Extreme pessimism, market oversold and minimum allocation of funds are factors in the rebound of the US stock market. Today, every investor in the market seems to be a macro trader.
Zhitong Finance APP learned that after British policy makers promised a new round of bond purchases to prevent a systematic collapse, the S&P 500 index rose 2% on Wednesday, ending a six-day decline; Goldman Sachs' basket of stocks that were shorted by the most 4.6%; traders shorting U.S. Treasury bonds were also trapped, and the 10-year U.S. bond yield plummeted by more than 20 basis points.
Oil, gold and copper all rose by more than 2%, causing those bet that the stronger dollar would curb the rise in commodities . The largest ETFs tracking U.S. stocks, U.S. Treasury bonds, investment-grade bonds, high-yield credit and raw materials combined rose by 12%, the strongest gain since April 2020.
Figure 1
Correlation rise has become a scourge for longs and shorts, with a sharp decline in cross-assets hitting potential market speculators, while a sharp rebound has left those who bet on greater pain losing all their money. As volatility indicators rise and the market is dominated by news headlines, anyone who relies on bottom-up fundamentals to invest in the U.S. stock market will be getting harder and harder.
Old Mission Capital FICC trading director Andrew Lekas said: "The market has obtained the confidence votes needed from the Bank of England. No quantitative model can foresee this situation, so adjustments after this event will naturally push up the S&P 500."
BoE's latest move triggers future rate hikes path debate
It is understood that previously, American Union officials threatened to sacrifice economic growth to control inflation, resulting in billions of dollars in losses in stocks and bonds. Then, they announced historic policy measures that will accelerate synchronous fluctuations between the S&P 500 component and various assets. Now, the simultaneous rise of stocks on Wednesday was in sharp contrast to a few days ago, when major central banks around the world tightened monetary policies, causing uneasiness to the financial market.
This blow is particularly severe for investors in UK assets. The pound rose more than 3% from Wednesday's low after the Bank of England's bailout plan, which could cause headaches for short sellers such as BlueBay Asset Management LLP. It is understood that BlueBay Asset Management has recently taken advantage of the pound to hit an all-time high. Meanwhile, the 30-year UK Treasury yield hit its biggest drop in history, which has disturbed the bears after two days of its biggest gain in history. Huw Roberts, head of analysis at Quant Insight, a London-based analytical research firm, said: "The main drivers are inflation and major central banks tighten monetary policy to combat inflation. The agency is understood to be committed to studying the relationship between assets and macro factors. With everything in line, an unprecedented two-day volatility has the potential to spread to other markets, and the consistent volatility in these markets is almost entirely determined by the market's perception of whether policy tightening will lead to a global recession. Last month, a measure of cross-asset correlation jumped to one of the highest levels in the past 17 years.
Piper Sandler Co., Roberto, head of global policy research at Piper Sandler Co., Roberto, Roberto, head of global policy research at Piper Sandler Co., last month, last year, Roberto, a measure of cross-asset correlation, jumped to one of the highest levels in the past 17 years. "UK Treasury yields may temporarily alleviate some upward pressures, according to reflections from U.S. and other global Treasury yields, but in the long run, they will continue to be driven by a sharp central bank interest rate hike. ”
Although the Bank of England’s latest move sparked a debate on its path to rate hikes in the future and whether the Federal Reserve will take the same action during the financial crisis, the desire to save the market is a nightmare for shorts who have returned to the market over the past decade as central bank moves are almost endangered.
Markets remain pessimistic about the economic outlook
Bank of America’s latest survey shows that fund managers have cut stock exposure to historical lows due to market concerns about recession, while their cash holdings have reached all-time highs.
In addition, data from Morgan Stanley major brokers show that in hedge fund , the net leverage ratio was 38% last week, slightly lower than the 35% low in more than a decade that reached in June. It is reported that the net leverage ratio is an indicator of the group's long and short positions in risk preference .
Therefore, the defensive position laid the foundation for such a rebound on Wednesday. However, buying on dips proved to be a futile strategy throughout 2022, with each rebound in bond and stocks subsequently frustrated. In fact, a Bloomberg model that tracks portfolios of 60% stocks and 40% fixed-income securities fell 20%, heading towards its worst year since the 2008 financial crisis.
Figure 2
Prestone Research Director Chris Weston, Pepperstone Group Ltd., said: "There are some incredible twists and turns in the news flow. The announcements and policy changes from the Bank of England and the Trass government are very unstable and seem to be made in a hurry."
