Blinded by hope the worst had passed, investors who spent recent sessions warming to bullish bets in stocks, bonds and foreign exchange paid a stiff price for their optimism Tuesday.
(Bloomberg) — Blinded by hope the worst had passed, investors who spent recent sessions warming to bullish bets in stocks, bonds and foreign exchange paid a stiff price for their optimism Tuesday.
Equity traders saw virtually all of a four-day surge wiped out after the government said August inflation was hotter than feared. Relative peace in the bond market was shattered, with two-year yields climbing the most in more than a month. The euro’s brief rally against the dollar faltered as data cemented expectations for a 75-basis-point Federal Reserve hike next week.
An old adage, that markets maximize pain, played out starkly, particularly for short sellers who after unwinding bearish bets last week had to sit and watch as the market affirmed those bets’ wisdom. Market timers everywhere took a bath as September lived up to its reputation as a month of extreme volatility.
“It’s a big mess today,” said Matthew Tuttle, chief executive officer at Tuttle Capital Management LLC. “The CPI numbers stunk. People were leaning toward them being cooler than expected, and coming out hotter than expected obviously cut a lot of people on the foot.”
With the exception of the dollar, almost everything was in the red. Stocks and bonds suffered another concerted selloff. Two of the biggest exchange-traded funds tracking the S&P 500 (ticker SPY) and Treasuries (ticker BND) posted a combined loss of 4.8%, marking the worst cross-asset retreat since mid-June.
Oil slipped as concern resurfaced that the central bank may hasten its monetary tightening, putting the economy at risk of a recession. Bitcoin was not spared by the sweeping selloff, despite being touted as an inflation hedge. The digital coin slipped almost 10% Tuesday, snapping a four-day advance.
The synchronized retreat highlights a signature hazard of 2022’s markets, that everything is at risk of moving in lockstep. The obsession with economic data has contributed to spike in a measure of cross-asset correlation tracked by Barclays Plc, with recent readings ranking among the highest of the past 17 years.
“This market is very tough, both ways,” said Michael Purves, founder of Tallbacken Capital Advisors. “Whether you were bullish the euro, Treasuries or equities, you got smoked today.”
Sweeping losses are a reversal from the previous four sessions, when investors appeared to position for a reading that showed an easing in inflationary pressure. They snapped up stocks and sold the dollar, while keeping front-end Treasury yields in check.
The equity rout was particularly severe for hedge funds, which according to Goldman Sachs Group Inc.’s prime broker last week scooped up shares for the first time in a month, with the notional long buying reaching a one-year high. It also caused pain for options traders who had piled into bullish contracts in recent days.
The selloff even brought pain to equity bears, a crowd that was forced to unwind wagers during the June-August bounce and again last week. A Goldman Sachs Group Inc. basket of the most-shorted stocks plunged 6.2% Tuesday, though most short sellers likely missed as they closed positions during the recent rally.
Tuesday’s turmoil was a flashback to August, when markets endured the worst cross-asset selloff in decades. And it ended a period of brief market calm in September, a month that historically has ranked among the worst for stocks.
The Cboe Volatility Index, a measure of equity options cost also known as VIX, climbed for a second straight session Tuesday after sliding in the previous two weeks. The ICE BofA MOVE Index, a similar gauge for Treasuries that fell in six of last eight weeks, rose the most in a week.
The CPI “data point to a sustained aggressive tightening in Fed policy and recession risks just took a big leap forward,” said David Rosenberg, chief economist and strategist at Rosenberg Research & Associates Inc. “Cash remains king.”
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.
