What Investors Are Thinking: The July Scan (3 min read)
The worsening European picture and the Fed’s ‘hawkish’ cut dominated July. Weak European growth and inflation data saw the ECB pivot to dovishness (just as the Fed did in June), and Brexit fears saw the pound plummet. Meanwhile, the Fed delivered a cut, but was less dovish than many had thought. This was probably down to the improved US growth data over July. The China backdrop was more neutral.
Equities Gains Limited
On market specifics, stock market gains in July were muted compared with June. The US was on course for a 2%+ month, but gave back some gains after the Fed’s move. It ended up 1.4% on the month. Japan was up around 1%., Euro-area was flat and China was down almost 1%. Sectorally, the tech sector was the top performer, while energy was the worst performer.
European Rates Rally
In fixed income, front-end (2y) US yields rose by over 10bps on stronger US data and a less dovish Fed, while 10y yields were almost flat on the month. German 10y yields fell over 10bps on anticipation of further ECB QE moves. Italian yields fell another 55bps in July following a similar move in June. The rally in Italian bonds has to be one of the biggest surprises of 2019.
In FX, the dollar outperformed all G10 currencies – most notably the pound, which fell over 4% during July. The euro was down 2.6% and the yen was down 0.9%. In EM, the Turkish lira was the outstanding performer, rallying close to 4%, while the central European currencies of HUF, PLN, and CZK were the worst performers, falling around 3.5%.
Hedge Funds Scaling Back Bearish Rates Positions
According to IMM positions, hedge funds were short both US 2y and 10y rates, short US equities, and long the dollar coming into July. Over the course of July, they scaled back their short 2y position, increased their short 10y rates position, scaled back their equity shorts, and reduced their dollar longs. Given the price action over the month, it is clear that hedge funds have been caught out by the Fed’s hawkish cut and the dollar rally.
Real Money Turning Neutral
For long term investors, we like to use consensus forecasts as a proxy for positions. Analysts were bearish US rates both at the front-end (2y) and long-end (10y). Over the course of July, they gave up much of that bearishness. They ended the month neutral on the front-end, and moderately bearish on long-end rates. On FX, analysts maintained a bearish dollar bias.
Investors Focused on Europe, Dollar and Yield Curve
Macro Hive has several thousand regular users, most of whom are investors, and thanks to the wide variety of articles we publish it’s possible for us to identify important trends in readership statistics. Here, we share them.
Starting with the opinion pieces, we find that across all three major regions (US, Europe, and Asia) – my piece on Deutsche Bank caught most attention. This may partly reflect its topic – the financial industry – but it probably also reflects concern around the broader European picture. Certainly, European markets performed poorly over July.
Outside of this, the regions were split on other topics. In the Americas, investors appear most interested in pieces on the dollar (rather than rates). In Europe, they were interested in the pound, and Turkey and Asia, they are focused on the Fed and yield curve. I should also add my piece on the cricket world cup attracted readers from both Europe and Asia – perhaps unsurprisingly considering that’s where the sport is most played!
We can we can further colour the picture by looking at which blogs and podcasts readers were most interested in. Macro topics such as predicting recessions, populism, and low inflation were widely read. On podcasts, anything to do with crisis and debt were popular.
The Biggest Risk for August
Triangulating positioning, forecasts and topics, we find that investors appear to be giving up on higher bond yields, they seem concerned about Europe and broader global debt dynamics and they are bearish the dollar. The big risk would be higher US yields and the dollar.
Opinion Pieces: Most Clicked
Curated Content: Most Clicked
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)