Skeptical on US stocks, equity hedge funds sit out market rally

NEW YORK, Aug 16 (Reuters) – Still uncertain on where US stocks are headed, equity hedge funds are sitting out the market rally despite taking big paper losses on bearish bets since June, according to industry executives and market data.

After slumping more than 20% during the first half on worries that aggressive US Federal Reserve rate hikes to tame inflation may cause a recession, the S&P has rebounded 17% since mid-June on signs prices may be stabilizing.

However, hedge funds have remained on the sidelines of the rally to assess more economic indicators before re-calibrating their portfolios, said prime broking executives and fund managers. Prime brokerages provide services to funds and big institutional clients.

In a sign of their dim view of the market, hedge funds are sitting on a record USD 107 billion worth of net short positions – or negative market bets – in S&P 500 futures, according to BNP Paribas calculations based on regulatory data from last week.

That skepticism among sophisticated investors with USD 1.1 trillion in assets globally suggests the rally could be short-lived, according to prime brokers.

“This is probably one of the most disliked rallies in the market across all client segments,” said a prime broker at a Wall Street bank, noting funds have been selling long positions into the rally. “The first week of August was one of our largest de-risking weeks we’ve seen in the last five years.”

Stocks are rallying largely because some investors believe the Fed will pull back on tightening monetary policy sooner than previously expected, although Fed officials are not promising that.

Not all bearish hedge funds have maintained their short positions, and some recent gains have likely been fueled by investors unwinding or “covering” those bearish bets, the people said. That process involves buying back stocks the funds had borrowed to sell short.

HEDGE FUND COVERING NOT A GREAT SIGN

“There was a lot of coverage by hedge funds while the market went up,” said Kris Kwait, chief market strategist at Commonfund, an asset manager which invests in hedge funds.

Kwait said the fact that hedge fund covering appeared to be driving the rally was “not a great sign” for its sustainability.

When the rally gained steam in July, hedge fund sales of long positions and purchases to cover short positions in non-essential consumer goods stocks, for example, were among the largest in the past five years, according to Goldman Sachs data.

Max Grinacoff, US equity and derivatives strategist at BNP Paribas, said short covering continued in August and last week in particular after Wednesday Consumer Price Index data suggesting inflation may have peaked sent stocks higher.

Since June 16, short sellers have suffered unrealized losses of USD 174 billion, although they are still up USD 162 billion in unrealized gains this year, according to financial analytics firm S3 Partners. Investors covered USD 45.5 billion of their short positions, according to S3.

Short interest has risen by 13.7%, or USD 126 billion, since then, mainly driven by sectors such as information technology, healthcare, industrials and consumer discretionary, S3 said in a report on Tuesday.

Equity positioning for institutional investors as a whole has crept up in recent weeks but remains in the 15th percentile of its range since January 2010, meaning it has only been lower 15% of the time over the past 12 years, according to an Aug. 13 note by Deutsche Bank analysts.

Due to macroeconomic uncertainties, hedge funds have significantly reduced their overall risk this year. Equity long-short hedge funds’ net leverage was 48% at the end of July compared with almost 70% in January, according to a Goldman Sachs’ report.

Hedge fund portfolio managers will likely reassess their strategies next month, when liquidity is set to increase as the summer break ends and more economic data is available, two prime broker executives said.

“Investors might still be bearish on the overall outlook,” said BNP Paribas’ Grinacoff. “But to the extent they’re getting caught offside, they may need to either cover or potentially participate in the upside rally.”

(Reporting by Carolina Mandl; Additional reporting by Saqib Ahmed and Alden Bentley; Editing by Michelle Price, David Holmes and Josie Kao)

Gold eases as dollar holds ground; investors await Fed cues

Aug 16 (Reuters) – Gold edged lower on Tuesday as the dollar held close to a near three-week high, while investors awaited direction on interest rate hikes from minutes of the US Federal Reserve’s last meeting.

Spot gold fell 0.2% to USD 1,774.79 per ounce by 1730 GMT, after a more than 1% decline on Monday.

US gold futures settled down 0.5% at USD 1,789.7.

The dollar held near a three-week high hit earlier in the session.

“Gold is facing some exhaustion as the dollar continues to appreciate ahead of Fed minutes… Gold market will be very choppy until we get to the Fed meeting in September,” said Edward Moya, senior analyst with OANDA.

The minutes from last month’s Fed meeting will be published at 14:00 ET on Wednesday.

“The minutes will likely confirm the belief that aggressive rate hikes are still on the table, which could support dollar and potentially put downward pressure on gold,” Moya added.

Recently, several Fed officials highlighted the need to continue raising interest rates to fight persistent inflation. Gold is considered an inflation hedge but higher rates make the non-yielding asset less attractive.

Investors have pulled out of gold exchange-traded funds and that could be weighing on gold too, Bank of China International analyst Xiao Fu said.

However, “as the risk of recession rises, gold’s downside could be limited despite aggressive rate hikes,” Standard Chartered said in a note.

Spot silver fell 0.8% to USD 20.10 per ounce, platinum edged 0.1% higher to USD 933.72, while palladium rose 0.2% to USD 2,150.51.

Rising recession risks are more likely to weigh on platinum, the industrially biased precious metal, which in particular could remain at the lower range traded so far this year despite supply concerns in South Africa, Standard Chartered added.

(Reporting by Ashitha Shivaprasad, Arundhati Sarkar and Rahul Paswan in Bengaluru; Editing by Devika Syamnath and Shailesh Kuber)

Dollar carry trade could soon be all the rage

Aug 16 (Reuters) – Being safe the dollar is one of few carry trades that might appeal in currently uncertain times, and with the buoyancy of stock markets and quieter markets supporting risk taking and therefore interest rate plays, demand for dollar could rise.

The interest rate gap between dollar and other major currencies, which is already 2.5% percent or more, will certainly widen further versus yen if Japan’s central bank holds super easy policy, and is unlikely to close versus euro or Swiss franc this year.

Those who invest in dollars and hold that position until the end of this year receive 100 pips versus EUR and CHF or 150 vs JPY. There is FX risk associated to any carry trade but volatility for major FX pairs has dived, suggesting a quiet period ahead.

Liquidity is deep for these pairs too, so positions can be turned quickly if needed while those who enter trades during bouts of dollar weakness should see profits enhanced. One such dip has just occurred with EUR/USD snapping back towards 1.01 after rallying over 1.0300, and USD/JPY almost 135 after approaching 130.

There will likely be similar opportunities to invest in dollars but dips may become shallower if the carry trade becomes fashionable.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own.)

Investors no longer ‘apocalyptically bearish’, BofA poll says

LONDON, Aug 16 (Reuters) – Investors are still bearish but no longer “apocalyptically” so, according to Bank of America’s (BofA) monthly survey of global fund managers in August, as hopes rise inflation and interest rates shocks will end in the coming quarters.

BofA, which polled investors overseeing USD 836 billion in assets between Aug. 5-11, said on Tuesday they had cut back a net underweight position in equities to minus 26%. That was an improvement on the low of minus 44% in July, a level last seen in the 2008 global financial crisis.

But fears of economic slowdown continued to rise, with 58% of investors anticipating a global economic recession in the next 12 months, up from 47% last month and the highest since May 2020.

The share of uninvested cash in portfolios dropped to 5.7% from 6.1% in July, but remained “very high”, BofA said.

Stocks have rallied in the past two months after a brutal first half of 2022, and BofA said August saw a big rotation into U.S stocks, technology and consumer shares, while investors sold out of defensive stocks such as utilities and consumer staples, as well as UK equities.

US shares are up about 12% in the last month, but remain about 10% down year-to-date.

Recent US inflation data has been better-than-expected, leading to expectations the Federal Reserve will not hike interest rates as aggressively as investors previously anticipated.

Despite the uptick in investor sentiment, Bofa said the survey indicated its Bull/Bear indicator remained at “max bearish”.

(Reporting by Lucy Raitano; Editing by Tommy Reggiori Wilkes and Mark Potter)

German bond yields edge higher ahead of sentiment data

Aug 16 (Reuters) – German bond yields edged higher on Tuesday ahead of sentiment data that will offer further clues about how investors are assessing an expected economic downturn in the bloc.

A Reuters poll expects data due at 0900 GMT to show the economic sentiment component of the survey remained unchanged from the previous month, albeit at a very negative value, in August.

“This comes after a week where bonds struggled to rally despite a steady drumbeat of bad economic headlines, begging the question of how much bad news is in the price already,” ING analysts told clients.

German 10-year yields ended last week 3 basis points higher despite an inflation data miss in the United States which suggested price pressures may finally be abating.

Prior to the data, by 0913 GMT, Germany’s 10-year yield, the benchmark for the bloc, was up 3 bps to 0.932%, holding below two-week highs of 1.025% touched last Friday.

Italian 10-year bond yields were down around 4 basis points at 3.02%. The closely watched gap over the German bond yield was at 209 bps.

Bond markets continue to face a tussle between fears around inflation and recession, which are particularly acute in the euro zone.

Weak data out of China and the United States and concerns around gas supply disruptions in Germany have hurt investor sentiment this week.

Also in focus was a debt auction from Germany, which is targeting 4 billion euros from the re-opening of a five-year bond.

(Reporting by Yoruk Bahceli; Editing by Jan Harvey)

Stocks and oil shaky, dollar firms amid recession fears

SINGAPORE/LONDON, Aug 16 (Reuters) – Stock markets struggled for direction on Tuesday as they grappled with worries over global growth, following weak Chinese and US economic data that knocked oil prices and commodity-linked currencies.

The dollar briefly hit a one-week high as investors piled back into the safe-haven currency, while the Aussie, euro and Chinese yuan buckled.

Europe’s benchmark STOXX index edged up 0.1% to hit a 10-week high and mark a fifth straight session of gains, led by mining companies as London-listed BHP Group reported strong results.

But S&P 500 futures ESc1 and Nasdaq futures dipped, indicating a likely weaker direction for US markets when they open later.

MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.1% after gains earlier in the day. MSCI’s benchmark index has gained 5% from the year’s lows but is still down 15% this year.

Just as investors were taking heart from a four-week rally in global equities that pushed markets to their highest in more than three months, Monday’s weak Chinese activity data spanning industrial output and retail sales hit sentiment.

Also, US single-family homebuilders’ confidence and New York state factory activity fell in August to their lowest since near the beginning of the COVID-19 pandemic, a further sign the world’s largest economy is softening as the Federal Reserve raises interest rates.

The picture was mixed across Asian bourses on Tuesday, with Tokyo .N225 and Taiwan benchmarks flat, while South Korean stocks .KS11 put on 0.2%.

Chinese stocks gave up early gains as growth concerns remained after data showed economic activity and credit expansion slowed sharply in July, prompting the central bank to unexpectedly cut interest rates.

The blue-chip CSI 300 index slipped 0.2% after dipping on Monday.

DOLLAR HAVEN

Investors’ latest move to the safety of the dollar came after the raft of weak global economic indicators.

The US economy contracted in the first and second quarters, amplifying a debate over whether the country is, or will soon be, in recession.

On Tuesday, the dollar index, which measures the greenback against six major peers, rose as high as 106.62, its strongest since Aug. 8, before last trading little changed at 106.49.

The euro, the most heavily weighted currency in the dollar index, dropped to the weakest since Aug. 5 at USD 1.0147 before trading little changed at USD 1.0163.

The Australian and New Zealand dollars were put on the defensive by frail global data.

Brent crude futures fell 0.93% to USD 94.23 a barrel after slipping on Monday close to their lowest since Russia sent troops into Ukraine on Feb. 24. WTI crude futures shed 0.63% to USD 88.83 a barrel.

“Commodities prices across the board were under pressure as China’s July economic data painted a more downbeat growth picture than previously expected, which prompted renewed concerns on demand outlook,” wrote Yeap Jun Rong, market strategist from IG Group.

Spot gold dipped slightly to USD 1,777.54 per ounce as demand for the precious metal was squeezed by the stronger dollar and concerns over future rate increases by the federal reserve.

(Editing by Jacqueline Wong, Robert Birsel)

China growth woes boost dollar, weigh down Aussie

TOKYO/HONG KONG, Aug 16 (Reuters) – The safe-haven US dollar hit a one-week high on Tuesday after weak global economic data, particularly in China, reignited global recession fears and weighed on risk-friendly currencies like the Australian dollar.

The dollar index, which measures the greenback against six major peers, hit a peak of 106.81 in early European trading, regaining all its losses from last week when lower-than-expected US inflation data sent investors out of the dollar and back towards risk-friendly assets.

The index was last up 0.12% at 106.6.

“The US growth picture is still intact, but the overall global picture remains fragile, given concerns about China, and that has put a dampener on risk sentiment and hurt the Aussie and some emerging market risk currencies,” said Sim Moh Siong, currency strategist at Bank of Singapore.

China’s central bank on Monday unexpectedly cut a key interest rate to try to revive credit demand to support the COVID-hit economy after a string of weak economic data releases for July.

The Australian dollar fell 0.44% to USD 0.699 on Tuesday, dipping back below the symbolic USD 0.7 level. Australia’s close trade ties with China means its currency is sometimes treated by traders as a liquid proxy for China’s yuan.

The US dollar climbed as high as 6.84146 on the yuan traded offshore, a level last seen in mid-May.

The move back to the safety of the dollar also hurt the euro, which fell 0.18% to USD 1.0142, and sterling, which was last trading at USD 1.2026, down 0.23% on the day,

The dollar also firmed 0.3% against fellow safe-haven the Japanese yen to 113.7 yen.

The dollar index fell as low as 104.63 last week for the first time since the end of June after sliding from a two-decade high at 109.29 in mid-July, as markets pared bets for continued aggressive Fed tightening amid signs of a cooling in the economy and inflation.

However, in recent days, several Fed policymakers have spoken of the need for continued rate hikes.

“Fed officials have no choice but to sound tough in the face of a very, very tight labour market and far too high inflation,” Kit Juckes, the head of FX strategy at Societe Generale, wrote in a research note.

“It’s hard to build a compelling case to sell the dollar in that world.”

(Reporting by Kevin Buckland and Alun John; Editing by Shri Navaratnam, Simon Cameron-Moore and Jan Harvey)

Oil extends losses as weak demand outlook lingers

Aug 16 (Reuters) – Oil prices fell on Tuesday as bleak economic data from top crude buyer China renewed fears of a global recession.

Brent crude futures fell 73 cents, or 0.8%, to USD 94.37 a barrel by 0313 GMT. WTI crude futures dipped 44 cents, or 0.5%, to USD 88.97 a barrel.

Oil futures fell about 3% during the previous session.

China’s central bank cut lending rates to revive demand as the economy slowed unexpectedly in July, with factory and retail activity squeezed by Beijing’s zero-COVID policy and a property crisis.

China’s fuel product exports are expected to rebound in August to near a year high after Beijing issued more quotas, adding pressure to already-cooling refining margins.

Investors also watched talks to revive the 2015 Iran nuclear deal. More oil could enter the market if Iran and the United States accept an offer from the European Union, which would remove sanctions on Iranian oil exports, analysts said.

Iran responded to the European Union’s “final” draft text to save a 2015 nuclear deal on Monday, an EU official said, but provided no details on Iran’s response to the text. The Iranian foreign minister called on the United States to show flexibility to resolve three remaining issues.

In the United States, total output in the major US shale oil basins will rise to 9.049 million bpd in September, the highest since March 2020, the US Energy Information Administration (EIA) said in its productivity report on Monday.

Market participants awaited industry data on US crude stockpiles due later on Tuesday. Oil and gasoline stockpiles likely fell last week, while distillate inventories rose, a preliminary Reuters poll showed on Monday.

The premium for front-month WTI futures over barrels loading in six months stood at USD 3.46 a barrel on Tuesday, the lowest level in four months, suggesting easing tightness in prompt supplies.

(Reporting by Stephanie Kelly and Muyu Xu; Editing by Stephen Coates)

Gold ekes out gains on lower US Treasury yields

Aug 16 (Reuters) – Gold prices edged higher on Tuesday, supported by a dip in US bond yields, although a stronger dollar and concerns over further rate hikes by the Federal Reserve kept gains in check.

Spot gold was up 0.1% at USD 1,781.40 per ounce, as of 0241 GMT. US gold futures eased 0.1% to USD 1,796.70.

Benchmark US 10-year Treasury yields fell for a third session to 2.7788%, decreasing the opportunity cost of holding non-interest-bearing gold.

Gold prices dropped more than 1% to a one-week low on Monday, as the dollar climbed to a one-week peak on safe-haven bid after weak global economic data reignited recession fears.

“A slew of weak data from China has revived fears of a global slowdown, which sent the US dollar higher to the detriment of metals,” said Matt Simpson, a senior market analyst at City Index.

“Gold failed to attract safe-haven flows, and its break of USD 1,783 support likely triggered stops along the way. Also, Friday’s mild attempt to close above USD 1,800 was a clue that all was not well for gold at those highs.”

Data on Monday showed US single-family homebuilders’ confidence and New York state factory activity fell in August to their lowest levels since near the start of the COVID-19 pandemic.

Industrial output in China expanded at 3.8% in July from year-ago levels, slowing from a 3.9% rise in the prior month.

Adding to slowdown worries, Fed officials have maintained a hawkish tone and hinted at more rate hikes down the year to tame high inflation.

Rising US interest rates and a slowing economy could potentially lead to reduction in demand for bullion.

Investors now await minutes from the Fed’s July meeting due on Wednesday for clues on further rate hikes.

Elsewhere, spot silver slipped 0.3% to USD 20.20 per ounce, platinum fell 0.1% to USD 932.01, and palladium was up 0.1% at USD 2,148.76.

(Reporting by Brijesh Patel in Bengaluru; Editing by Subhranshu Sahu and Sherry Jacob-Phillips)

Stocks drift, oil slumps on recession fears

SINGAPORE, Aug 16 (Reuters) – Asian markets struggled for direction on Tuesday, weighed by worries over global growth following weak China data that knocked oil prices and commodity-linked currencies.

The dollar held near a one-week high as investors piled back into the safe-haven currency, while the Aussie, euro and Chinese yuan buckled.

MSCI’s broadest index of Asia-Pacific shares outside Japan ticked up 0.2%, recovering from Monday’s losses. MSCI’s benchmark index has gained 5% from the year’s lows but is still down 15% so far this year.

Just as investors were taking heart from a four-week rally in global equities that pushed markets to their highest in more than three months, Monday’s underwhelming Chinese activity data spanning industrial output and retail sales hit sentiment.

Also, US single-family homebuilders’ confidence and New York state factory activity fell in August to their lowest since near the start of the COVID-19 pandemic, a further sign the world’s largest economy is softening as the Federal Reserve raises interest rates.

“In short, the risks of a global recession are suddenly much clearer. Then again, they were ‘always’ clear to some,” Rabobank said in a note. “And does anyone think that a central-bank pivot will make them less likely at this stage?”

Overall, the picture was mixed across Asian bourses on Tuesday, with Tokyo and Taiwan benchmarks little changed, while South Korean stocks gained 0.5%.

Chinese stocks rose, a day after the central bank unexpectedly cut interest rates after data showed economic activity and credit expansion slowed sharply in July. The CSI 300 index ticked up 0.1% after dipping on Monday.

On Wall Street, major indexes climbed on Monday, reversing earlier session losses. Shares posted four straight weeks of gains amid optimism over a slowdown in US inflation that could temper the pace of Fed rate hikes.

The US economy contracted in the first and second quarters, amplifying an ongoing debate over whether the country is, or will soon be, in recession.

Growth worries were also the dominant theme in Europe.

Euro zone government bond yields fell on Monday with investors concerned about possible recession and amid persistent fears of production cuts in Germany due to potential gas rationing.

On Tuesday, the dollar index, which measures the greenback against six major peers, held steady at 106.53, just below the previous session’s peak of 106.55, the strongest since Monday of last week.

The euro, the most heavily weighted currency in the dollar index, was flat at USD 1.0158 after earlier slipping to the weakest since Aug. 5 at 1.0154.

The Australian dollar fell as low as USD 0.70005, threatening to drop below the psychological 70 cent mark for the first time since Wednesday. New Zealand’s kiwi slipped to USD 0.6349, also the lowest since Wednesday.

Fragile demand outlook hit oil prices as they extended losses from the previous session.

Brent crude futures lost 1% to USD 94 a barrel after falling to their lowest on Monday since before Russia sent troops into Ukraine on Feb. 24. WTI crude futures shed 0.7% to USD 88.80 a barrel.

(Editing by Jacqueline Wong)

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