, due at 0800 GMT.

Data earlier in the day showed German retail sales fell 2.4% in March, a much worse reading than the 0.4% increase economists had expected.

France’s 10-year bond yield was up 8 bps at 2.969%.

Ratings agency Fitch cut the country’s credit rating by one notch to AA- on Friday, saying potential political deadlock and social unrest posed risks to President Emmanuel Macron’s reform agenda.

(Reporting by Harry Robertson; Editing by Kirsten Donovan)

Rouble edges lower as Russian market assesses rate outlook

May 2 (Reuters) – The rouble edged lower against the dollar on Tuesday as the Russian market reopened after a long weekend and the dust settled on the central bank’s hawkish pledge to keep rate hikes on the table after it held interest rates on Friday.

At 0715 GMT the rouble was 0.2% weaker against the dollar at 80.38 and had gained 0.2% to trade at 88.50 versus the euro. It firmed 0.3% against the yuan to 11.56.

The rouble strengthened sharply on Friday, ending two weeks of trading in a range of 81-82 against the dollar. It reached a three-week high against the dollar, euro and yuan before paring gains after the central bank held interest rates at 7.5%.

The rouble’s move was “largely the result of tight rhetoric from the Bank of Russia, which has made it clear that it intends to raise the key rate”, said Alor Broker analyst Alexei Antonov.

The next resistance level the rouble could strengthen to is 77.50 to the dollar, Antonov said.

Brent crude oil, a global benchmark for Russia’s main export, was up 0.4% at USD 79.62 a barrel.

Russian stock indexes were lower.

The dollar-denominated RTS index was down 0.2% at 1,031.9 points. The rouble-based MOEX Russian index was down 0.1% at 2,633.3 points.

(Reporting by Alexander Marrow. Editing by David Goodman)

London stocks kick off May on bright note after upbeat HSBC earnings

May 2 (Reuters) – London’s blue-chip FTSE 100 edged higher on Tuesday, boosted by a jump in shares of HSBC after the lender’s quarterly profit tripled, though overall gains were limited by weakness in energy stocks.

The internationally-focused FTSE 100 rose 0.3% by 0710 GMT, while the mid-caps index was up 0.4%.

HSBC Holdings advanced 3.8% to the top of the FTSE 100 after its first-quarter profit topped expectations as rising interest rates worldwide boosted income and helped it pay its first quarterly dividend since 2019.

BP fell 3.6% after the oil major pared back its share buyback program. The company, however, made a USD 5 billion profit in the first quarter of 2023, up from the previous three months due to strong oil and gas trading.

Superdry fell 2.7% after the struggling fashion brand said it is in “positive” talks with investors regarding an equity raise of up to 20%.

Meanwhile, British house prices showed signs of stabilisation in April, as per mortgage lender Nationwide.

(Reporting by Shristi Achar A and Amruta Khandekar in Bengaluru; Editing by Savio D’Souza)

European shares muted ahead of Fed rate decision, HSBC jumps

May 2 (Reuters) – European shares were subdued on Tuesday, as investors returned from Labor Day weekend, ahead of interest rate decisions from the US Federal Reserve and European Central Bank later in the week.

The pan-European STOXX 600 index inched up 0.1% by 0715 GMT, with bank and technology shares leading gains on the index, rising 1.2% and 0.8%, respectively.

Oil and gas shares were down 0.9%, tracking oil prices.

The Fed is expected to hike interest rates by 25 basis points on Wednesday but investors will remain focussed on whether the US central bank indicates that it expects to pause rate increases after May.

HSBC Holdings Plc jumped 3.9% on better-than-expected tripling of quarterly profit, as rising interest rates worldwide boosted the lender’s income.

Electrolux AB climbed 6.6% and was the top gainer on the index after reports of an approach from China’s Midea Group for a potential acquisition of the Swedish brand.

Meanwhile, BP Plc lost 3.0% after the company pared a share buyback plan but made a USD 5 billion profit in the first quarter of 2023, up from the previous three months.

Investors will watch the euro zone preliminary inflation figures for April, due at 0900 GMT, for more clues on ECB’s monetary tightening path.

(Reporting by Shubham Batra in Bengaluru; Editing by Varun H K)

Stocks stuck, Aussie dlr surges after RBA surprise

SINGAPORE, May 2 (Reuters) – Asian shares wobbled in cautious trade on Tuesday as investors kept their focus on US banks and a series of data releases and central bank meetings this week, which began with a surprise rate hike in Australia.

The Aussie dollar AUD=D3 shot more than 1% higher against its US counterpart and the New Zealand dollar rose 0.5% in sympathy after the Reserve Bank of Australia delivered a 25 basis point hike, defying expectations it would stay on hold.

Three-year Aussie government bond yields also jumped, while Australian stocks slipped 0.9% and investors’ attention turned on what it may signal for the United States.

“One of the things that sticks out to me is that they’re still saying they might need to increase interest rates,” said Commonwealth Bank of Australia strategist Joe Capurso.

“So as well as the increase today, that’s supporting the Aussie dollar,” he said. That could unwind, he said, as there’s a “reasonable chance” the Federal Reserve takes a similar approach at its meeting on Wednesday.

Elsewhere there were jitters at short tenors in the US Treasury market as the government’s borrowing ceiling looms, and MSCI’s broadest index of Asia-Pacific shares outside Japan was flat as concern swirls around US banks.

Mainland China markets were closed. Japan’s Nikkei hit a 16-month high, before backing off slightly, with the bank sector a drag.

The sale of First Republic Bank’s assets to JPMorgan Chase resolved the third US bank failure in two months, but leaves markets anxious about the next shoes to drop, even if the initial response has been reasonably positive.

JPMorgan shares rose 2.1% overnight and chief executive Jamie Dimon told analysts: “This part of the crisis is over.”

Debt ceiling

Much of Europe returns from May Day holidays on Tuesday, with final activity surveys due, preliminary inflation figures and a survey of European bank lending that will be closely watched given recent stresses in the sector.

European futures rose 0.2% in Asia, while S&P 500 futures were flat. Rate hikes also loom, with interest-rate futures fully pricing a 25 bp rate rise in Europe on Thursday, with a chance of a larger rise, and pricing a 95% chance for a 25 bp hike from the Federal Reserve on Wednesday.

The contrast with Japan, where on Friday the central bank left settings ultra-easy, has had the yen under heavy pressure for days and though it relented it did not abate on Tuesday.

The yen hit an almost two-month low on the dollar at 138.78 and made a 14-1/2 year low at 151.42 per euro. It’s trading at its lowest level on the Swiss franc in Refinitiv data stretching back four decades, and dropped about 1% on the surging Aussie on Tuesday.

The euro EUR=EBS held at USD 1.0987.

US credit default swaps – which reflect insurance against a default – are illiquid but hitting records as brinkmanship pushes the US government near its borrowing limit.

Overnight, Treasury Secretary Janet Yellen said the Treasury might run out of money to cover obligations as soon as June 1.

One-month Treasury bill yields jumped about 16 bps in Asia and bid-offer spreads were wide.

“The next few weeks are going to be unpredictable,” Goldman Sachs analysts said in a note,” with uncertainty over the precise deadline not helping to focus lawmakers’ minds.

“That could raise the risk that Congress does not lift the debt limit in time, which could result in missed payments but could also result in a short-term extension, in which case the exercise would repeat a few weeks or a few months later.”

(Editing by Shri Navaratnam and Sonali Paul)

Wall Street near flat after First Republic news, awaiting Fed

NEW YORK, May 1 (Reuters) – US stocks ended little changed on Monday as investors took in the weekend auction of First Republic Bank (FRC) and braced for this week’s expected interest rate hike from the Federal Reserve.

The KBW regional banking index dropped 2.7%, while shares of JPMorgan Chase & Co (JPM), which won the auction of failed lender First Republic, rose 2.1%.

JPMorgan will pay the US Federal Deposit Insurance Corp USD 10.6 billion to take control of most of the regional bank’s assets.

Investors have been on edge about the banking system’s health following the collapse of two other regional banks in March.

“Hopefully this is sort of the last of the banking crisis, but something else might surface at some point,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York.

Market watchers also digested the latest economic news, which suggested to some that the Fed may need to stick to its tightening cycle for the near term. The Institute for Supply Management (ISM) said on Monday its manufacturing PMI rose last month from March.

The Fed, which has been raising rates to cool inflation, is expected to hike rates an additional 25 basis points on Wednesday.

The Dow Jones Industrial Average fell 46.46 points, or 0.14%, to 34,051.7; the S&P 500 lost 1.61 points, or 0.04%, at 4,167.87; and the Nasdaq Composite dropped 13.99 points, or 0.11%, to 12,212.60.

Energy was down the most of the major S&P 500 sectors, falling 1.3% as crude oil prices declined.

Recent earnings, however, provided some lingering optimism for investors, Ghriskey said. First-quarter results from S&P 500 companies have mostly beaten expectations, easing economic concerns.

“We’ve had good earnings relative to expectations. Analysts for now have backed off of lowering estimates,” he said. “If we could have rates at this level … and corporate America continue to deliver, it’s very positive.”

Recent upbeat earnings from Alphabet Inc (GOOGL), Microsoft Corp (MSFT) and Meta Platforms Inc (META) helped the benchmark S&P 500 notch its second consecutive month of gains on Friday.

The S&P 500 technology index climbed 0.2% on Monday, offsetting some of the day’s weakness.

Volume on US exchanges was 10.24 billion shares, compared with the 10.37 billion average for the full session over the last 20 trading days.

Declining issues outnumbered advancers on the NYSE by a 1.36-to-1 ratio; on Nasdaq, a 1.17-to-1 ratio favored decliners.

The S&P 500 posted 35 new 52-week highs and one new low; the Nasdaq Composite recorded 88 new highs and 188 new lows.

(Additional reporting by Ankika Biswas and Sruthi Shankar in Bengaluru; Editing by Saumyadeb Chakrabarty, Shounak Dasgupta and Richard Chang)

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