Inflation Wish is Wall Street’s busiest trade, but the strategy has recently fizzled out as inflation has shown signs of cooling, prompting many institutional investors to look to deleverage.
Inflation trades include long dollars, short technology stocks and US bonds. This is a consistent investment strength this year when price pressures are at a 40-year high.
For example, technology stocks are the main force that caused the US stock market to climb sharply on Tuesday.Nasdaq The 100 Index (NDX-US) climbed as much as 2.8% before trimming part of its gains following a suspected Russian missile attack in Poland and geopolitical tensions. US Treasury yields fell and the dollar slid to three-month lows.
The split-second switch between losers and winners in the trade spooked managers who had bet heavily that the Fed’s battle against inflation would continue to lift dollar and US bond yields and dampened the recent tech stocks down to 16. Some investors at low point of the year.
Perhaps the most painful are some commodity trading advisors (CTAs). Indices tracked by Société Générale showed they enjoyed double-digit returns this year on inflation themes but are now in their worst performance since March 2020.
To be fair, whether inflation has peaked is still a matter of debate, and both investors and politicians have misjudged the future price trend many times in recent years. The only certainty is that a crowded trade could be canceled at any moment and short covering among hedge funds will only exacerbate market volatility.
Andrew Beer, manager of Dynamic Beta Investment Company, said: “Inflation trading has gone from outliers to many. For commodity trading advisors, trade reversals are not a problem and crowded trade reversals are cause for concern. worry”.
As last Thursday’s CPI report had investors speculating that the central bank might reassess monetary tightening policy,S&P 500 indexIt’s up 6% so far on the day. Wall Street strategists were somewhat misunderstood by investor enthusiasm as reports showed that while price pressures had cooled, they had not materially eased.
Funds rotate rapidly
Shifts like this have happened many times in the last year, but they have all been fleeting and this time the speed at which money moves between assets is astonishing compared to previous ones.
fromDow JonesThe market-neutral Dow Jones momentum index, for example, which buys the best-performing stocks against the worst-performers, fell 1.5% on Tuesday, extending its decline to 9% over the past four days, the highest in two years.
This mutual exclusion of momentum was seen in other markets as well, with the US dollar depreciating by 2% last Thursday, the biggest drop since 2015. On the same day, the 2-year US Treasury yield fell 25 points basis, the largest decline since 2008 .
Charlie McElligott, a cross-asset strategist at Nomura Securities, described it as a “momentum shock” across assets and many traders were forced to trim their positions to stop losses.
Jared Woodard, a strategist at Bank of America, said it was unclear what the future holds for inflation trading, as price pressures could linger for several years, making a sharp turn like a shift to currency bets look unsustainable. technology stocks.
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