SINGAPORE (Reuters) – After a turbulent week in global markets, the worst of the sell-off may be over but investors need to “keep a tight rein on big directional bets for now,” Tony Pasquarello, Goldman Sachs’ global head of hedge fund coverage, said.
In a note to clients on Wednesday seen by Reuters, Pasquariello described the market’s week-long moves since Friday as a “global margin call” and outlined where markets go from here.
Why is this important?
Investors are struggling to figure out whether the broad stock market collapse, fueled by fears of a U.S. recession and the unwinding of yen-funded carry trades, is over.
They are also adjusting to uncertainty over impending interest rate cuts by the Federal Reserve and the US elections in November.
Context
The rout this week has taken markets by surprise, with the Japanese currency falling about 6% in just five trading days in August and 10% over the month. The yen has also risen 10% from a 38-year low in a single month.
The entire trading community may not be entirely risk-free, Goldman Sachs said, with franchise flows and prime brokerage data not revealing much selling, although the moves bear the hallmarks of significant risk transfer.
Quotes
Pasquariello: “I’m having a hard time identifying a significant portion of the S&P’s risk/reward profile here, so I’d advise keeping the brakes on large directional bets for now and looking to make money from the layers of the market.”
“The worst of the forced risk reduction is over, but I think the trend is towards continued selling by the trading community.”
“Commodity trading advisors and volatility control funds are likely to remain short for a bit longer… I suspect the retail community will lack confidence until the uptrend is clearly re-established.”
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