U.S. Treasuries are selling off along with equity futures, a sign that investors are dumping even their safest assets. The dollar is also weakening against other major currencies, sparking concerns about the global economy.
Big Hedge Funds Caught in the Crossfire
- Reuters reports that U.S. Treasuries extended losses, and hedge funds were at the heart of it, as their lenders could no longer stomach the “basis trade” – large positions betting on small differences between cash Treasuries and futures prices.
- The basis trade is consistently but barely profitable, necessitating leverage. Now, hedge funds are selling bonds to raise cash to repay loans, many of them from money market funds.
Experts Weigh In on the Market
Goldman Sachs global strategist Peter Oppenheimer forecasts that a U.S. event-driven bear market will morph into a cyclical recession and drive U.S. equity prices lower by 30%.
- Oppenheimer defines three types of bear markets: “Structural,” “Cyclical,” and “Event-driven.” He believes the current market is an event-driven bear market, triggered by tariffs.
- Oppenheimer notes that while the tariffs are not being revoked, the predictions depend on this happening.
- The S&P 500 is approaching bear market territory, with a decline of 20% or greater from recent highs.
Scotiabank Strategist Hugo Ste-Marie
“Extreme oversold: Percentage of stocks above their 50-day line is down to 13%. Readings below 25% tend to depict more extreme oversold conditions…
- Ste-Marie’s homemade indicator, an aggregation of 12 indicators, shows short-term deviation from longer-term trends, and is now at more extreme panic levels.
- The VIX index closed at just over 45 on Friday, one of the highest closes in the past 30 years.
The Future of the Market
While the market is currently facing significant challenges, the article concludes that oversold conditions have generally reached levels that suggest a technical bounce is increasingly likely.
However, there are still unknowns that could weigh further on equities, such as the impact of tariffs on growth and inflation.
If you buy the dip, the article recommends sizing your trade accordingly, and treating that as a technical bounce only.
“Is it a good time to bet the farm?” Ste-Marie asks.
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