Fed is first among equals for King Dollar’s subjects

Aug 4 (Reuters) – While a myriad of factors will impact the US dollar through year-end, the most important will be monetary policy decisions from the Federal Reserve — with the more hawkish its policy the better for the currency.

The next Fed policy announcement is on Sept. 21, when money markets currently price a 46% chance of a third consecutive 75 basis point interest rate hike.

If the Fed raises rates by 75 bps next month, and looks set to keep on hiking in the fourth quarter, it could propel the USD index through last month’s 20-year high of 109.29 (July 14).

Any such move would hearten the 40 out of 56 currency strategists polled by Reuters between Aug. 1-3 who said the dollar’s strength has not yet peaked.

IMM speculators held a net USD long position of USD 18.46 billion in the week ended July 26, just before the Fed raised rates by 75 bps for the second consecutive meeting (IMM speculators have been net USD long since July 2021).

(Robert Howard is a Reuters market analyst. The views expressed are his own)

Foreigners turn sellers of Chinese shares in July on COVID worries

Aug 4 (Reuters) – Overseas investors turned net sellers of Chinese stocks in July, as mainland stock prices tumbled on concerns that COVID-19 flare-ups and ensuing lockdowns would further disrupt economic activity.

Refinitiv data showed foreigners sold a net 21.07 billion yuan ($3.12 billion) worth of mainland shares in July via Stock Connect, a key cross-border link between the mainland and Hong Kong exchanges.

They sold a net 11.8 billion yuan worth of shares in the Shanghai stock exchange, and 9.27 billion in the Shenzhen stock exchange.

Foreigners had bought a cumulative 95.45 billion yuan in the previous three months, according to the data.

China’s factory activity contracted unexpectedly in July, due to the fresh emergence of coronavirus cases, with its official manufacturing manager’s index falling to 49 from a reading of 50.2 in June. A reading below 50 is considered as a contraction.

Also, a threat by Chinese home buyers to halt mortgage payments until developers resume construction of pre-sold homes deepened concerns about the debt-stricken property sector last month, raising fears banks could face hefty writedowns.

The benchmark CSI300 Index dropped 7% last month.

Winnie Wu, China equity strategist at BofA Securities, said renewed fears of Chinese ADRs delisting and heightened geopolitical tensions also affected money flows in July.

Foreigners have dumped about 962 million yuan worth of China-listed shares so far this month, as tensions between Washington and Beijing escalated on news U.S. House of Representatives Speaker Nancy Pelosi was set to visit Taiwan.

However, Herald van der Linde, head of HSBC’s Asia Pacific equity strategy, said he had an overweight rating on Chinese equities.

“Beijing has shifted its policy tone from de-risking to being pro-growth, and policies like setting up the real estate fund should substantially reverse the investor gloom,” he said.

“In addition, foreign institutional investors are generally underweight Chinese equities, so if there are improvements, they have plenty of room to add to their positions in this market.”

Meanwhile, Chinese investors purchased about $405 million worth of Hong Kong shares via Stock Connect in July, which was their smallest net buying since November.

(Reporting By Patturaja Murugaboopathy, Gaurav Dogra in Bengaluru; Editing by Vidya Ranganathan and Kim Coghill)

OPEC+’s tiny boost to oil output may show its waning influence: Russell

LAUNCESTON, Australia, Aug 4 (Reuters) – The almost inconsequential increase in oil output announced by the OPEC+ group has highlighted an emerging dynamic in global crude markets, namely that the producer group is no longer in the driving seat.

Since OPEC+ was formed in 2017 the market has hung on its every word and analyzed every move with great detail, and oil prices have largely moved in tandem.

But by increasing production by a tiny 100,000 barrels per day for September, the group, which consists of the Organization of the Petroleum Exporting Countries (OPEC) and key allies including Russia, runs the risk of diminishing its relevance.

OPEC+ is facing two problems.

The first is that the market is increasingly focused on the related issues of declining demand amid a global economic slowdown, while still trying to assess the full impact of the loss of Russian crude and product exports, especially to former top buyer Europe.

The second is that the group is struggling to produce as much oil as it says it will, which has the impact of leading market watchers to look more at what OPEC+ actually does, rather than what it says it’s going to do.

The 10 members of the OPEC part of the wider group that have quotas produced 24.98 million bpd in July, up slightly from June’s 24.74 million, according to a Reuters survey.

While the small increase may seem to indicate the OPEC 10 are meeting their commitment to pump more oil, the actual target for them under the OPEC+ agreement was 26.276 million bpd.

This means the 10 OPEC members with quotas were under-producing by 1.7 million bpd.

It doesn’t take much imagination to work out that crude prices would be substantially lower than what they currently are if the OPEC members were actually meeting output targets.

But the market is no longer focusing on shortfalls in production from both the OPEC 10 and the wider OPEC+ group.

PRICE ACTION

This was starkly illustrated by the reaction of global benchmark Brent crude futures to the miniscule OPEC+ boost to September’s planned output.

The front-month contract fell its lowest since Feb. 23, the day before Russia invaded Ukraine, ending Wednesday’s session at USD 96.78 a barrel, down 3.7% on the prior day’s close.

US West Texas Intermediate futures also dropped to the lowest since February, ending at USD 90.66 a barrel, down 4% from the previous day, as the market focused on a surprise build in US crude and gasoline inventories.

The increase in US stockpiles is among indicators suggesting that crude demand is softening amid the spike in prices caused by Russia’s attack on Ukraine and the subsequent impact on global economic growth.

It may be more important to the market now to look at factors such as the ongoing, but tapering, release of US strategic inventories, as well as demand figures across the globe.

Asia, the top-importing region, is showing mixed signs when it comes to crude demand, with Refinitiv Oil Research forecasting July imports at 24.57 million bpd.

While this is up from June’s 8-month low of 23.83 million bpd, it’s below May’s 26.73 million bpd and is in line with the average of imports for the first half.

China, the world’s biggest crude buyer, is still a soft spot, with July imports expected at 8.42 million bpd, down from June’s 8.75 million bpd, which was a 49-month low, according to Refinitiv data.

There is some optimism that China’s imports will pick up over the rest of 2022, but this will be dependent on Beijing’s success in stimulating the world’s second-biggest economy as it emerges from a series of COVID-19 lockdowns.

India, the world’s third-biggest crude importer, is also forecast to see slightly weaker arrivals in July, with Refinitiv estimating 4.63 million bpd, down from June’s 4.69 million bpd.

Overall, the market dynamic seems to be tilting toward demand concerns outweighing supply issues.

This doesn’t render OPEC+ irrelevant, but it does lessen the influence the group will have in influencing prices, at least for now.

(Editing by Kim Coghill)

Oil prices edge up on supply concerns after drop to near 6-month low

Aug 4 (Reuters) – Oil prices rose on Thursday as supply concerns triggered a rebound from multi-month lows plumbed in the previous session after U.S. data signalled weak fuel demand.

Brent crude futures rose 10 cents, or 0.1%, at $96.88 a barrel at 0653 GMT, while West Texas Intermediate (WTI) crude futures was last up 21 cents, a 0.2% gain, at $90.87.

Both benchmarks fell to their weakest levels since February in the previous session after U.S. data showed crude and gasoline stockpiles unexpectedly surged last week and as OPEC+ agreed to raise its oil output target by 100,000 barrels per day (bpd), equal to about 0.1% of global oil demand.

The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, known as OPEC+, have been previously increasing production but have struggled to meet targets as most members have already exhausted their output potential.

“OPEC+ agreed to increase production by 100,000 barrels per day in September, far lower than previous months’ production. The global energy market still faces supply shortages,” said Leon Li, an analyst at CMC Markets.

He added that WTI oil prices are “likely to oscillate” between $90 and $100 a barrel.

While the United States has asked the group to boost output, spare capacity is limited and Saudi Arabia may be reluctant to beef up production at the expense of Russia, hit by sanctions over the Ukraine invasion that Moscow calls “a special operation”.

Ahead of the meeting, OPEC+ had trimmed its forecast for the oil market surplus this year by 200,000 barrels per day (bpd) to 800,000 bpd, three delegates told Reuters.

“It looks like OPEC+ is resisting calls to boost output because the crude demand outlook continues to get slashed. The world is battling the ongoing global energy crisis and it won’t be getting any help from OPEC+,” Edward Moya, senior analyst with OANDA, said in a note.

“The oil market will remain tight over the short term and that means we should still have limited downside here. Crude prices should find strong support around the $90 level and eventually will rebound towards the $100 barrel level even as the global economic slowdown accelerates.”

Oil’s demand outlook remains clouded by rising fears of an economic slump in the United States and Europe, debt distress in emerging market economies, and a strict zero COVID-19 policy in China, the world’s largest oil importer.

U.S. crude oil inventories had also rose unexpectedly last week as exports fell and refiners lowered runs, while gasoline stocks also posted a surprise build as demand slowed, the Energy Information Administration said.

Supporting prices on Thursday, however, the Caspian Pipeline Consortium (CPC), which connects Kazakh oil fields with the Russian Black Sea port of Novorossiisk, said that supplies were significantly down, without providing figures.

(Reporting by Laura Sanicola and Emily Chow; Editing by Kenneth Maxwell)

Gold climbs as yields retreat with US jobs report in focus

Aug 4 (Reuters) – Gold prices edged higher on Thursday, supported by a pullback in the US Treasury yields, while cautious investors awaited key US non-farm payrolls report due this week for more cues on the Federal Reserve’s rate-hike stance.

Spot gold was up 0.3% to USD 1,769.74 per ounce, as of 0628 GMT. US gold futures rose 0.5% to USD 1,785.60.

Benchmark US 10-year Treasury yields slipped from their highest levels in more than one week, reducing the opportunity cost of holding non-interest-bearing gold.

“Most of the investors are on the sidelines because there are tensions brewing between US and China, so people are not sure what is going to happen,” said Brian Lan, managing director at dealer GoldSilver Central.

“Furthermore, there is also another area that people are thinking that if interest rates are going up, probably holding the dollar might make more sense than holding gold. So I expect gold prices to be range-bound in the near term.”

Limiting gold’s advance, the dollar =USD hovered near its highest this week after hawkish comments from Fed officials.

US central bank officials voiced their determination to rein in high inflation, although one noted a half-percentage-point hike in its key interest rate next month might be enough to march towards that goal.

Rising US interest rates dull non-yielding gold’s appeal.

After a couple of strong economic readings this week, focus now shifts to US jobs data due on Friday that could offer more clarity on Fed’s aggressive tightening to fight stubborn inflation.

Indicative of sentiment, holdings of SPDR Gold Trust GLD, the world’s largest gold-backed exchange-traded fund, fell to their lowest since mid-Jan at 1,000.65 tonnes on Wednesday.

Meanwhile, US House of Representatives Speaker Nancy Pelosi left Taiwan on Wednesday, adding that Chinese anger cannot stop world leaders from traveling to the self-ruled island claimed by Beijing.

Spot silver dipped 0.1% to USD 20.02 per ounce, platinum fell 0.2% to USD 896.14, and palladium was 0.3% higher at USD 2,022.55.

(Reporting by Brijesh Patel and Eileen Soreng in Bengaluru; Editing by Rashmi Aich and Sherry Jacob-Phillips)

Dollar climbs as Fed officials suggest more rate hikes to come

HONG KONG, Aug 4 (Reuters) – The dollar was on the front foot on Thursday, helped by several US Federal Reserve officials pushing back against suggestions they will slow the pace of interest rate hikes, while the pound was flat ahead of a Bank of England meeting.

The dollar index, which measures the greenback against six peers, was steady in early trade at 106.39 having eked out small gains overnight. It is up around 0.5% this week, reversing the trend of the previous two weeks.

“The dollar weakened last week after the (policy setting) Federal Open Market Committee meeting because the market wanted to believe that the Fed was pivoting in a dovish manner because of slowing growth,” said Sim Moh Siong, currency strategist at Bank of Singapore.

“This week, there are a lot more FOMC speakers pushing back against this idea, all singing the same tune: ‘we are not done, and you should expect more rate hikes’,” he added .

San Francisco Fed President Mary Daly and Minneapolis Fed President Neel Kashkari overnight voiced their determination to rein in high inflation, reiterating similar messages from other officials the day before.

A Reuters poll of analysts earlier this week found 70% thought the dollar was yet to peak in this cycle, even after the dollar index hit a two-decade peak in July.

According to CME’s FedWatch tool, the market is pricing in a 58% chance of a 50 basis point rate hike at the Fed’s September meeting, and a 42% chance of a another massive 75 basis point increase.

However Sim said the dollar’s recent performance was a mixed picture as the improved risk sentiment, which has also helped equity prices in the US has been supporting risk friendlier currencies.

The Australian dollar was at USD 0.695 on Thursday morning after gaining 0.46% the day before, trying to head back above the symbolic USD 0.7 level it fell from earlier in the week after seemingly dovish remarks from the central bank.

Also in central bank news, Sterling was little changed at USD 1.2158 ahead of a BOE meeting later in the day at which most investors expect the central bank will raise rate by 50 basis points to 1.75%, the highest level since late 2008.

The decision is due at 1100 GMT.

The euro was flat at USD 1.01635 and the Japanese yen, which has borne the brunt of this week’s dollar gains, recovered a little to 133.54 per dollar.

Bitcoin was up a touch at USD 23,000.

(Reporting by Alun John; Editing bt Sam Holmes)

Nasdaq ends at three-month high as PayPal fuels optimism

Aug 3 (Reuters) – Wall Street ended sharply higher on Wednesday, with strong profit forecasts from PayPal and CVS Health Corp lifting sentiment and helping elevate the Nasdaq to its highest level since early May.

Data showed the US services industry unexpectedly picked up in July amid strong order growth, while supply bottlenecks and price pressures eased. That supported views that the economy was not in recession despite output slumping in the first half of the year.

A fresh batch of strong results from companies including PayPal (PYPL) and CVS Health Corp. (CVS) boosted sentiment in a largely upbeat quarterly reporting season. Reports exceeding low expectations have helped Wall Street rebound from losses caused by worries about decades-high inflation, rising interest rates and shrinking economic output.

“We’re going through Q2 earnings and, by and large, from the tech complex to consumer discretionary and industrials, we’re seeing a lot of better-than-feared prints, and that’s just good enough right now,” said Sahak Manuelian, managing director of trading at Wedbush Securities in Los Angeles.

Apple (AAPL) and Amazon (AMZN) rallied almost 4%, while Facebook-owner Meta Platforms (META) jumped 5.4%.

PayPal soared almost 10% after it raised its annual profit guidance and said activist investor Elliott Management had an over USD 2 billion stake in the financial technology firm.

CVS Health gained 6.3% after the largest US pharmacy chain raised its annual profit forecast after posting strong quarterly results.

Manuelian said an additional factor behind Wednesday’s stock rally was growing confidence among investors that the Fed has already carried out the bulk of the interest rate hikes that will be necessary to bring inflation under control.

Meanwhile, Richmond Federal Reserve President Thomas Barkin on Wednesday joined policymakers saying that the US central bank is committed to getting inflation under control and returning it to its 2% target.

The S&P 500 climbed 1.56% to end the session at 4,155.12 points.

The Nasdaq gained 2.59% to 12,668.16 points, while Dow Jones Industrial Average rose 1.29% to 32,812.50 points.

Additional data on Wednesday showed new orders for US-manufactured goods increased solidly in June and business spending on equipment was stronger than initially thought, pointing to underlying strength in manufacturing despite rising interest rates.

The most traded stock in the S&P 500 was Tesla (TSLA), with USD 24.3 billion worth of shares exchanged during the session. Its shares rose 2.27%.

Of the 11 S&P 500 sector indexes, 10 rose, led by information technology, up 2.69%, followed by a 2.52% gain in consumer discretionary.

The S&P 500 has rebounded about 13% from its closing low in mid-June and would have to climb another 15% to get back to its record high close in early January.

Moderna Inc. (MRNA) surged about 16% after the vaccine maker announced a USD 3 billion share buyback plan.

Regeneron Pharmaceuticals (REGN) climbed 5.9% after it beat quarterly revenue estimates, while coffee chain Starbucks Corp. (SBUX) rose over 4% after it reported upbeat quarterly profits.

Advancing issues outnumbered falling ones within the S&P 500 by a 3.7-to-1 ratio. The S&P 500 posted two new highs and 30 new lows; the Nasdaq recorded 51 new highs and 37 new lows.

Volume on US exchanges was relatively heavy, with 11.7 billion shares traded, compared to an average of 10.7 billion shares over the previous 20 sessions.

(Reporting by Aniruddha Ghosh and Devik Jain in Bengaluru and by Noel Randewich in Oakland, Calif; Editing by Sriraj Kalluvila, Arun Koyyur and Cynthia Osterman)

Some investors doubt summer surge in corporate bonds will last

NEW YORK, Aug 3 (Reuters) – A roaring rebound in US corporate bonds is being met with skepticism by some investors, who believe the gains may be short-lived as recession fears dampen the outlook for the USD 10 trillion market.

Hopes that the Federal Reserve will be less aggressive than previously anticipated in its fight against inflation helped drive a powerful rebound across markets in recent weeks, fueling big gains in many of the assets that had suffered during a sell off in the first half of 2022.

Corporate bonds were no exception. Total returns in dollar-denominated junk bonds as measured by the ICE BofA US High Yield Index for July were the highest since 2009, while those for investment grade debt were the highest since November 2020.

Some investors believe the rally could falter if it becomes clearer that the Fed’s series of jumbo-sized rate hikes are slowing economic growth. Others worry that the Fed’s reduction of its balance sheet, known as quantitative tightening, could present another obstacle for credit in weeks ahead.

“I don’t think we’re out of the woods, but we’re not as deep in the woods as we were a few months ago,” said Eric Theoret, global macro strategist at Manulife Investment Management.

Theoret believes credit will likely weaken again as evidence of a slowing economy mounts, albeit not beyond lows it had seen earlier in the year.

Some Fed officials in recent days have pushed back on the idea that the central bank was on the cusp of a dovish pivot, a narrative that helped accelerate gains in asset prices after its monetary policy meeting last week.

More evidence on whether the 225 basis points in economic tightening the Fed has already delivered is slowing growth is on the way, as investors await US jobs data on Friday and inflation numbers next week. Signs that the economy continues to run hot could bolster the case for more hawkish monetary policy and send bond yields higher, weighing on prices.

Analysts at Barclays expect credit spreads to widen to “recession levels” of 200-210 basis points for investment-grade and 850-900 basis points for high-yield debt. Those spreads, which show how much investors are willing to pay for riskier bonds over Treasuries, are currently at around 150 and 460 basis points, respectively.

“Financing conditions are tightening quickly both in the US and globally, and economic growth is well below trend. This is usually challenging for companies and credit spreads. We do not believe this time will be different,” they wrote.

LIQUIDITY WITHDRAWAL

Even with last month’s rally, investment grade bonds have notched a total return of -12% year-to-date while high yield bonds have returned -9%, putting both on track for their worst year since 2008, Refinitiv data showed.

US investment-grade and high-yield bond funds experienced inflows of roughly USD 9 billion and USD 4 billion in July, respectively, a month that included deals such as a USD 10 billion offering by Bank of America and a USD 7 billion one by JPMorgan. The category has notched USD 67 billion in outflows this year, according to fund flow data from EPFR.

High yield bonds, less sensitive to shifts in interest rates, have attracted around USD 14 billion year-to-date. Appetite for riskier credit tends to dry up when investors sense an economic slowdown approaching.

Some investors also worry that the Fed’s reduction of its USD 9 trillion balance sheet, which it kicked off last month as part of its efforts to cool the economy, could adversely affect credit markets. The Fed has embarked on quantitative tightening once before, in 2017, and investors have speculated on how the process could affect asset prices this time around.

Matt Miskin, co-chief investment strategist from John Hancock Investment Management, said that investors may shy away from riskier assets such as corporate bonds as the Fed’s balance sheet reduction helps tighten financial conditions and contributes to lower market liquidity.

Greg Zappin, portfolio manager at Penn Mutual Asset Management, said QT was one of the factors leading him to a risk-averse position in his portfolio.

“It’s a very relevant factor, it’s only the second time we’ve experienced it and it’s happening in a different kind of economic backdrop,” Zappin said.

(Reporting by Davide Barbuscia; Editing by Ira Iosebashvili and Will Dunham)

Gold range-bound as dollar, T-bond yields pick up steam

Aug 3 (Reuters) – Gold prices traded in a tight range on Wednesday, pressured by a stronger dollar and Treasury yields as hawkish comments from US Federal Reserve officials pulled the metal further away from last session’s one-month peak.

Spot gold rose 0.1% to USD 1,761.76 per ounce by 2:37 p.m. ET (1837 GMT), seesawing in a roughly USD 20 range, while US gold futures fell 0.7% to USD 1,776.4.

The dollar index rose 0.2%, making dollar-priced gold more expensive for other currency holders. US 10-year Treasury yields also jumped to their highest in nearly two weeks.

“Some Fed speakers have repeated an aggressive stance, which is keeping inflow (in gold) limited,” Edward Moya, senior analyst with OANDA, said. “However, global recessionary fears are to put an end to these aggressive rate hikes, so gold should maintain a bullish trend”.

San Francisco Fed President Mary Daly said on Wednesday raising interest rates by 50 basis points next month would be reasonable, if the economy evolves as expected.

A high interest rate environment makes bullion less appealing as it yields no interest.

Worsening ties between Washington and Beijing over US House of Representatives Speaker Nancy Pelosi’s visit to Taiwan had pushed gold to its highest since July 5 on Tuesday at USD 1,787.79.

Gold is considered a safe investment amid geo-political and economic uncertainties.

Investors await US jobs data due on Friday.

“Friday’s employment figures are likely to offer more clarity on what the path of the Fed’s tightening is likely to be, with an upside surprise likely to reinforce expectations of a more hawkish central bank and therefore weigh down on gold,” said Ricardo Evangelista, senior analyst at ActivTrades.

Spot silver rose 0.2% to USD 20.00 per ounce, platinum XPT= was up 0.5% to USD 898.21, while palladium fell 1.8% to USD 2,024.73.

Analysts have sharply lowered their price forecasts for platinum and palladium as the global economic slowdown reduces demand, a Reuters poll showed.

(Reporting by Ashitha Shivaprasad, Arundhati Sarkar and Swati Verma in Bengaluru; Editing by David Holmes and Krishna Chandra Eluri)

Wall Street’s ‘fear gauge’ in limbo as big investors keep shunning stocks

NEW YORK, Aug 3 (Reuters) – Wall Street’s most closely watched gauge of market anxiety shows expectations of choppy trading ahead despite a recent snapback in US stocks, though institutional investors’ low exposure to equities may help curb gyrations.

The Cboe Volatility Index, an options-based indicator that reflects demand for protection against drops in the stock market, recently stood at 23, following a sharp rally in stocks that has taken the S&P 500 index up 12% from its mid-June low on expectations that the Federal Reserve may be less hawkish than anticipated in its fight against inflation.

VIX readings above 20 are generally associated with an elevated sense of investor anxiety about the near-term outlook for stocks, while readings north of 30 or 35 point to acute fear.

The VIX is well above its long-term median of 17.7, signaling continued unease about the longer-term outlook for stocks. Still, it is down from its year high of almost 40 and has oscillated between 20 and 30 for six weeks, its longest time within that 10-point range in a year-and-a-half.

Meanwhile, the VVIX index – a gauge of expected swings in the fear index, slumped to a three-year low earlier this week, signaling investors do not expect sharp swings in either direction from the VIX.

“There is just less of a concern of an outlier kind of move in the market,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.

The lowered expectations for extreme volatility come as investors assess whether stocks can sustain a rally in which the S&P 500 in July notched its best one-month percentage gain since November 2020. The July rally followed stocks’ worst first half of the year since 1970.

San Francisco Fed President Mary Daly on Tuesday pushed back on expectations of a so-called dovish pivot from the Fed, saying that the central bank’s fight against inflation was “nowhere near” done, and data on US employment on Friday and consumer prices next week could bolster the case for Fed hawkishness.

Meanwhile, several Wall Street banks have cast a skeptical eye on the recent rebound in stocks and warned of more downside ahead.

“We view this as a bear market rally,” wrote Savita Subramanian, equity and quant strategist at BofA Global Research in a report, noting that such rebounds have occurred an average of 1.5 times per bear market since 1929. The bank has a year-end target of 3,600 on the S&P 500, about 14% below current levels.

LOW EXPOSURE

One factor that could help dampen market volatility in coming months is limited exposure to stocks among institutional investors, who earlier this year raced to cut their stock allocations as the Fed ramped up expectations that it will fight inflation with market-bruising interest rate hikes.

Despite the recent bounce, big investors’ exposure to stocks remains low. Equity positioning for both discretionary and systematic investors remains in the 12th percentile of its range since January 2010, according to a July 29 note by Deutsche Bank analysts.

“Institutional positioning in equities is at the low end of its historical range,” said Anand Omprakash, head of derivatives and quantitative strategy at Elevation Securities. “You have a situation where the catalyst for an explosive equity crash is not as prevalent as it might have been in the past.”

Lighter positioning means investors are not exhibiting the same rush to load up on options insurance against a downside move in stocks, a factor that can moderate the VIX’s rise even if stocks come in for another bout of weakness.

The 10-day average daily trading volume in VIX options has slipped to about 360,000 contracts, the lowest since early January, according to a Reuters analysis.

Lighter allocations to equities may also take the edge off potential selloffs, said Max Grinacoff, US equity derivatives strategist at BNP Paribas. His firm has a year-end target of 4,400 on the S&P 500 – some 7% above current levels.

“Because of how clean positioning has become through the year … you are not having the impact from everyone running for the exit at once,” he said.

(Reporting by Saqib Iqbal Ahmed in New York; Editing by Ira Iosebashvili and Matthew Lewis)

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