Reuters: Market shock may continue in autumn!

Fearing that concerns about a recession in the U.S. and the Japanese central bank catching currency speculators off guard will lead to further sell-offs, major investors are preparing for the shock experienced in stock markets in the summer to continue into the fall.

MSCI's index of world stocks rose almost 2 percent this week as the pace of intense stock and currency trading slowed, triggering falling prices, volatility and sell-offs by mutual funds.

But weak data on the U.S. jobs market and global consumer trends have raised expectations of a new market shakeout, with asset managers who oversee billions of dollars in investments saying they are more likely to continue selling stocks than buying them.

However, investors' “buy low” response to sales, which is generally based on the belief that markets will recover, has given way to more fear.

“This is no longer just a major financial market crash, maybe that's how we would describe the last week, but it's much broader,” said Mahmood Pradhan, a former deputy managing director of the IMF and head of the global macroeconomics arm of the research division of Amundi, Europe's largest fund manager.

Pradhan expects investors, who have already been reducing their equity positions and increasingly shifting to cash, to continue to be reserved, according to Bank of America.

Michael Kelly, head of the multi-asset fund unit at PineBridge Investments, which manages about $170 billion in client assets, is among those who say the fund he manages has reduced its weighting in stocks and may continue to do so.

“The next two months are going to be very volatile,” Kelly said.

Kelly added that the first interest rate cut expected in the US next month may be too late to save the economy.

Investors' global growth expectations have fallen to their lowest levels in eight months.

WHO'S NEXT?

Weak US employment data and an unexpected interest rate hike by the Bank of Japan (BOJ) spooked volatility-indexed and trend-following investment funds, sending anxious investors into government bonds and sending global stock markets into a sell-off.

The BOJ's interest rate hike has wreaked havoc on billions of dollars of profitable investments as speculators borrowed cheap yen and invested in higher-yielding assets such as U.S. technology stocks.

JPMorgan estimates that 70% of those carry trades have been pulled back. But yen-denominated cash flows are harder to calculate, and the prospect of a further pullback is dampening people’s risk appetite, said Amundi’s Pradhan.

Gerry Fowler, head of European equity strategy at UBS, said the hedge fund sell-off was probably over but slower-moving investors typically take four to six weeks to make adjustments to their portfolios.

Marie de Leyssac, multi-asset portfolio manager at Edmond de Rothschild Investment Partners, said these fund managers could make the next sale but would act based on economic data.

Although Leyssac does not foresee a sharp slowdown in the U.S. economy, he prefers to buy put options, which provide insurance against losses on stocks, rather than buying them.

Goldman Sachs strategist Scott Rubner noted in a note that in the next wave of selling, pension funds will reduce their weight in stocks and shift to fixed income investments.

TURBULENCE MAY CONTINUE

Paul Eitelman, chief U.S. investment strategist at Russell Investments, said that if U.S. employment data were to remain weak, it could cause new volatility in the markets.

The speech that US Federal Reserve (Fed) Chairman Jerome Powell will give at the Jackson Hole central bank conference next week and the balance sheet that artificial intelligence giant Nvidia will announce on August 28 will be closely monitored in terms of risks in the markets.

“It makes it harder to increase risk even if you think the volatility makes fundamental sense,” said Arun Sai, senior asset strategist at Pictet Asset Management.

Fund managers tend to stay away from buying stocks when there are large swings in prices.

The VIX index, described as Wall Street's “fear gauge,” and an index that tracks volatility on European stock markets have declined after hitting their highest levels in years last week but continue to send warning signals.

VVIX, another indicator that rises when investors expect the VIX index to be turbulent, is trading above the 100 level, signaling that the turmoil in the markets is not over yet.

“You should watch VVIX closely until you see it break below 100. That's the key level,” said Stuart Kaiser, Citi's head of equity trading strategy.