Wall Street Fears ‘Hard Rollover’ of Risks After Calm Month

(Bloomberg) -- In the end, September wasn’t so bad for markets. And that’s making Wall Street nervous.

The S&P 500 finished the month up 1.7% and the MSCI All-Country World Index gained 1.9%. Gauges of volatility for both U.S. stocks and Treasury futures settled lower even as the yield on America’s benchmark 10-year debt rose by 20 basis points.

For at least some of that, thank the Federal Reserve, which cut rates for the second time in a decade in a bid to shore up economic growth. The move helped markets limp forward following a bruising August, yet a chorus of analysts is warning investors about the risks that still loom.

“Optimists may boldly claim that averting crisis -- but ending up with more (insurance) policy accommodation -- fosters a Goldilocks-esque environment,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd., in a note Tuesday. “But that amounts to neglecting a hard rollover of risks into the fourth quarter at our own peril.”

Varathan lists everything from the continuing U.S.-China trade dispute to geopolitical issues in the Middle East and Korea, not to mention the impeachment inquiry into U.S. President Donald Trump, as potential catalysts for market chaos ahead.

Wall Street Fears ‘Hard Rollover’ of Risks After Calm Month

He isn’t alone. Ryan Detrick, senior market strategist at LPL Financial, notes that the S&P 500 had no one-day drops of 1% and only two 1% gains throughout the whole month of September. That’s unusual and means the normally volatile month “could be passing some big moves to October this year,” he said.

Tail-risk hedges make sense given it’s the fourth quarter and equities have done so well this year, according to Saxo Capital Markets Pte. Global Macro Strategist Kay Van-Petersen. “It would almost be imprudent not to have some protection,” he said.

Investors may be taking heed. Options are pricing in heightened risk of a “big move in the near term,” Wells Fargo & Co. derivatives strategist Pravit Chintawongvanich wrote Monday. And the concern has already proven somewhat justified: the S&P 500 fell 1.2% on Tuesday, starting October on a down note after weak U.S. factory data.

At UBS Global Wealth Management, Global Chief Investment Officer Mark Haefele prefers income-generating strategies. He’s expecting yields to remain suppressed and upside for equities to be limited, according to a Monday note. He wants to see progress on the U.S.-China trade front as well as better economic data to get more positive on stocks.

There’s still some upside sentiment as well. UBS Group AG derivatives strategist Stuart Kaiser recommends a bullish trade -- but it’s to own S&P 500 October calls, which he sees as a good way to hold equity exposure while limiting risk given the trade-related events and key U.S. economic data coming this month.

Strategists tracked by Bloomberg have a median year-end prediction for the S&P 500 of 3,000, versus the index’s close on Tuesday of 2,940.25, so they’re expecting a modest gain from current levels.

Still, the downside catalysts can come swiftly and unexpectedly, as everything from Trump’s tweets on trade in May to the attack on Saudi oil infrastructure last month showed.

“All said, potentially hard-hitting risks persist and the warning is that long risk positions may be rudely (steam-)rolled over if complacency overtakes caution,“ Mizuho’s Varathan said.

©2019 Bloomberg L.P.

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