U.S. equity funds got hammered again last week as U.S. equities track data surprises rather than interest rates, according to Deutsche Bank. They add that the markets could be in for a shock because they are only pricing in a single Fed rate hike in the next three years. Although no one can predict the future, the prediction demonstrates how long we could be “stuck” in a low interest rate environment.
Bond yields fall to historical lows
Strategist Parag Thatte said in a report dated June 17 that 10-year U.S. Treasury yields tumbled to their lowest level in four years last week at only 20 basis points higher than the lows hit in 2012. A collection of weak macro data contributed to the decline, including weak payrolls, uncertainty about Brexit, the dovish June FOMC meeting and the European Central Bank’s bond buying program. He adds that the markets then began pricing in only one rate hike of 25 basis points over the next three years and that we’re seeing an even greater disconnect between rate hike expectations and data surprises, which are close to neutral as negative surprises offset positive ones.
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Thatte reported that active bond and equity funds have both gotten hammered by the move in rates and divergence from data surprises. Equity mutual funds underperformed by 64 basis points on average over the last couple of weeks, and 76% of these funds underperformed. Long-short equity hedge funds slipped 1.5% He believes equity funds continue to be aligned toward rate hikes and that market exposure remains near neutral.
Bond funds have underperformed as well over the last couple of weeks.
U.S. equity flows tracking rate hikes
He adds that end investor flows to U.S. equity funds kept tracking data surprises last week with “small” inflows and outflows as investors looked past the rate decline. European funds witnessed huge outflows last week as data surprises reflected the continuing unwind of last year’s huge inflows.
Dollar positioning shifted from long in the first week of this month due to uncertainty about Brexit declined back to neutral as sterling shorts retreated and yen longs kept rising. Thatte reported that oil positioning reached record highs last week as well as prices rose 20% and were “expensive to fair value” in the middle of last month.