Investors stick to bets even as dollar and bonds slip

Tue May 19, 2015 1:31am EDT
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By Richard Leong

NEW YORK (Reuters) - 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. 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.

    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 U.S. with J.P. Morgan Private Bank in New York.

    The euro has risen 9 percent to $1.14 since hitting a 12-year low against the dollar on March 16, on signs that Europe has escaped a downward price spiral because of a weaker euro, engineered by European Central Bank's 1.1 trillion euro quantitative easing program.

    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 EURN.N and iShares MSCI Germany exchange-traded funds EWG.P, according to regulatory filings.   Continued...

Traders work on the floor of the New York Stock Exchange May 14, 2015. REUTERS/Brendan McDermid/Files