World Economy

European Investors Stick to Their Bets

European Investors Stick to Their BetsEuropean Investors Stick to Their Bets

The dollar’s four-week decline and a slump in bond prices has upset some assumptions about where global financial markets are heading, but haven’t deterred most investors from staying faithful to their bets.

At the beginning of the year, a weak global economic environment combined with central-bank support made some trades seem like sure winners: buy the dollar, buy bonds, sell oil, and buy stocks, Reuters reported.

After the last four weeks, with the dollar sliding, oil rising above $50 a barrel and a rebound in inflation expectations, only the equities bet is left standing.

Still, most investors interviewed by Reuters said trades based on expectations for lower bond yields and a higher dollar will regain their attraction. They called the recent market moves more “technical” in nature.

“What we have really seen this month is a correction as opposed to a turn,” said Mark Astley, chief executive officer at Millennium Global, a $14 billion currency specialist based in London. He expects the euro to resume its fall later this year.

  Investor Sentiment

One reason for a shift in investor sentiment was a resurgence in Europe, prompting some fund managers to invest more heavily in European stock markets.

“The unwind we have seen of these crowded trades in the past few weeks has everything to do people far too long Bunds and a recognition that the European economy has recovered a bit,” said Kate Moore, chief investment strategist for US with J.P. Morgan Private Bank in New York.

Thanks to the brighter outlook on Europe, the $11 billion New York-based hedge fund Jana Partners upped its stakes in the region’s equities, adding positions in Euronav NV and iShares MSCI Germany exchange-traded funds, according to regulatory filings.

Euronav shares were up 16 percent since March 31. The Germany EWG ETF is up 10.3 percent on the year, handily beating the 3.8 percent rise of the Standard & Poor’s 500 index.

“We think both European economic growth and profits growth will outstrip expectations,” said Chris Darbyshire, chief investment officer at Seven Investment Management in London, which has $14 billion in assets.

 ECB Support

Whether the support from the ECB is enough to offset an increase in US benchmark lending rates is another question. The Fed is still expected to end its near zero interest rate policy later this year. That unknown means, according to strategists at Bank of America/Merrill Lynch, that returns will remain mediocre, with “volatile trading” as investors rotate from one asset class to another, as well.

The shakeout in the bond market was arguably more painful, worsened by thin liquidity that traders blame on tighter regulations. The benchmark 10-year Treasuries yield was 2.22 percent on Monday, up from 1.85 percent a month before the bond market rout. Ten-year German Bunds were last at 0.65 percent, up from 0.10 percent a month earlier.