Author: Lu Wang
Article: Original article
Publication date: Wednesday, November 16, 2022
The most popular deal on Wall Street, i.e. a bet on inflation, suddenly proves to be unsuccessful, triggering a wave of forced deleveraging among a broad cohort of institutional funds.
Stakes on falling tech stocks and long dollar positions are among the most lucrative strategies this year, with inflation being at 40-year highs. Now, as lower producer inflation tends to complement signs of decelerating price growth, these stakes appear to be shaky.
Growing markets are hitting hard on financial managers, who have been betting big on the Fed's inflation course to keep hiking rates, while making the U.S. currency more attractive.
The issue of whether inflation has peaked or not, is a controversial one, along with the fact that over the last years investors and politicians have made inaccurate statements about future price trends. Something less debatable is that inflationary trading may be winding down, with massive closures of short positions exacerbating market volatility.
Charlie McElligott, an asset management strategist at Nomura Securities International, said that rising volatility sparked a slight unloading of portfolio assets. In the so-called "momentum shocks", a lot of traders were pushed to trim losses and reduce risks, following the low U.S. inflation figures that forced them to reconsider global monetary tightening.
The process continues after the PPI report is released, adding only more "dovish relief," McElligott wrote in a note on Tuesday, meaning bets on where the Fed's benchmark interest rate hits its peak in this tightening cycle.
The situation with the overall inflationary trade is uncertain. However, Jared Woodard, a strategist at Bank of America, suggests that price pressures are likely to continue for years, leaving any major shift to assets, including tech stocks, inconsistent in the long run.
As Woodard notes, the country may be in the early phase of a major macroeconomic shift. Thus, revised estimates are likely to be substantial and longer-lasting.
Forecast: Nasdaq 100 is expected to grow in the short run