ANOTHER shock central bank move, another lockstep market reaction across Wall Street and beyond.
This time it was the Bank of England’s (BoE) dramatic intervention in government bonds that took global traders by storm, underscoring how every asset remains at the mercy of monetary officials in crisis-fighting mode.
After British policy makers pledged a fresh round of debt buying to forestall a systemic crash, the S&P 500 duly surged 2% Wednesday to halt a six-day slide.
Burning bears who had sought cover from the Federal Reserve-induced rout over the past week, a Goldman Sachs Group Inc basket of the most-shorted stocks jumped 4.6%. Short traders in Treasuries were also caught out, as the 10-year yield plunged more than 20 basis points. Oil, gold and copper all spiked more than 2%, torching anyone betting that dollar strength would keep a lid on commodity gains.
Together, the combined advance of the biggest ETFs tracking US stocks, Treasuries, investment-grade bonds, high-yield credit and raw materials reached 12% Wednesday, the strongest concerted rally since April 2020.
The makings of the rebound were all there — extreme pessimism, oversold markets, and rock-bottom fund positioning. Yet the larger point remains uncomfortable to stock pickers and the like: Everyone’s a macro trader now.
“The market got the vote of confidence it needed from the BOE,” said Andrew Lekas, head of FICC trading at Old Mission Capital. “No quantitative models could have seen this coming, so a repositioning after that sort of event naturally took the S&P higher.”
Rising correlations have become the bane of bulls and bears, with big cross-asset plunges zapping would-be market timers and furious rebounds wiping out anyone betting on more pain. With volatility measures elevated and the market dominated by headlines, life is getting hard for anyone relying on bottom-up fundamentals to invest in the US stock market.
One day, it’s Federal Reserve officials threatening to sacrifice economic growth to wrest control over inflation, fueling billions of dollars in losses across equities and bonds. Another day, they’re announcing historic policy measures that ramp up in-tandem moves among S&P 500 shares and across assets.
“The main driver at the moment is inflation and central banks’ tightening monetary policy to combat inflation,” said Huw Roberts, head of analytics at Quant Insight, a London-based analytics research firm that studies the relationship between assets and macro factors.
The synchronized rally Wednesday is a stark contrast from just days ago, when a slew of central-bank tightenings around the world rattled financial markets.
The whiplash was particularly dramatic for investors in British assets. After the BOE’s rescue plan, the pound jumped more than 3% from Wednesday’s low, potentially inflicting headaches for short sellers like BlueBay Asset Management LLP who recently rode the currency’s crash to a record. Meanwhile, yields on 30-year gilt sank the most ever, burning bears two days after staging the biggest jump in history.
The unprecedented two-day volatility has the potential to spill over to other markets at a time when everything is moving in lockstep, with their unified swings turning almost exclusively on views as to whether policy tightenings will cause a global recession. Last month, a Barclays Plc measure of cross-asset correlation jumped to one of the highest levels of the past 17 years.
“UK, and by reflection US and other global yields, are likely to experience some temporary relief from upward pressure, but in the longer term they will continue to be driven by aggressive central bank rate hikes,” said Roberto Perli, head of global policy research at Piper Sandler & Co.
While the BOE’s latest move sparked a debate on the future path of its rate hikes and whether the Fed would do the same during times of financial stress, the willingness to rush to the market’s rescue is a nightmare for bears who just returned to the market after being driven almost into extinction by central bank easings in the last decade.
Money managers have slashed equity exposure to record lows amid recession fears, while their cash holdings hit all-time highs, according to Bank of America Corp.’s latest survey.
Among hedge funds, net leverage, a measure of the risk appetite that takes in account the group’s long versus short positions, sat at 38% last week, just shy of a decade-plus low of 35% reached in June, data from Morgan Stanley’s prime broker show.
The defensive positioning set the stage for a bounce like Wednesday’s. Yet for all of 2022, dip buying has proved a futile strategy, with every bounce being subsequently thwarted across bonds and stocks. In fact, a Bloomberg model tracking a portfolio of 60% stocks and 40% fixed-income securities is down 20%, heading for the worst year since the 2008 financial crisis.
“News flow has some incredible twists and turns,” said Chris Weston, head of research at Pepperstone Group Ltd. “Announcements and policy changes from the BoE and Truss government are fluid and seemingly made on the fly.” – BLOOMBERG