Analysis – Summer market shock not over as investors brace for more turmoil By Reuters

By Naomi Rovnick

LONDON (Reuters) – Big investors are bracing for this summer’s stock market rout to happen in the fall, fearing a broader sell-off will follow the turmoil caused by worries about a U.S. recession and currency speculators misled by the Bank Japan.

The sharp reversal in crowded stock and currency trading that had spawned vicious feedback loops of price declines, volatility and hedge fund selling has eased, with global stocks nearly 2 percent higher so far this week.

But asset managers overseeing hundreds of billions of dollars in investments said they were more likely to sell stocks than buy back, with signs of weakness in the U.S. labor market and global consumer trends lowering the bar for market responses.

The buy-the-dip mentality, where investors typically respond to sell-offs by making recovery bets, has been replaced by fear.

“It’s not just a big financial market crash right now, which maybe we could describe last week as. It’s broader than that,” said Mahmood Pradhan, former IMF deputy managing director and head of global macro. at the research branch of Amundi, the largest fund in Europe. manager.

He expects investors, who according to Bank of America have already trimmed equity positions and moved increasingly into cash, to remain cautious.

Michael Kelly, head of multi-assets at PineBridge Investments, which oversees about $170 billion of client funds, is among those who have trimmed his funds’ stock market positions and may pull back even more.

“It’s going to be very, very volatile over the next couple of months,” he said.

A first US interest rate cut, expected next month, could be too late to save the economy, he added.

Investors’ global growth expectations fell to eight-month lows.

WHO IS SELLING NEXT?

A weak US jobs report and a shock BOJ rate hike prompted a global stock market sell-off as volatility-linked hedge funds and trend-watchers headed for the exits and anxious investors piled into government bonds.

The BOJ’s hike destroyed billions of dollars worth of previously profitable deals in which speculators had borrowed cheap yen to buy higher-yielding assets such as US technology stocks.

About 70% of this carry trade has now been cancelled, JP Morgan estimates. But cash flows from yen-linked positions are hard to measure, and Amundi’s Pradhan said the possibility of a further rebound makes people quite risk-averse.

Gerry Fowler, head of European equity strategy at UBS, said the sell-off in hedge funds was probably over, but it often took four to six weeks for ordinary, slower-moving investment managers to adjust their portfolios.

Those fund managers could be the next to sell, said Marie de Leyssac, multi-asset portfolio manager at Edmond de Rothschild Investment Partners, but they would do so based on economic data.

While she doesn’t see a wild U.S. slowdown as likely, she doesn’t buy stocks, instead preferring put options, which insure against equity losses by paying out when markets fall.

Pension funds would further sell equity exposure and shift to fixed income, Goldman Sachs strategist Scott Rubner said in a note, adding that the second half of September was Wall’s worst period of the year Street from 1950.

TURBULENCE

Russell Investments chief investment strategist Paul Eitelman said another weak US jobs report would have the potential to trigger further volatility.

Federal Reserve Chairman Jerome Powell’s speech at the central bank’s annual conference in Jackson Hole next week and artificial intelligence giant Nvidia’s (NASDAQ: ) Aug. 28 earnings report are other market risk events.

“Volatility makes it difficult to increase exposure, even if you think it makes fundamental sense,” said Arun Sai, senior multi-asset strategist at Pictet Asset Management.

Money managers’ risk mandates tend to prevent them from buying stocks when prices fluctuate widely.

Wall Street’s measure of expected volatility and its European equivalent hit multi-year highs last week before easing, but a related index continues to send warning signals.

The VVIX, another options market indicator that rises when traders expect the VIX itself to be turbulent, is trading above the 100 mark, suggesting that the market’s wild ride is not yet over.

“Until you see VVIX go below 100, you should have it on your radar. It’s the key value right now,” said Stuart Kaiser, Citi’s Head of Equity Trading Strategy.