While we watch investors all around the world selling their long equity holdings, the markets seem poised to achieve the illusive ‘correction’ that has been predicted and hotly anticipated in many analyst reports and hedge fund missives. S&P 500 is down 1.26 percent today, the largest detraction seen in recent weeks.
The correction is a step in the natural course of events in bull markets, and perhaps a kind of karma for over zealous, fundamentals-defying stock markets. Ever since Bernanke did not rule out QE taper in his testimony, many market habits have reversed course. S&P 500 has been experiencing discernible sell offs now, a first since November. Additionally investors dumped US treasuries and yields widened, again a reversal of a previous trend.
USD Against All Others
If QE taper indeed materializes, the US dollar is expected to strengthen further. SocGen’s Hedge Fund Watch notes the increased buying trend in USD against all other currencies in its latest report. USD has stayed strong except for the dip it experienced against all major emerging market currencies as US manufacturing data slipped unexpectedly last week.
Hedge Funds Bearish On GBP
Hedge funds are especially bearish on GBP, where short contracts are reaching new highs. While GBP’s performance has not been as bad as one may suppose from these oversized shorts, SocGen points out that hedge funds think the new Bank of England governor, Mark Carney, will step up the stimulus, an expectation that SocGen’s analysts do not agree with. As of May 28, hedge funds/CTA’s had 118,145 short contracts on GBP options and futures on Chicago Mercantile Exchange, which amounts to $11.3 billion notional. The value of hedge funds’ GBP bearish calls are second only to shorts in EUR and JPY futures.
After AUD, Now Swiss Franc Up For Bearish Bets
After the Reserve Bank of Australia cut rates to record lows, AUD officially became a target of bearish bets. Now it looks like it is time for the once mighty Swiss franc to get under the knife. SocGen notes increasing trend of shorting CHF against the USD. According to CFTC, hedge fund/CTA shorts in CHF futures and options rose 18 percent in the week ending on May 28.