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Need to Know: Hedge funds had become ‘extreme’ sellers of stocks even before Yellen’s interest-rate remarks. Here’s why.



As a former Federal Reserve chair herself, now Treasury Secretary Janet Yellen should have known that her comments about the possibility of a need for an interest-rate hike would send markets into a tizzy, and by the end of the day she had walked back her remarks. No matter, as they’d brought about a classic rotation — the technology-heavy Nasdaq Composite

dived 1.9%, while the Dow Jones Industrial Average

actually rose slightly.

What was interesting was that the bond market didn’t follow suit. The 10-year yield on Treasury inflation-protected securities actually fell, to negative 0.81% — nearly a three-month low. It is noteworthy that the market for interest rates didn’t see anything terribly new or interesting in Yellen’s remarks about interest rates. The currency market wasn’t volatile. So maybe the stock market was vulnerable to selling.

Bank of America reports that, of its clients, hedge funds have been “extreme” sellers of stocks. The rolling four-week average flows for hedge funds were the lowest in the history of this series, which dates back to 2008 — and were three standard deviations below the average.

The hedge-fund selling was most concentrated in the communications-services and information-technology sectors, according to the BofA data — i.e., the tech winners that have thrived during the COVID-19 pandemic. Who’s buying? Retail clients were the only group to buy U.S. equities for the third week in a row and have been net buyers for 10 straight weeks, per Bank of America.

Why would hedge funds be getting nervous? Well, the April payrolls report on Friday is expected to be a seven-digit affair, after nearly topping a million in March. Even with Federal Reserve policy makers at pains to dismiss signs of surging inflation, they can’t ignore a rapidly healing labor market, so official data showing a surge in jobs creation will inevitably cause market discussion of when the central bank will pull back on its bond buying.

“As usual, it looks like the connection between legacy ‘duration proxy’ tech sector/’secular growth’ is the risk into the next two months of ‘peak’ U.S. economic data base-effect, with this week’s heavy U.S. data slate culminating in the CRITICAL Friday NFP, which is expected to be a WHOPPING +++ print and is set to dictate the timing of Fed ‘tapering’ socialization,” said Nomura Securities strategist Charlie McElligott.

How whopping? Steve Englander, head of global G-10 currency strategy at Standard Chartered, said a payrolls number in excess of 2 million would scare investors, and anything above 1.5 million would cause “uncertainty.” In other words, the risk is that by Friday, traders might be talking like Yellen did on Tuesday.

GM tops forecasts

ADP reported a 742,000 rise in private-sector payrolls for April, which was below economist expectations. The Institute for Supply Management’s services index edged lower to a still-strong 62.7% reading.


lost less than forecast in the first quarter on better-than-expected revenue. Activision Blizzard

rose as the videogame maker’s “Call of Duty” franchise drove better-than-expected results. Real-estate services provider Zillow


also topped expectations.

General Motors

easily topped first-quarter earnings expectations even as it reiterated a 2021 outlook that lags Wall Street expectations.

After the close on Wednesday, ride-hailing service Uber Technologies
e-commerce site Etsy

and payment provider PayPal

report results.


oversight board upheld a suspension of former President Donald Trump on the social platform.

Worrying coronavirus news came from the island nation of Seychelles, where infections have surged despite 62% of its population having received two doses of a vaccine. India’s foreign minister left the Group of Seven gathering in London because of possible exposure to the virus that causes COVID-19.

Back on the horse

U.S. stocks

edged up after Tuesday’s stumble. The yield on the U.S. 10-year Treasury

rose to 1.60%.

Random reads

This town used nearly $230,000 of coronavirus relief funds on a giant squid statue.

Loan officers are more likely to reject loan applications before lunch, a study finds.

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