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On Friday, the American stock exchanges ended with a marked boost, with heavy tech shares pulling up both Nasdaq’s indices and the broad S&P 500 index.
The fact that investors’ willingness to invest has become so widespread – so quickly – surprises many.
As recently as Wednesday evening, Fed chief Jerome Powell was clear that there is still some way to go until the inflation target of two percent is reached. The signals from the previous interest rate meeting have already been forgotten, and as long as he does not now state that a new interest rate hike is very likely, capital will be set in motion in the risky capital classes.
And with Friday’s signals that price inflation in the US was at its lowest in two years, investors didn’t need long to think before buying shares around Baut. And especially the large tech stocks. The desire to buy was underpinned by reports from the labor market, where a cooling can also be traced.
The risk appetite can now be seen in several places in the financial market:
Tea share prices are rising, and Nasdaq’s main index is only ten percent away from the top listing in November 2021. Insuring yourself against losses in the high interest rate market has not been so cheap in a year. The prices of certain risky commodities are rising, while safe havens (gold) are falling. And protecting a portfolio against falls in the stock market has become very reasonable. Moreover, the fear index Vix also shows that volatility in the market is down more than 40 percent this year.
Who dares to fight back?
In fact, some believe that it is now hysterically cheap to buy insurance against price falls, such as options. Bank of America analyst Benjamin Bowler is one of those who have pointed this out.
Options
Options mean the right to buy shares or other securities at a certain time at a predetermined price. This price may be completely different from the market value at the specified time.
Bowler is head of equity derivatives analysis at the bank and this week he wrote a memo in which he pointed to the pricing of the right to sell the S&P 500 index five percent below its current level in one year. The court will act as an insurance policy for everyone with positions and funds, such as index funds, which mirror the index, and Bowler writes:
– Since the start of our data in 2008, it has never cost so little to protect against a fall in the S&P 500 over the next 12 months, as high interest rates together with low implied volatility and correlation suggest for hedging.
He believes this must be seen in the light of other economic data and then states:
– The low pricing is striking.
Other experts who are confronted with the strong willingness to invest and take risks in today’s relatively uncertain market agree that something is going wrong:
– It is dangerous and widespread, but it is late July, and who can bear to fight it? asks macro strategist Peter Tchir rhetorically in a Bloomberg article.
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Tchir works as chief strategist at the American investment bank Academy Securities, and to the news agency he adds:
– We are in a phase where people feel obliged to fully invest capital. The hawkish Fed is no excuse right now, and it’s also hard to say it’s a recession.
– Incredibly cheap
While it is cheaper than ever to insure against stock market falls, other hedging strategies have become very popular. Also the slightly illogical ones given today’s market. Because at the big investment banks, there should be a high demand for derivatives that make it possible to get more out of a further upswing.
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According to Amy Wu Silverman, head of derivatives strategy at investment bank RBC Capital Markets, these positions are being bought by investors and managers who have been too cautious in recent months and are now lagging the market.
To Bloomberg she states:
– The market is just not ready to let the positive story go yet. Hedging is outrageously cheap right now.
She continues:
– There is an increased demand for call options from people who have underperformed, rather than from those who have done their business well and need hedging.
– No added value apart from a better night’s sleep
Thor Gunnar Olsen is responsible for derivatives trading at DNB Markets and sees the same trend as his American colleagues at home in Norway, with options being sold at an ever cheaper price. The reason is simply lower volatility in the market, especially during the summer months.
– Now that it is a holiday and the big companies have reported their quarterly figures, the players expect that not much new will happen in the market. It is only in September that the activity picks up, says Olsen.
Olsen also points to interest rate increases as an important factor. However, he sees no signs that risk appetite is increasing.
– The appetite for investment has been rather sluggish despite the fact that the market has risen. It must be remembered that the upswing in the USA has been driven by a few technology companies, and at home in Norway the development has been virtually unchanged over the past year. There have also been few issues this year, which indicates that the risk appetite is not particularly high.
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The main index on the Oslo Stock Exchange has risen 0.8 per cent over the past year, while the American composite index S&P 500 has climbed 11.5 per cent.
Olsen says there are several people who have lost money to protect themselves against a falling stock market.
– In the new year, many people thought the market would fall and insured themselves through put options, but it has not provided any value apart from a better night’s sleep, he says. (Terms) Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using links, which lead directly to our pages. Copying or other forms of use of all or part of the content may only take place with written permission or as permitted by law. For further terms see here.
2023-07-30 18:19:45
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