Option markets show that traders remain cautious about the prospect of further declines, particularly at the single-stock level. While the market rout of recent weeks has tempered somewhat investors’ fervor for hedging at the index level, the ratio of put to call contracts on individual equities on the Cboe rose to the highest level since March 2020.
As the retail-stock meltdown kicked off last week, respondents to the MLIV survey became more bearish over the latter part of the May 17-20 polling period. On average MLIV professionals in the research, risk management and sales community were more pessimistic than their peers in portfolio management and sell-side trading. (The mean data can be skewed by outlier views.)
Meanwhile, Marko Kolanovic at JPMorgan Chase & Co. is downplaying fears of an oncoming US recession and the median estimate from prominent Wall Street strategists suggests the index will close the year out at 4,800, suggesting hopes for a market bounce later this year. For Kristina Hooper, while an economic downturn is “pretty much priced in,” she doesn’t see that happening.
“Sentiment is very negative, which supports the view we’re closer to the bottom,” said the chief global market strategist at Invesco Ltd.
Yet as central bankers seek to engineer a tightening of financial conditions to moderate excesses, the risks of further cross-asset chaos is very real.
Asked which event will take place before the Fed shifts to dovish policy, 47% of respondents said they anticipated the S&P 500 falling 30% from its peak, while a similar proportion said US unemployment would rise to 6%, from 3.6% currently.
More than 40% expect US investment-grade credit spreads to blow out beyond 250 basis points before the monetary-easing cycle kicks in, while around one-in-four see American home prices tumbling 20%.
Asked which asset class would need to see further declines before the risk-aversion cycle blows over, readers overwhelmingly cited equities, while housing, commodities and bonds also received submissions.
Meanwhile, some 31% of respondents said the end of the Fed’s hiking cycle would deliver the biggest boost to growth and 27% indicated a preference for a scenario whereby China ends its zero-Covid policy.
Around one in five said that a bigger growth dividend would come if the war in Ukraine were to end, and a similar proportion voted for a drop in crude oil to $70 a barrel.
--With assistance from Eddie van der Walt, Sebastian Boyd, Felice Maranz, Lu Wang, Tomoko Yamazaki, Nour Al Ali, Tom Keene, Lisa Abramowicz and Elena Popina.
This article was provided by Bloomberg News.