It’s been a while since the world’s richest and/or most famous fund managers spooked retail investors with warnings to get out of the market… now. That changed overnight when Dan Ivascyn, the man who replaced Bill Gross as CIO of the world’s largest bond fund at PIMCO, said that it’s time to take profits… now.
Speaking at a Thursday panel during the UBS Global Wealth Management Summit in Davos, the man responsible for allocating hundreds of billions in client funds said that geopolitical tensions and rising interest rates have created a “much more fragile situation” than in early 2016, when the Brexit vote and the U.S. elections weighed on markets. He noted that with fixed-income markets still expensive by historical standards, there’s less room to absorb negative surprises.
“Market participants should become a bit more concerned. Wherever you were in the risk spectrum a year or two ago, we think you should be a touch lower” said an unexpectedly alarmist Ivascyn who added that “We are not overly alarmist but we do think it’s time to take a bit of risk off the table.”
Ivascyn is not the only one worried about the escalating trade war between the U.S. and China: on Wednesday, and again this morning, first the Fed and then the ECB revealed in their published meeting minutes that both central banks see trade war as the biggest downside risk.
Additionally, Russian sanctions and the conflict in Syria have rattled global markets this year, while rising interest rates and a surging Libor have aggressively tightened financial conditions and are starting to put pressure on corporations that have borrowed heavily in the past years. As Bloomberg notes, “bond managers have warned that over-leveraged corporations could create the next wave of financial pain.” So far stocks have refused to listen.
Then there is the risk of the unwind of some $20 trillion in central bank liquidity injections: “You are clearly seeing signs of increased volatility associated with some of the central bank uncertainty, political uncertainty we have seen in the U.S., emerging markets and Europe,” Ivascyn said.
Earlier in the day, the CEO of Credit Suisse, Tidjane Thiam, agreed that the ongoing central bank tightening will lead to “trauma.”
“The tensions are showing and it’s very hard to imagine where you can get out of a scenario of prolonged extraordinary measures without some kind of – I always use the word ‘trauma,’” Thiam said at an event in London on Thursday according to Bloomberg. “It was a reasonable answer to an extreme situation, but the challenge was the lack of an explicit exit strategy and that’s showing.”
Other bankers have also warned on the effect of a return to a more normal interest rate environment, with JPMorgan executive Daniel Pinto saying last month that equity markets could fall as much as 40% in the next two to three years amid rising rates and inflation.
For now, with the S&P still just a few percentage points from its all time highs, algos which only care about frontrunning other algos, and not to mention buyback VWAP programs, don’t seem to care…
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