Key Points
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Fauci warns of ‘more and more’ coronavirus complications in young people 1
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The final day of June is a week away, and Wall Street is already speculating that there’s the potential some asset allocators, like pension funds, could take the big gains from the stock market and move them into bonds. 2
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North Korea suspends plans for military action against South 3
Fauci said he’s never seen a single virus have such a wide range of symptoms. 1
Fauci told lawmakers that parts of the U.S. are beginning to see a “disturbing surge” in coronavirus infections. While New York state is seeing a decline in Covid-19 cases, other states are seeing a rise in cases that “reflect an increase in community spread.” 1
“The end of the quarter is going to be pretty interesting, given how much the market has moved during this quarter. There could be volatility here. We already witnessed it and there’s potential for more, as we move toward the end of Q2,” said Dan Deming, managing director at KKM Financial. 2
Bond strategists pay particular attention to the month end, which can bring about moves in fixed income markets as pensions and other funds and investors adjust their portfolios to bring asset allocations back in line.
“We estimate that U.S corporate pensions will move about $35 billion into fixed income,” said Michael Schumacher, director of rates strategy at Wells Fargo. He added that is the largest flow in the six years he has been tracking portfolio rebalancing. 2
“The reasons are pretty obvious. You had this massive rally in stocks and bonds haven’t been keeping pace,” said Schumacher. The S&P 500 is up 3.3% for the month of June. Schumacher said his estimate is based on the assumption that about 20% of the amount of imbalance will be traded at month end.2
Schumacher said if 10-year Treasury yields moved back toward June’s high of near 0.96%, and if stocks rise along with it, there’s potentially $50 billion that could roll from stocks into bonds.2
Goldman Sachs reportedly identified $76 billion in pension selling of stocks. “While we acknowledge the risk of a small correction in equity markets over the coming two weeks as a result of this negative equity rebalancing flow, we continue to believe that we are in a strong bull market in equities and any dip would represent a buying opportunity,” the JPMorgan strategists wrote. 2
Some of the quarter end adjustments are already showing up in derivatives markets. 2
“Based on the price movement, it would appear that some market participants had to rebalance and or reposition their hedging because the market moved so much for the quarter.” 2
“There’s a very high probability of window dressing and readjustment of positions,” said Deming.2