Hedge funds raise bets against US stocks as debt deadline nears

Hedge funds and asset managers have raised bets against the US stock market to their highest levels since 2011, driven by fears of a possible US debt default and recession.

Net short positions held in derivatives contracts linked to the S&P 500 — the price they declined — have risen sharply in recent weeks, according to a Societe Generale analysis of the combination of futures positions from the U.S. Commodity Futures Trading Commission.

Investors are racing to save their portfolios as US shores debt nears default, with President Joe Biden warning Republicans in Congress that failure to reach an agreement to raise the government’s $31.4tn borrowing limit could hurt the economy There will be “catastrophe” for .

Despite debt concerns and the collapse of several US regional banks in the spring, the S&P has risen 8 percent this year, hitting an eight-month high earlier this week and raising hopes that Wall Street will The new bull market has already started.

Marko Kolanovic, JP Morgan strategist, said “the market’s rise seems to have gone wrong because investors were never pricing in the material risk of failure to raise the debt limit”.

Société Générale described the high levels of short positions as a warning signal that is “too strong to ignore”.

US politicians are looking to finalize a deal on the debt ceiling in the coming days before June 1, when the US could run out of cash to pay all its financial obligations.

Many managers are also concerned about valuations on US equities and the possibility that a sharp increase in interest rates by the Federal Reserve to try to fight inflation could trigger a recession.

The S&P 500 currently trades at a forward multiple of 18.7x, which is near the top of its historical valuation range.

“Equity is a bit expensive to us. Price (to) earnings ratios are near historic highs, said Kenneth Tropin, president of Connecticut-based Graham Capital Management, which holds $17.7 billion in assets. He said traders at his firm had been running a modest short position for most of this year, though these were cut as stocks rallied.

“Given a rally driven by only a handful of names, relatively expensive valuations in technology companies and large-cap growth stocks, and the negative impact of credit tightening on corporate earnings, we expect higher volatility in the coming months and Let’s look at the S&P 500. About 3,800 by December,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. The index stood at about 4,175 on Friday.

According to Mario Unali, a portfolio manager at investment firm Kairos, many hedge funds are buying individual stocks with strong cash flows, while also taking smaller bets against the overall market.

“Confidence in a broad-based risk rally remains muted due to the uncertain economic environment,” he added.

Some in the market believe that problems in the stock markets could be felt towards the end of the year, especially if interest rates remain higher than the market expects.

Michael Wilson, chief US equity strategist at Morgan Stanley, said earnings were slowing in the second half of this year as consumer spending began to slow and problems affecting regional banks would accelerate the availability of credit to US businesses.

“The major (US equity) indices are priced in for positive results on a number of fronts at the same time, while we think the risks have increased and in some cases are increasing,” Wilson said.

Graham’s Tropin said, “My best guess is that we could see a nice size correction in equities during the second half of the year if the Fed frustrates those who believe they will triple rates before the end of the year.” Will cut the bar.”