Hedge funds dump European and US markets for Asia amid global trade uncertainty

Hedge funds moved to unwind bullish and bearish wagers in Asia on Monday after dumping bets in the US and Europe on Friday, Goldman Sachs said in a note to its clients on Wednesday, according to a report from Bloomberg.

According to the report, the exit was massive, with 75% of the selling concentrated in developed markets. Japan took the hardest hit as funds rushed to cover shorts and offload long positions.

In emerging markets, China led the downturn as hedge funds cut bullish bets, which is the latest ever retreat from risk-heavy positions. The movement in Asia followed the largest two-day reduction in hedge fund positions worldwide in four years.

Just last month, hedge funds piled into Asia at record levels, yet despite the volatility, the region continues to see positive inflows this year across both long and short positions.

Hedge funds targeting Asia’s fundamental long-short strategies saw 0.9% gains in March and 4% returns for 2024. China-based managers led the way, gaining 1.4% this month and 6.9% for the year.

Meanwhile, global long-short managers took heavy losses, already down 3% in March and 1% for the year as selling pressure intensified.

The panic comes as US stocks experience their worst correction in years. The S&P 500, which soared over 20% in both 2023 and 2024, has plunged 9.3% from its all-time high of 6,144 reached on February 19.

The sell-off has rattled retail investors, who had poured into stocks via platforms like Fidelity, Robinhood, and Coinbase. Retail trading activity has been on the rise, with Fidelity reporting a jump from 31.5 million to 36 million accounts between 2023 and 2024, marking a 14% surge.

At the same time, Interactive Brokers saw its user base triple since 2020, while Charles Schwab recorded a 23% increase in active accounts. This retail-driven boom is now facing its first major test as stocks sink and volatility spikes.

Market chaos deepens as investors brace for more losses

Futures contracts tracking European and US stocks continued to slide as Asian markets reeled. Euro Stoxx 50 futures fell 0.5%, while the Nasdaq 100 dropped more than 1%, erasing Wednesday’s modest rebound after the release of weaker-than-expected US inflation data.

With markets under pressure, US Treasuries edged higher, and the Japanese yen strengthened following comments from Bank of Japan Governor Kazuo Ueda, who predicted improvements in real wages and consumer spending.

Investors are being hit with a barrage of uncertainty, from rising US unemployment to looming federal job cuts. Donald Trump’s renewed tariff war and ongoing global realignments over Ukraine have intensified fears of an economic slowdown, pushing bond traders to price in a rising recession risk.

“This still strikes me as a market that simply cannot hold on to any gains at the moment, which should be a big old red flag for any potential dip buyers out there,” said Michael Brown, senior strategist at Pepperstone Group.

Strategists at major investment banks have been downgrading their US equity outlooks. Goldman Sachs joined Citigroup and HSBC in warning that US stocks could face further losses.

Earlier this week, Citi downgraded US equities to neutral, while at the same time upgrading China’s rating to overweight.

“The renewed volatility is due to the market’s late realization that one soft CPI print won’t immediately change the Fed’s path,” said Charu Chanana, chief investment strategist at Saxo Markets. “The real concern here is growth. Inflation softening doesn’t change that.”

Investors are also closely watching Trump’s legislative moves as Democratic Senate Leader Chuck Schumer said his party would block the Republican-backed spending bill, raising the threat of a government shutdown.

“A timely pivot to tax cuts will be important given the market’s poor sentiment on tariff threats,” said Homin Lee, senior macro strategist at Lombard Odier. “Any legislative setback, like a shutdown, could become a market risk.”

Meanwhile, hedge funds aren’t the only ones reacting to the turmoil. Major US stock exchanges have been expanding their trading hours as retail demand for crypto and 24/7 trading surges. The New York Stock Exchange, Nasdaq, and Cboe Global Markets have all announced extended trading plans.

Trump’s trade war escalates as markets remain on edge

The Hong Kong stock market is emerging as an unexpected winner in Trump’s second presidency. Since Trump took office again, the Hang Seng Index has surged 20%, making it the best-performing major index globally.

At the same time, Hong Kong’s stock exchange is exploring ways to lower entry barriers for investors, which could boost liquidity and drive even more capital into the region.

Frank Benzimra, head of Asia equity strategy at Societe Generale, said the market’s trajectory depends largely on US policy decisions. “I don’t know whether tariff fears are easing. There still seems to be a lot of uncertainties,” he said.

While some Wall Street analysts think the worst is over, JPMorgan strategists aren’t convinced. “If US equity exchange-traded funds continue seeing inflows, there is a good chance that most of the current US equity market correction is behind us,” wrote Nikolaos Panigirtzoglou and Mika Inkinen in a recent note.

However, Trump isn’t stepping back from his tariff war. In response to EU countermeasures against his new 25% tariffs on steel and aluminum, he vowed to hit back with even more trade barriers. Canada also retaliated, slapping 25% tariffs on $20.8 billion worth of US goods, including steel and aluminum.

On the bond market, Japanese government bond futures plunged to their lowest level since 2009, following remarks from Kazuo Ueda, who suggested that real wages and consumer spending would recover as import inflation slows and wage growth strengthens.

The commodity market isn’t immune to the turmoil either. Gold pared back its gains, settling around $2,940 per ounce, while oil prices fell after their biggest rally in two weeks.

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