The recent movement in the S&P may not have been as harsh, but many traders felt a sense of deja vu reminiscent of March 2020. This is because all the trades that had been successful in the past year suddenly came crashing down. Everything from popular stock strategies to FX carry trades to anti-fiscal stupidity trades to bitcoin experienced a significant downturn. BofA’s Michael Hartnett noted that the past two weeks witnessed gold, an asset inflation play, dropping by 8% in Japanese yen, an asset deflation play, due to various factors such as rate cuts by Powell and political events like Trump’s victories leading to the liquidation of overcrowded trades like short yen, long copper, and long AI.
While some believe that the market correction is healthy, Hartnett cautioned that certain key levels must be maintained, such as yen at 152, copper at 9000, and tech at 18700. Investors had already factored in a combination of Fed cuts, Trump’s victory, and a soft landing, along with well-behaved credit spreads which act as the “glue” for Wall Street. However, concerns arise if IG CDX spreads exceed 60 bps.
On one hand, investors are moving away from cash and towards risky assets in anticipation of future rate cuts by the Fed. Last week saw significant fund flows into equities, bonds, gold, and cryptocurrencies, while cash experienced a substantial outflow. Gold, IG bonds, EM equities, China, and Japan saw notable inflows during this period.
Despite the ongoing risk-on sentiment in the markets, Hartnett remains bullish on bonds for the second half of 2024, as the reversal of the initial ABB trades continues to perform well. He highlights the importance of monitoring political trends, especially the shifting probabilities of Trump and Harris winning the election. The focus is now on swing states and the manufacturing sector, with implications for trade policy and the US dollar.
Looking ahead, the outcome of the US election and its impact on economic policies will be crucial for various asset classes. As the political landscape evolves, investors will need to closely monitor developments in key swing states and the manufacturing sector to gauge potential market movements.
In conclusion, while market movements may seem volatile at times, staying informed and adapting to changing trends will be essential for investors navigating the complex financial landscape. Check out the full BofA note for more in-depth analysis and insights.