In its latest research report, the JPMorgan research team noted that there are quite a few similarities between what has been observed so far in April this year and what was observed in August last year.
Analysts believe that when inflation unexpectedly rose and expectations of a rise in central bank interest rates were not realized, investors began to consider reducing their heavy positions or increasing their hedging against risky markets. The most striking feature is that the rise in 2-year UST yields eventually led to a decline in equity and credit markets starting in August.
Given the current high exposure and low cash allocation of investors to risky assets, the market may be exposed to higher risks.
In addition, the report also pointed out that the market is currently facing a new change in the downside risk after the Bitcoin "halving".
U.S. two-year Treasury yields rose
JPMorgan's Global Market Strategy report noted that the 2-year U.S. Treasury (UST) yield rose from 3.8% in early May to 4.9% in early August last summer, a change largely ignored by equity and credit markets. However, once the 2-year UST yield began to consolidate at a high level of 5% or more, the stock and credit markets began to suffer from the beginning of August. From the beginning of August to the end of October, the stock market experienced a correction of about 10%.
Since January, the yield on the two-year US Treasury note (UST) has risen from 4.2% to 4.9%, comparable to the level in August last year.
This increase was largely ignored by equity and credit investors between January and early April, similar to the situation in May-July 2023.
The report warns that with the two-year UST yield consolidating around 5%, there could be a repeat of the "high-yielding long-term" scenario seen between August and October last year, when it triggered fears of a hard landing for the economy and hit risk assets.
Increased exposure to risky assets
The report also mentions that the leverage of risk parity funds entering April is higher than at the beginning of August last year and similar to the level at the end of 2021.
According to their metrics, investors heading into April had even higher exposure to risky assets such as stocks and credit than they did in August last year.
Cash allocations are at all-time lows
The allocation to cash is very low compared to equities and bonds held by the private sector outside the banking system, i.e., the ratio of the M2 money supply to equities and bonds held by the private sector.
This cash allocation was at its lowest level in the sample period in early April and significantly lower than the previous low in early August last year.
In addition, the commodity position looks close to neutral at the moment, while the gold position looks quite high whether we look at momentum signals or speculative positions. Liquidity conditions in government bonds deteriorated in April's sell-off, compared to commodities and corporate bonds.
There was a lack of protection in tech stocks, and CTAs began to reduce their stock positions
Short interest in SPY and QQQ ETFs is low to a new record, suggesting that there is little protection in the US stock market, especially in tech stocks.
In addition, systemic funds like momentum-driven CTAs have begun to reduce previously extreme equity positions, which could signal a shift in market attitude.
In addition to the above characteristics, analysts believe that the current market faces new risks, and the price of bitcoin may face downward pressure after the "halving" event, due to the overbuying situation shown by futures positions, and the price of bitcoin is still well above the volatility-adjusted comparison with gold ($450,000), or the projected production cost after the halving ($420,000).
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