Russia’s Ukraine war upends market bets -Breaking
By Saikat Chatterjee and Dhara Ranasinghe
LONDON, (Reuters) – The Russian invasion of Ukraine caused a number of popular trades to be rescheduled. This has resulted in heavy losses for investors who were bullish on European stocks as well as the euro. Investors bearish on government debt and the Japanese yen have also suffered significant losses.
Before the attack, there was an assumption that global recovery was going well, earnings from companies were strong, and that central banks were facing increasing inflation. They were planning to increase interest rates several more times this year.
While the geopolitical tensions that have been rising continue to increase inflationary pressures via oil channels, they also threaten some of most important consensus trades in the market.
We just suffered a huge pain point with the Russian invasion. This was enough to get rid of the most aggressive short term positions,” Aaron Hurd senior portfolio manager currency. State Street Global Advisors Boston.
Hurd predicts that some of the most established bets may come under greater pressure, if conflict affects the wider growth outlook.
These five charts show you the major consensus positions on global markets.
1 SHORT YEN, LONG EUROS
According to Commodity Futures Trading Commission data, hedge funds had net shorts on the Japanese yen just below their three-year peak. This was due to the assumption that the Bank of Japan would be slower than global counterparts when tightening policy.
These positions would have been hit hard by the yen’s three-week peak on Thursday.
A large consensus trade was long euros. According to CFTC, net longs rose $1.2 billion last week and are now at 6-month highs.
According to derivative markets, traders were seen buying put contracts this week in an effort to safeguard against losses. The single currency was at its lowest point since July 2020, falling below $1.11.
The rising trend to place bets against the dollar — long dollars positions decreased to the lowest levels since August. However, this was also counterproductive as the price jumped to mid 2020.
2/ BEARS MOOD DOWNBEAT, PROWL
A BofA monthly survey found that European stocks are the most desired region for investors, with a net 30% excess.
However, it’s also most susceptible to fallingout from Russia conflict. European stocks fell to their lowest point since May 20,21 on Thursday. European bank share, a highly-preferred trade, has fallen 6.5% thanks to ECB rates hike bets.
Goldman Sachs’ European stocks prediction was cut by 8% at end-2022 by Goldman Sachs. The chief economist of the European Central Bank stated that conflict could result in a loss of as little as 0.4% to the GDP for the Euro zone.
Put options on European stock indices have risen sharply as risk aversion has taken hold. The current prices for March contract expiring at 10 percent are now 10% lower than the levels in March. The level of open interest (the number remaining contracts) is the highest it has ever been.
NON SO AGGRESSIVE NOW
Traders bet against Treasuries, as they were persuaded that the U.S. Federal Reserve will increase interest rates fast and big in the coming months.
Treasury shorts in the rate-sensitive front end of the bond curve, increased, and bearish bets placed on 2-year note options at their highest point since October.
These bets have been quickly canceled amid the rush for safer trades. The CME’s Fedwatch tool shows that the Fed has cut half of the bets on a rate rise of 50 bps in the next month, and expectations for ECB rates hikes are also down.
“Central banks’ stagflation trade-off has only become more difficult amid the Russian invasion,” said Kristoffer Kjær Lomholt, chief analyst at Danske Bank.