Big investors are bracing for this summer’s stock market rout to run into the autumn, fearing a broader wave of selling will follow the turmoil sparked by U.S. recession concerns and the Bank of Japan wrong-footing currency speculators.
The buy-the-dip mentality, where investors typically respond to selloffs by making recovery bets, has been replaced by fear. The BOJ hike wrecked billions of dollars worth of previously profitable trades where speculators had borrowed yen cheaply to buy higher-return assets like U.S. tech stocks. About 70% of that carry trade has now been unwound, JP Morgan estimates. But money flows tied to yen-related positions are tough to measure and Amundi’s Pradhan said the possibility of further unwinding is making people quite risk averse.
While she doesn’t see a savage U.S. slowdown as likely, she wasn’t buying stocks, instead preferring put options, which insure against equity losses by paying out when markets fall. “Volatility makes it hard to increase exposure even if you think it fundamentally makes sense,” Pictet Asset Management senior multi-asset strategist Arun Sai said.
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