iFlow > Investor Trends
Investor Trends provides a deep dive into patterns and behaviors in equity, bond and currency markets around the globe, underpinned with deeper macro insights.
Geoff Yu
Time to Read: 4 minutes
EXHIBIT #1: DOLLAR PERFORMANCE VS. KEY PAIRS
Source: BNY
Our take
The first Federal Open Market Committee (FOMC) meeting led by Chairman Kevin Warsh comes amid a resurgence in dollar interest. By the end of last week, with the market fully pricing in a ceasefire agreement, the dollar was overwhelmingly the preferred currency to own, further reinforcing “U.S. exceptionalism.” Our data show very strong sales of CAD and AUD; even the EUR couldn’t benefit from a relatively hawkish ECB. Only the JPY, CNY and SGD were net bought against the dollar, continuing a trend from the beginning of the year where markets were interested in undervalued North Asian exporters. The prospect of further improvement in North Asian balance of payments as oil prices fall have supported this group, even though rate differentials against the Fed look set to widen further.
Forward look
The dollar started to find bids at the beginning of the conflict amid significant safe-haven demand and liquidity preference due to sudden balance of payments deterioration globally. Theoretically, some moderate reversion to the pre-conflict status quo should have helped unwind some dollar longs. This is far from the case at present, indicating the dollar is now being driven by non-conflict factors. The need for short-term positioning driven by equity performance and new share issuance is one factor, but the comprehensive change in interest rate expectations, which is backing up the case for U.S. equity performance and growth, is perhaps more important. The Reserve Bank of Australia decision this week communicated a view that the end of their tightening cycle is in sight, and the Bank of Canada will struggle to generate a more hawkish path at present. We expect the greenback to continue performing well outside of APAC names until the market adopts a different Fed narrative.
EXHIBIT #2: POSITIONING, U.S. SEMICONDUCTOR AND SEMICONDUCTOR EQUIPMENT (GICS 4530) STOCKS, SOUTH KOREA AND TAIWAN STOCKS
Source: BNY
Our take
Equity risk sentiment has taken another leg higher as the U.S. and Iran reach a deal to extend the ceasefire, which crucially includes reopening the Strait of Hormuz to shipping. Even so, significant uncertainty remains over supply chains, and markets do not expect swift reversion in input costs to pre-conflict levels. Consequently, risk-seeking flows remain likely in the sectors that are seen as enjoying secular growth and lacking price sensitivity, namely in technology. Even the prospect of additional share supply isn’t affecting interest, but concentration risk is now at levels the market can’t afford to ignore. If we combine institutional holdings of the Semiconductor and Semiconductor Equipment industry group (GICS Level 2) and Taiwanese and South Korean equities (where gains correspond to the same industry group), close to 14% of our clients’ total global equity holdings are in this one specific industry group. That share has more than trebled over the last three years.
Forward look
In the U.S. alone, tech already represents over 30% of holdings, with the semiconductor industry group accounting for over 15% of all U.S. equity holdings. Many will point to concentration risk being an issue. That said, if a market like the U.S. – where growth is increasingly self-generated – should reflect its dominant growth drivers, there’s a case that technology and semiconductor holdings are still too low rather than too high. The total positioning figure will be higher when factoring in other companies involved in capex, but assuming semiconductor holdings are already adequately priced in, growth rates will naturally peak from here. The burden of further returns will lie on growth in aggregate capitalization and the wider U.S. economy, much of which AI and productivity gains are expected to deliver.
EXHIBIT #3: CROSS-BORDER HOLDINGS OF GOVERNMENT BONDS, U.K. VS. EUROZONE
Source: BNY
Our take
For U.K. assets, the Bank of England (BOE) decision on Thursday is not the key event. We expect rates to remain on hold, but there will be votes for a precautionary hike. However, we don’t see much interest pushing for a more prolonged cycle even among the hawkish members, leaving very little chance that the BOE will match the European Central Bank in sustaining a hawkish outlook. We expect Governor Andrew Bailey to reiterate his view that the labor market is loosening sufficiently to avoid strong wage growth, which characterizes second-round effects, while the economy is already responding to a tightening in financial conditions enforced by higher yields across the curve.
After the meeting, attention will swiftly move to Greater Manchester, where its mayor Andy Burnham is expected to win a by-election and immediately seek a leadership challenge upon his return to the House of Commons. Given the market’s base case is for a new prime minister by year-end, and Burnham is the leading candidate to replace Sir Keir Starmer, gilt markets will need to adjust to a change in fiscal policy, most likely in an expansionary direction.
Forward look
Our data indicate the U.K. gilt market continues to attract strong inflows due to high real rates, but interest remains largely dependent on domestic investors. In contrast, cross-border gilt holdings have recently fallen to the lowest levels since late 2022, and the holdings gap for cross-border investors between Eurozone sovereign debt and gilts also reached its widest level since early 2022.
In absolute terms, both markets’ holdings are well above the “stressed” levels seen in late 2022, and we do not expect a repeat. Admittedly, cross-border interest in both sovereign markets is poor at present as the region is seen as prone to stagflation, but the current gap suggests additional risk premia attached to the U.K. on a relative basis. Previous holdings drops in 2022 and 2023 were followed by significant recoveries – between 10 and 15 percentage points of the rolling 12-month average – in cross-border holdings due to fiscal improvement. Irrespective of political developments, risk-reward is now materially improved for gilt market recovery due to low external holdings. A credible showing in the fall fiscal event is required to realize potential gains.
