By Tommy Stubbington And Christian Berthelsen
April proved a cruel month for investors in financial markets,
many of whom had bet the U.S. dollar would continue its march
higher, oil prices would fall further and the rally in bond markets
around the world would gain steam.
Instead, the trades that had proven winners in recent months
backfired, as an accumulation of negative economic data dimmed the
outlook for the U.S. economy and prompted many investors to push
back their expectations for when the Federal Reserve will raise
interest rates. The return of Greek troubles as a disruptive force
and flare-ups in the Middle East made it harder to predict where
markets were headed.
The euro strengthened 4.5% against the dollar in April after
tumbling 11% in the first quarter. The U.S. benchmark crude-oil
price soared 25% after declining 11% in the first three months of
the year. The Nasdaq Biotechnology Index fell 2.8% in April after
jumping 13% in the first quarter. Yields on German government bonds
bounced higher after nearing zero last week.
The turnaround month ended with an exclamation point Thursday.
The Dow Jones Industrial Average dropped 195.01 points, or 1.1%, to
17840.52, dragged down by suddenly vulnerable technology stocks.
Shares of Twitter Inc. tumbled 22% in April, a selloff that came
mostly after the social-media company's disappointing first-quarter
earnings Tuesday. In the first quarter, Twitter's stock rallied
40%.
For investors, the reversals highlight how quickly markets can
swing, especially when many traders have piled into the same
bets.
The rapid ascent in global stock and bond markets has stoked
worries about pricey valuations, making them vulnerable to a
selloff. A slowdown in U.S. growth, a brightening outlook for
Europe, pockets of resilience in Chinese demand and rapid cutbacks
by U.S. shale-oil producers are just some of the surprise factors
behind the turnabout across stock, bond, currency and commodity
markets.
Still, many investors say they are sticking with their bets.
They expect the U.S. economy to rebound--as it did last year--after
hitting a soft patch. The European Central Bank continues to pump
billions of euros into its economy through bond purchases.
And oil supplies in the U.S. remain abundant even as they show
signs of receding, potentially pressuring crude prices.
"It is spring cleaning," said Thomas Flury, head of currency
strategy at UBS Wealth Management, which oversees $2 trillion of
assets. "Everything that made money this winter is being pushed
away."
As they nurse losses, some fund managers are confident long-term
trends--such as rising stocks, a strengthening dollar, falling bond
yields and softness across commodity markets--will prevail.
UBS, for instance, still is favoring bearish bets on the euro.
The ECB is unlikely to scale back its stimulus measures, which
exert downward pressure on the currency, Mr. Flury said.
Meanwhile, the Federal Reserve is still on course to be the
first major central bank to increase interest rates--a move that
bolsters the dollar's allure--even if that happens later than
initially foreseen.
Nonetheless, Mr. Flury says he is bracing for more sharp
rebounds in the euro.
The European currency on Thursday gained 0.8% against the
greenback, to $1.1223, further defying earlier predictions that the
two currencies would hit parity. The euro has risen for six trading
days in a row, the longest winning streak since December 2013.
While the euro is up from its 12-year low of under $1.05, it is
still 7.2% lower on the year.
"It's a short-term unwind," said Alessio de Longis, a
macroeconomic strategist in the global multiasset group at
Oppenheimer Funds Inc., referring to volatility across markets.
"I'm convinced medium-term trends will re-establish themselves.
These were very crowded trades."
Oppenheimer, which oversees $237 billion, hasn't shifted its
bets it makes on behalf of clients despite the recent volatility.
The firm is bearish on the euro versus the dollar and bullish on
European stocks.
Mr. de Longis points out that the oil-price recovery was a
catalyst for some of the reversals across other markets. The rise
in oil prices capped the savings that consumers will see from lower
fuel costs that could be parlayed into other expenditures. That
weighed on stocks and the dollar, which were seen to be
beneficiaries of more robust consumer spending.
The benchmark U.S. crude-oil price jumped to a fresh four-month
high Thursday, closing at $59.63 a barrel on the New York
Mercantile Exchange. But record supplies in the U.S. and the
willingness of Saudi Arabia to keep its spigots open are likely to
limit the rally, analysts and investors say.
Across the Atlantic, both stocks and bonds have been pummeled in
recent days. In early March, the ECB began pumping EUR60 billion
($67 billion at Thursday's exchange rate) a month into the region's
bond markets, helping to fuel a rally in bond prices and a plunge
in the euro. The resulting collapse in bond yields sent a wave of
cash into eurozone stock markets, as investors hungry for returns
were pushed into riskier assets. When bond prices rise, yields
fall.
On Thursday, the yield on the 10-year Bund, as German government
bonds are called, climbed sharply to 0.37%. Just last week, the
yield hit an all-time low of 0.05%, spurring predictions of zero or
even negative yields on the benchmark for European credit
markets.
Bunds have now given up all the price gains made since ECB
bond-buying kicked off, but 10-year yields remain well below the
0.54% seen at the end of 2014.
Data on Thursday showed consumer prices in the eurozone were
steady in April after four months of declines, favorable economic
news that added fuel to the bond selloff, traders said, since bond
investors are sensitive to any rise in prices that could erode the
value of their portfolio.
"There's been a fantastic rally, and bond yields are extremely
low," said Luca Paolini, chief strategist at Pictet Asset
Management, which oversees $438 billion of assets.
Pictet favors stocks, which should benefit from any pickup in
growth, over bonds in its portfolios, Mr. Paolini said.
For now, Europe's stock markets have also been caught up in the
frenzy. The Stoxx Europe 50 has lost 4.2% since April 15, although
the index remains up 14% this year. European stocks had rallied in
part on hopes that a weaker euro would make the continent's
exporters more competitive and boost profits earned outside Europe.
A relatively stronger currency dulls that effect.
Write to Tommy Stubbington at tommy.stubbington@wsj.com and
Christian Berthelsen at christian.berthelsen@wsj.com