The latest BofA Global Fund Manager survey shows that “long gold” is the most popular trade for the third month in a row. This interest in gold stems from concerns about stagflation and geopolitical issues. Following gold, traders are also favoring “long Mag 7” and “short US dollar.” The “short US dollar” position might surprise some traders, as the dollar has remained steady compared to its April values against major currencies. Market charts suggest caution for anyone thinking of short positions without solid reasons.

Biggest Tail Risks For Fund Managers

The survey highlights key tail risks for fund managers. The risk that a “trade war could cause a global recession” has diminished since June. However, worries about “inflation leading the Fed to raise rates” and “credit events from rising bond yields” have increased. These risks are closely linked to the Federal Reserve’s actions. Furthermore, significant macro risks may arise from inflation or challenges related to Trump’s tax bill, requiring careful monitoring of these issues. This survey clearly shows fund managers’ sentiments, indicating where capital is flowing and how risks are assessed. The repeated emphasis on gold over three months reveals the strong focus on hedging against inflation and global uncertainty. Many view gold not just as a commodity, but as a safety net during turbulent economic and political times. The ongoing popularity of “long Mag 7” indicates that traders are still heavily invested in large-cap tech stocks, possibly overlooking the slowing momentum in parts of this sector. With high valuations and tighter interest rate expectations, we should question whether some portfolios are overly dependent on similar growth patterns. The situation with dollar positions is perplexing. Traders continue to short the dollar even without significant weakening. The DXY has remained stable, contradicting the pessimism reflected in market positions. Betting against the dollar seems less logical unless tied to strong oppositional bets on currencies like the yen or euro. Unless there’s a significant shift in US economic data or unexpected dovishness, keeping short positions on the dollar seems unconvincing. The perception of tail risks is also changing. Fears of a trade war and drastic demand drops are less pressing, likely because there isn’t a single dominant event causing global anxiety like tariffs did in past cycles. Instead, attention is now focused on inflation and credit strain. Any rise in inflation could push the Federal Reserve toward tighter policies, while increasing yields could put pressure on financing, especially for weaker companies.

Higher Borrowing Costs And Inflation

Rising borrowing costs and stubborn inflation indicate a shrinking safety margin. It’s not just about rising yields; it’s about when debt rollovers start to cause problems. This situation directly affects stock market volatility and credit spreads, especially for high-yield issuers. Powell’s comments make this situation critical. The market desires confirmation of rate cuts, but even small hesitations concerning wage growth or inflation could shake up expectations. Moreover, the budget impact from the previous tax policy remains a concern. Spending patterns under that legislation might come back into focus if fiscal paths diverge from monetary goals. We’re paying close attention to economic data. Key indicators like core prices, job strength, and inflation metrics (like trimmed mean or sticky CPI) could influence market sentiments again. Any new fiscal announcements or hints about tax discussions in 2025 could renew attention on funding balances and rating sensitivities. For those with strategies based on short-term fluctuations, these risks may not seem urgent. However, volatility sellers, interest rate traders, and spread strategies all need to reassess how far expectations can drift from actual pricing. We should stress-test around two scenarios: inflation falling below forecasts that keep policy stagnant longer than anticipated and persistent inflation that pushes central banks to act, even as recession fears grow. This issue isn’t just a short-term concern. It’s about what assumptions are overly priced in as we approach quarter-end. Are tightening fears genuinely easing? If so, how much is that reflected in swap curves and front-end futures? Have we seen actual adjustments in equity volatilities? It’s time to rethink duration sensitivity and refine exit strategies from crowded positions. While heavy investments in safe assets during uncertain times are not new, the lack of strong conviction is notable. We may be nearing a point where small surprises lead to significant market reactions. Create your live VT Markets account and start trading now.

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