FT : Quant funds support market rally by ramping up bets on US stocks

Quant funds support market rally by ramping up bets on US stocks
Investors that rely on statistical trading models are quickly unwinding bearish positions

Quant funds are increasing their bets on US stocks, helping fuel a sharp rally that has added $7tn in value to markets since June even as economic data point to a slowdown in the world’s largest economy.

In many cases, the funds — which look for trends in the market and then attempt to ride the momentum — have quickly unwound positions taken in late 2021 and earlier this year that were structured to benefit from falling stock markets.

As they have closed out those bearish bets, they have helped push stock prices higher — and then followed the new trend by making fresh wagers that benefit from the rally.

Charlie McElligott, a strategist at Nomura, said quant funds “moved fast and unemotionally” to shift their stance, catching “a very bearish market . . . very flat-footed”.

These funds have spent tens of billions of dollars on futures, helping push the benchmark S&P 500 and tech-heavy Nasdaq Composite up double-digits from recent lows, according to traders and analysts.

Nomura estimates that trend-following hedge funds and volatility-control funds have purchased $107bn of global stock futures since markets hit a low in late June, with a large portion of that used to close short positions.

“With positioning basically at the low there was a lot of cash on the sidelines and so as the market stabilised and started to rally, more and more of this flow has come back into the market,” said Glenn Koh, the head of equities trading at Bank of America.


The role of the computer-driven funds helps partly explain the head-scratching advance in the $47tn US stock market.

Whether the “risk-on” shift can last depends in part on whether the Federal Reserve can raise rates to damp economic activity and stamp out inflation without pushing the world’s largest economy into recession.

Investors moved to the sidelines en masse as stocks slid earlier this year, and many trend-following hedge funds placed short bets on the market as they predicted further declines.

Markets were pummelled by Russia’s invasion of Ukraine in February, surging commodity prices and the threat of economic slowdowns in China, the US and western Europe just as central banks raised interest rates to snuff out inflation.

But after the S&P 500 fell into a bear market in June, the market snapped back, recouping more than half its losses this year.

Investors have pointed to other factors propelling the recovery in addition to the short-squeeze pushing some funds back into the market. Some managers are betting inflation could peak, while others argue a spurt of weak economic data might stop the Fed from lifting interest rates as aggressively as some policymakers believe it must.

Alongside the rally, the dramatic price swings that had characterised the sell-off earlier in the year have eased. Gauges of volatility have fallen, with the Cboe’s Vix volatility index closing this month below its long-term average of 20 for the first time since April.

Daily swings in the S&P 500 and in many of the stocks that comprise the index have become smaller than they were between January and June. If that trend continues, the door will be open for a large pool of funds that shift positions based on volatility to increase their wagers on equities.

JPMorgan Chase analysts said the buying may continue. It told its hedge fund clients last week that volatility-targeting and risk-parity funds were buying roughly $2bn to $4bn worth of equities a day. The bank estimated those purchases “can last perhaps another 100 days if volatility stays low”.

Marko Kolanovic, a JPMorgan strategist, said the rally had reached most corners of the market. Some 88 per cent of S&P 500 stocks are trading above their average over the past 50 days, up from just 2 per cent in mid-June.

“Strong participation is an indication that this rally is durable, and another expression the market’s tail risks have receded,” Kolanovic said. “Volatility targeters can be expected to add exposure overall, and especially to equities.”

Fund managers have grown more optimistic. After polling portfolio managers this month, Bank of America strategist Michael Hartnett said they were “no longer apocalyptically bearish”.

Big caveats remain. Fed policymakers have warned they could raise rates higher and keep them there for longer than traders currently predict. And an inflation or growth shock could yet rattle markets.

That explains why the rally so far has been led by systematic funds rather than traditional money managers and long-short equity hedge funds.

“You see some people taking shorts off,” said Mike Lewis, the head of US cash equity trading at Barclays. “But you haven’t really seen people taking money and putting it back to work.”

FT : It’s time for Europe to ask Norway to cut the price of gas

It’s time for Europe to ask Norway to cut the price of gas
While any reduction might be politically difficult, it might be in the interests of Oslo to accept one

In the gas crisis there has been one bright spot. Norway — democratic, friendly, reliable Norway — has stepped up to help keep the lights on in Europe, maximising production even at the expense of its own oil output to try and replace every molecule it can of Russian supply.

But as the price of gas has continued to soar, more than doubling since Russia started openly choking exports in June, there are quiet rumblings in the industry. They suggest that it is time to ask Norway to do more, even something that might once have seemed unthinkable: Norway should agree to cut the price at which it sells its gas.

Before the howls of protest from Oslo and complaints from free-market purists, it is worth saying this is nowhere near a formal proposal. But that these views are even being aired privately by hardened oil and gas executives outside Norway suggests they are worth exploring.

The argument is as follows: Europe, whether it wants to admit it or not, is embroiled in an economic war as a result of Russia’s invasion of Ukraine.

The greatest threat to Europe’s support for Kyiv, well understood by Vladimir Putin, is that the energy crisis becomes an economic crisis and western voters turn inward. Gas prices are no longer just high but rapidly becoming economic weapons.

However nice the gas windfall Norway is reaping seems today — and at the equivalent of almost $400 a barrel of oil it is mind-bogglingly huge — it is not in the country’s strategic interests to see its neighbours fall into a deep recession or to have an emboldened Russia pushing up against the EU’s borders.

The hard numbers are enlightening. The vast majority of gas Norway supplies goes by pipeline to Europe, making up about a quarter of the continent’s supplies. For the UK, they account for an even higher 40 per cent of supplies.

The Norwegian government forecast in May that its revenues from oil and gas would already approach €100bn this year. In a country of 5.4mn people that is about €18,000 per person, or more than total UK government public spending per capita in 2020/21.

Gas prices have doubled since then and now trade at more than ten times the level they averaged over the previous decade. Norway clearly has significant fiscal headroom. Revenues from oil and gas were less than €30bn last year.

If Oslo was to agree to cap the price at something like the equivalent of $150-$200 a barrel of oil — more than Norway earned on average in the first half of this year, when state-backed energy champion Equinor enjoyed record profits — that would still be painful but manageable for European economies.

Long-term investors in the country’s energy sector, including the government, would still be rewarded. Aslak Berg, an economist who has worked for the Norwegian government and the European Free Trade Association, said that while any reduction in the price might be politically difficult to swallow, Oslo had an interest in contributing to a stable European economy and to supporting Ukraine.

“An option that could make sense for both parties is to commit to long-term contracts at prices significantly lower than today’s spot price, but well above the historical average,” he said.

Such a solution would not be a panacea. European gas market prices would probably remain high in order to attract the necessary cargoes of liquefied natural gas away from Asia. There are risks to interfering with normal market signals. But it would, almost undoubtedly, help to bring down the bill for bailing out households and industry this winter around Europe.

Norway is also more exposed to swings in the global economy — in large part driven by volatile energy prices this year — than might be immediately apparent. Its $1.2tn sovereign wealth fund, which invests the proceeds from decades of oil and gas production, lost 14.4 per cent, or $174bn, in the first half of this year — more than the government stands to make from record oil and gas prices.

Norway is also aware of the threat to long-term gas demand from this crisis. Its desire to build a future energy economy based on renewables like offshore wind and ‘blue’ hydrogen relies on close co-operation with its neighbours too. High-level executives in Norway speak candidly of the dangers of being seen to pursue a “Norway first” approach.

It is crucial for Europe to avoid falling into the resource nationalism trap, which would play into the hands of Putin. No one should suggest that Norway be treated as a profiteer or its contribution to European energy security forgotten. But it is worth at least debating if anything can be done to bring down prices.

Turning up the taps to full capacity is already appreciated. Doing it at a price that helps soothe the pain for European economies might be in Norway’s interests too.

FT : ESG study concludes it is time for the concept to be scrapped

ESG study concludes it is time for the concept to be scrapped
Funds that score highly on some UN Sustainable Development Goals often score low on others

An analysis of 6,000 US funds has concluded there is no such thing as a “good” or “bad” investment in terms of the UN’s Sustainable Development Goals.

Instead, the picture is far more complex, according to Util, a sustainable investment data specialist, which is calling for the unbundling of environmental, social and governance (ESG) factors in a report that identifies leaders and laggards according to UN SDGs.

“Almost every company, industry and fund impacts some goals positively, others negatively,” Util said in its report released on Thursday that used machine learning in its assessment.

For example, it found that the 10 laggards on Climate Action were mostly utilities funds. Against other SDGs, however, every one of them is among the top 100 leaders in terms of the Quality Education; Affordable and Clean Energy; Decent Work and Economic Growth; and Industry, Innovation and Infrastructure metrics.

The “E”, “S” and “G” represented such different, even conflicting, objectives that it was time for the concept to be scrapped, the company argued.

“What our research highlights is the need for an approach that allows for a lot of different investor preferences,” said Patrick Wood Uribe, chief executive of Util, adding that attempts to categorise companies as only good or bad did not meet the need for nuance.

“This is more accurate,” Wood Uribe said, adding that it fitted with a global trend towards more personalisation.

For some funds, for example the BAD ETF, a US-listed exchange traded fund that focuses on the betting, alcohol, cannabis and drugs (biotechnology and pharmaceutical) industries, its laggard status according to three UN SDGs is exactly where its founder expected it to end up.

“I wouldn’t want to say that we are totally contra ESG, but we don’t think that investors should sacrifice their returns because of some stigma or something,” said Tommy Mancuso, president and founder of the BAD Investment Company.

BAD, which launched in December last year, has $8.7mn in assets under management and has lost more than 16 per cent since the beginning of the year. Mancuso is adamant, however, that the fund is well positioned to benefit from regulatory changes and a general market upturn.

“I’m in complete disagreement with any person who tries to shame someone for the way they invest. In the end, we invest to make money,” Mancuso said.

In the laggard sections across the board, funds focusing on the extractive industries feature heavily. BAD was identified as a laggard according to the Quality Education, Gender Equality and Decent Work and Economic Growth metrics. It did not score highly on any metric.

Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, said the report’s findings were welcome in many respects, although he cautioned against putting too much faith in the actual rankings, given the unreliability of data from some developing and frontier markets.

“The paper is right to call out some aspects of ESG and sustainable investing. It is a highly complex topic which is often highly subjective, sometimes contradictory and often reduced to unhelpfully simple metrics,” Lamont said.

Util defended its decision to include funds that had not even set out to perform well according to UN SDG metrics.

“While demand is growing for tailored funds hooked around individual social or environmental concepts, we’re also moving away from the idea that ‘brown’ or ‘dirty’ activities should be scrubbed from portfolios,” Util said.

>>> US After Hours Summary: CSCO +4.6%, WOLF +19.1% higher on earnings; BBBY falls -15% as RC Ventures files to sell stake; BBWI -1.8% lower on earnings


After Hours Summary: CSCO +4.6%, WOLF +19.1% higher on earnings; BBBY falls -15% as RC Ventures files to sell stake; BBWI -1.8% lower on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: WOLF +19.1%, CSCO +4.6%, KEYS +3.3%, SNPS +1%, AMCR +0.8%

Companies trading higher in after hours in reaction to news: DCP +3.2% (PSX increases its economic interest in DCP from 28.26% to 43.31%; also makes offer to acquire all publicy held common units of DCP for $34.75/unit; also PSX realigns economic and governance interests in DCP), QDEL +2.6% (authorizes new $300 mln share repurchase program), WGO +2.4% (increases dividend by 50%; also authorizes new $350 mln share repurchase program), KIND +1.7% (director purchases shares), HLTH +1.2% (clinical study demonstrates that its point of care molecular COVID-19 test is as accurate as a centralized lab-based RT-PCR), DOV +0.8% (announces collaboration with Bottomline for fuel mgmt system), PRGO +0.7% (issues statement responding to news story regarding Zantac litigation), AVAV +0.5% (acquires Planck Aerosystems), MANU +0.1% (British billionaire Jim Ratcliffe is interested in buying the company, according to Reuters)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: BBWI -1.8%

Companies trading lower in after hours in reaction to news: BBBY -15% (RC Ventures files to sell BBBY stake), AXDX -12.3% (commences public offering), APRN -6.3% (meme stocks lower on BBBY RC Ventures news), GME -3.8% (meme stocks lower on BBBY RC Ventures news), FUBO -3% (meme stocks lower on BBBY RC Ventures news), HUT -2.7% (establishes at-the-market equity program), EAR -1.3% (supports new regulation on OTC hearing aids; believes its hearing aids are within the FDA's requirements), RGTI -0.6% (stock offering by selling shareholder)

FT : Ofgem director quits in protest at changes to price cap calculation

Ofgem director quits in protest at changes to price cap calculation
UK energy regulator gives ‘too much benefit to companies at expense of consumers’, says Christine Farnish

A board member of Ofgem has quit after accusing the energy regulator of prioritising companies over consumers.

Christine Farnish, a non-executive director at Ofgem, said she had resigned because the “regulator didn’t get the balance right and gave too much benefit to companies at the expense of consumers”. 

“It’s a judgment call. Answers aren’t particularly palatable but you want the interests of consumers to come first,” she said.

Farnish’s departure was sparked by Ofgem’s decision this month to change the way it calculates the energy price cap, an adjustment that analysts have warned could add hundreds of pounds to household bills.

Her resignation is a further blow to the beleaguered regulator, which has been heavily criticised by consumer groups, MPs and the National Audit Office over its handling of the energy crisis.

Ofgem said at the start of August that it was changing the methodology for the cap to enable suppliers to recoup the full costs of buying energy for their customers at current very high prices. The regulator insisted the changes were necessary to preventing more suppliers from going bust, after the costly failure of about 30 companies since the start of January 2021.

Analysts upgraded their estimates for the cap by hundreds of pounds following the revisions. Martin Young at Investec warned the tweaks would push the cap to around £4,200 a year in January, up from a previous estimate of £3,725. The cap is currently £1,971 a year based on the consumption of a typical household.

Other analysts have since revised their forecasts higher in light of the combination of the change to methodology and further increases in wholesale gas and electricity prices.

Ofgem confirmed the methodological changes at the same time as it announced it would update the price cap every three months as opposed to twice a year, which also sparked outcry from fuel poverty campaigners.

Ed Miliband MP, Labour’s shadow climate change and net zero secretary, said Farnish’s resignation was “further proof that the government is asleep at the wheel when it comes to the energy bills crisis”.

“We simply cannot allow the British people to suffer a further increase in bills.”

Farnish is a former chair of Consumer Focus as well as a former non-executive director at the water regulator Ofwat.

Ofgem said: “Due to this unprecedented energy crisis, Ofgem is having to make some incredibly difficult decisions where carefully balanced trade-offs are being weighed up all the time. But we always prioritise consumers’ needs both in the immediate and long term.

“The rest of the board decided a shorter recovery period for energy costs was in the best interest of consumers in the long term by reducing the very real risk of suppliers going bust, which would heap yet more costs on to bills and add unnecessary worry and concern at an already very difficult time.”

Ofgem has faced criticism after dozens of smaller suppliers folded in the past 18 months, adding more costs to household bills linked to the transfer of their customers to other companies.

FT : Japan’s latest alcohol advice: please drink more

Japan’s latest alcohol advice: please drink more
Government-backed project aims to counter drop in consumption among young that has hit tax revenues

While most countries would welcome sobriety among their youth, Japan has veered in the opposite direction: with a campaign for them to drink more alcohol.

The east-Asian nation’s tax agency is requesting ideas on how to tempt younger citizens to step up their tippling as the finance ministry frets over the fiscal implications of generational change.

The unorthodox government-backed “Sake Viva!” contest closes in early September and calls on people aged between 20 and 39 to help devise business ideas to revitalise an industry hit by demographic changes, the pandemic and diminishing interest.

The planned intervention follows the failure of Japan’s drinks industry, despite all its marketing powers, to stem a long-term slide in Japanese alcohol consumption that began well over a decade before the pandemic.

Taxes on alcohol products accounted for 3 per cent of the government’s tax revenue in 2011, but had fallen to 2 per cent by 2020, according to the tax agency. Japan’s government runs a chronic budget deficit and has total debts equivalent to more than twice the nation’s gross domestic product.

A fall in the total volume of alcohol consumed in Japan was inevitable once the indigenous population began to shrink over a decade ago and the proportion of citizens aged over 65 increased to more than a quarter of the country eight years ago.

According to figures released by the tax agency, Japan’s average per adult annual intake of booze has dropped from 100 litres per year in 1995 to 75 litres in the 2020 fiscal year.

The World Health Organization in 2018 put Japan’s annual per capita drinking rate — expressed in terms of pure alcohol — at eight litres a year, more than China’s 7.2 litres but less than the UK’s 11.4.

Younger Japanese people, in common with many others of their generation elsewhere in the world, drink less heavily than their forebears and increasingly do not drink at all.

“Sake Viva!” is the latest in a long history of schemes designed to offset the effects of Japan’s population ageing and shrinking, as well as changing attitudes towards health and consumption.

The tax agency launched an “Enjoy Sake!” project early this year and requested ideas for events to promote the sale of alcoholic beverages.

The latest contest aims to draw out ideas that acknowledge fundamental shifts in lifestyle — not just those caused by the coronavirus pandemic, but also longer-term factors weighing on Japan’s drinking habits.

Organisers hope that entrants will come up with “new products and designs”, as well as plans to encourage drinking at home. They also hope to find ways to use the metaverse to generate the sort of bonhomie that would traditionally lead to opening a bottle.

Japan’s health ministry said it had not co-operated with the tax agency on its contest but was in close regular contact with it over alcohol and health issues. The ministry added that it expected the campaign to be mindful of the “appropriate amount of alcohol consumption” that would avoid major health problems.

FT : Germany’s Uniper on the ‘brink of insolvency’ after €12bn loss

Germany’s Uniper on the ‘brink of insolvency’ after €12bn loss
Europe’s biggest importer of Russian gas has become a ‘pawn’ in Ukraine conflict

German utility Uniper reported a €12.3bn first-half loss, saying it had become a “pawn” in the Ukraine conflict pushed to the “brink of insolvency” by a dramatic drop in Russian gas deliveries.

The loss by Europe’s biggest importer of Russian gas is one of the largest by a German company, eclipsing Bayer’s €10.5bn loss in 2020.

Uniper chief executive Klaus-Dieter Maubach warned on Wednesday that Europe faced a grim energy outlook this winter, saying the gas supply crisis made it “almost impossible” to predict the group’s performance in the second half of the year.

“We do assume that Gazprom, if it wanted to, could considerably increase its gas deliveries through Nord Stream 1,” he said, adding that gas prices had gone haywire because of “concerns about the reliability of energy supply”.

Germany, which before the Ukraine war bought 55 per cent of its gas from Russia, is trying to avoid rationing energy this winter. Despite the shortfall of Russian deliveries, its gas storage facilities have been filled to 77.3 per cent capacity, in line with the government’s plans. The government aims to bring the level to 95 per cent by November.

Uniper, majority-owned by Finnish utility Fortum, last month received a €15bn bailout from the German government, which will take a 30 per cent stake and also provide loans to prevent a collapse. Uniper’s share price has lost more than 81 per cent this year, bringing its market capitalisation down to €2.8bn.

The company has been squeezed by a drop of up to 80 per cent in Russian gas deliveries since June, forcing it to buy expensive supply on the spot market to meet contractual obligations to provide gas to clients in Germany including 100 regional utilities owned by municipalities.

From October, Uniper will be able to pass on 90 per cent of the higher costs to consumers. The company warned that it would nonetheless continue to generate operating losses for the coming 18 months but hoped it could “return to positive territory” in 2024.

Over the past 12 months, gas prices in Germany have risen more than fivefold to €200 per megawatt hour. Uniper said that since Russian gas supplies through the Nord Stream 1 pipeline started to dwindle in mid-June, it has suffered an average daily loss of €60mn. It has also taken a €2.7bn impairment on its stake in defunct Russian gas pipeline project Nord Stream 2 and a €4.9bn loss on its derivatives position.

“In Germany . . . there is not a single energy company that such a development would not bring to its knees,” Maubach said, adding that Uniper had already drawn more than half of a €9bn credit line from state-owned German lender KfW.

Under the Uniper bailout, the company will be able to access up to €7.7bn in government support. Rating agency Standard & Poor’s has labelled Uniper “a government-related entity” since the rescue.