Wall Street traders are placing fresh bets on a post-Covid world

‘There’s growing optimism that we are nearing the end and we are seeing that reflected across the markets,’ said Craig Erlam,
Image: Victor J. Blue/Bloomberg

Evidence is piling up that traders are betting the coronavirus’s grip on the global economy is loosening for good — even as the spreading omicron variant ignites fresh supply-chain chaos and worries over the effectiveness of existing vaccines.

A Wells Fargo basket of stocks that win in the great economic reopening has stormed back toward pre-pandemic levels versus a gauge of rate-sensitive tech companies. A rally in commodities has added to evidence that the investment and consumption cycle is rebounding. Meanwhile German bund yields have just turned positive as central banks around the world pare pandemic stimulus.

“There’s growing optimism that we are nearing the end and we are seeing that reflected across the markets,” said Craig Erlam, senior market analyst at Oanda Corp. “Each market you look at there is a common theme of the recovery and the belief that it’s here to stay.”

A Bank of America Corp. survey of global fund managers on Tuesday showed overweight allocations to technology shares fell to the lowest since 2008 as they tilted in favour of assets that benefit from the economic upturn from banks to energy stocks.

The drop in the Nasdaq Composite pushed it over the threshold into correction territory Wednesday driven by megacap stocks including Amazon.com Inc., Tesla Inc. and Apple Inc. The Russell 1000 Value Index slipped just 0.1%.

“The market is following the most likely scenario of this variant calming down,” said Naka Matsuzawa, a Tokyo-based strategist at Nomura. “At the very least, we expect market participants to turn their attention to the possibility of the pandemic’s end as a result of a decline in omicron cases or a drop in the Covid mortality rate.”

Over in the UK, where the variant began spreading in November, Prime Minister Boris Johnson is ready to ease restrictions as infections and hospitalisations fall.

That’s not to say that the global market is uniformly bullish. Far from it. Investors are hedging their optimism with a still-elevated level of cash, with Ned Davis Research warning on a slowdown in earnings momentum and a hawkish Fed as it revamps its call on US stocks.

The prospect of Fed rate liftoff as soon as March is another big reason why investors are dumping tech stocks that are valued on future growth expectations, while piling into banks and energy stocks that rise with rates.

“There are so many different components driving the movements we are seeing,” Erlam said. “We can’t attribute it entirely to just the belief that we are nearing the end of the pandemic even though that is one major factor.”

A look at sectors that would be expected to be among the biggest beneficiaries of the pandemic’s fading show lingering doubts. The Solactive Travel & Leisure Index is still 18% below pre-pandemic levels while the US Global Jets ETF (JETS), which tracks US and international passenger airlines, is down more than 30%.

All the same the big markets show investors are putting the still-spreading virus in the rear-view mirror. The global stock of negative-yielding debt has fallen to $9.1 trillion, half its peak in 2020, while Goldman Sachs Group Inc. is calling for oil prices to reach $100 a barrel in the third quarter as consumption grows.

“The word this year is normalisation,” said Christopher Harvey, head of equity strategy at Wells Fargo. “When I think about normalisation it’s spending, it’s risk, it’s valuation, it’s everything across the board.”

© 2022 Bloomberg

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