Investors Are Reaching for Riskier Assets as Fear Leaves the Markets - Latest Global News

Investors Are Reaching for Riskier Assets as Fear Leaves the Markets

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – U.S. stocks are hitting new records, Bitcoin is surging and investors are rejecting insurance against portfolio declines as evidence that the economy is heading for a so-called soft landing stirs market participants’ appetite for risk.

Let’s call it the Goldilocks trade – a bet that the Federal Reserve will be able to tame inflation while preventing growth from falling too quickly. While that outcome was in doubt as recently as last month, investors have been reassured by a series of recent economic data – including Wednesday’s report that showed U.S. consumer prices fell more than expected in April.

Investors’ newfound propensity for risk-taking can be seen across all asset classes. The S&P 500 hit a new record high on Wednesday, rising 11% year-to-date as it recovers from last month’s decline. The Nasdaq Composite Index and the Dow Jones Industrial Average also reached new highs.

Assets like Bitcoin and meme stocks, often seen as barometers of risk appetite even though their connection to economic fundamentals is often questioned, have also risen sharply.

Meanwhile, participants’ growing confidence was reflected in a survey of fund managers by BofA Global Research: The company’s most comprehensive measure of investor sentiment, based on cash holdings, equity allocations and economic growth expectations, was the most positive since November 2021.

“Investor appetite for risk assets appears to be increasing,” said Garrett DeSimone, Head Quant at OptionMetrics.

Here’s a chart-based look at how investors’ newfound optimism is reflected across markets:

After concerns about the Federal Reserve’s ability to cut interest rates in the face of stubborn inflation led to a 4.2% decline in the S&P 500 index in April, investors now appear eager to push up stock prices .

Many people decide to do this without paying attention to the protection against their disadvantages. The Cboe Volatility Index, which measures demand for protection from market swings, closed at a four-month low on Wednesday. The lesser-known VVIX index, a measure of how much investors will move on the VIX, has also fallen and is now near its lowest level in about a decade.

While there are few takers for option hedges that would hedge a market decline, call contracts that would benefit from further gains in the stock market are in high demand.

According to options analysis firm Trade Alert, the average daily trading call count in a month is 1.2 to 1, the most bullish reading for that metric in about a month.

Some market participants have also described the rally in meme stocks as a sign of robust risk appetite among investors.

Shares of GameStop have risen 140% in the last week after shares of other companies on the platform, including theater chain AMC and headphone maker Koss, followed suit. Like GameStop, many of the stocks are heavily shorted and their fundamentals have declined in recent years.

Hopes that weaker U.S. economic data could give the Fed the leeway to cut interest rates later this year have pressured the dollar in recent sessions. The dollar, a popular haven in uncertain times, has fallen 2% against a basket of its peers since hitting a 17-month high in mid-April.

That has helped boost some emerging market currencies, which are sometimes seen as riskier than currencies pegged to developed markets.

The Polish zloty rose 3.7% for the month, while the South African rand and Colombian peso gained 2.8% and 2.7%, respectively.

Volatility expectations for the bond market have also declined in recent sessions. U.S. Treasury yields, which move inversely to bond prices, fell to their lowest level in more than five weeks on Wednesday.

Bitcoin, often viewed as a key barometer of risk appetite, hit a three-week high of $66,261 on Tuesday and is closing in on the record high of $73,803 reached in March.

(Reporting by Saqib Iqbal Ahmed; Additional reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Shri Navaratnam)

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