Laura Cooper, head of macro credit and global investment strategist at Nuveen, discusses the ongoing market turmoil driven by US policy changes and tariff uncertainty. She unpacks whether the confidence shift away from US assets, including the dollar, could be a long-lasting rotation or a temporary blip in the US exceptionalism narrative, and looks at how investors are hedging and protecting their portfolios in the current trading environment.
The strategist also discusses the recent divergence in retail and institutional flow—where retail traders are flooding into US stocks as many institutional investors head for the exit—and if or how this could have wider implications for market volatility and liquidity.
Interview
Jo Gallagher The last few weeks have seen a major shift in confidence in US assets with dollar depreciation and a sell-off in US equities and US debt, all in reaction to Trump’s tariff agenda. Is this a material shift away from the U.S. or are we seeing a temporary redirection?
Laura Cooper Well, that’s the active debate that we’re having across the platform and I think at this stage, it’s about looking for data sources and flow insights to try to arrive at a conclusion. But I think at this juncture, it is too soon to say. I think one thing that is certain is the fact that market participants were caught quite off guard by just how quickly we saw a shift away from that US exceptionalism narrative. And despite the fact that we are seeing some relief on the tariff headlines, we had Fed speakers more recently suggest that maybe rate cuts could be pulled forward. Overall, this is just going to inject greater policy uncertainty that’s going to continue to weigh on the confidence channel and overall drag US economic activity. So against this backdrop, this rotation away from US assets does really make sense.
Now, to your point, is this a temporary blip or is this more of a structural shift in the data so far? Looking at equity data, for example, capital flows do tend to be quite lagged. But if we look at some sources, like an aggregate of ETF flows and positioning, it does suggest that we are seeing foreign investors buy back into U.S. Equities. If we look data ending the week of April 17th, and in particular, Europeans were buyers of U.S. Equities once again, in addition to their own domestic stock markets. In fixed income, we are seeing consecutive weeks of outflows. But again, we’re watching for really important data points. So Japan has been a predominant buyer of U S treasuries. And if we look at kind of the weekly data that recently came out, we did see Japanese investors resume their buying of treasuries once again. So we are seeing overall April down about 19 and a half billion from a Japanese buyer base, but overall the fact that they’re resuming, I think is a positive signal. And then finally, if we start looking at kind of treasury auctions, even the weakest auction in the U.S at the three year, we still saw quite robust demand from the foreign buyer base in line with what we’ve seen in previous auctions so far this year. And then if we look at the U.S. Dollar, to your point, has really been the outlier in recent price action. This, to our mind, is a buyer strike at this juncture. We’re not seeing signs yet of a liquidation event. We’ll be watching for any signs of forced leadership change at the Fed, any shifts in that rule-based economic order in the U S, and any material signs that this policy uncertainty can continue to persist. I think that’s when we’ll be kind of more cautious that this could potentially be that structural shift.
Jo Gallagher So how are investors hedging and protecting their portfolios against these headline risks? What do you see in the data?
Laura Cooper I think against this backdrop of heightened macro uncertainty, liquidity is key. We are seeing a harvesting of liquidity from liquid positions in portfolios. When it comes to illiquid exposures, those that are actually nearing maturity, we are seeing reinvestments being deferred. I think overall, the trend amongst institutional investors is to take this wait and see approach.
Now, we are seeing some signs of cash being redeployed, for example, in our own multi-sector credit portfolios. We are now looking at potential opportunities in high yield against a backdrop where we still think the fundamentals are quite firm. And then gold, looking at the price action, is clearly that key portfolio diversifier that investors are flocking to. In speaking with our traders, what they’re seeing in terms of emerging markets, we’re not really seeing appetite for hedges. I think overall, CDX really just captures a very narrow slice of what’s happening. We tend to see options being wildly expensive in this type of backdrop.
When it comes to rates, we are seeing more balanced flows around hedges, we’re really seeing that appetite for tail risk hedges again, because it’s quite expensive, it may bleed carry. Perhaps the most interesting trend that we are seeing is actually coming out of Europe in terms of the European investment grade space. We are seeing real money demand for hedges taking place in terms kind of greater volume of iTraxx and other optionality, particularly from UK real money investors and so that does seem to be kind of the clearer way to hedge exposures in this backdrop.
Jo Gallagher A big theme right now is the divergence between retail and institutional growth. We have retail investors flooding into US equities, whereas institutional investors are making their way for the exit. Why is this happening and are we seeing glimpses of this in Europe and elsewhere?
Laura Cooper Well, I think what we’re seeing is that retail investors continue to have this buy the dip mentality. And this comes after one of the longest bull market rallies on record in about 11 years. And so I think these investors have been conditioned to the mindset that stocks only go up. So these bouts of elevated volatility really just present buying opportunities for them. And actually, if we look at some of what the data is telling us. Since April 2nd, that Liberation Day where we had those tariffs announced, we saw retail investors buy more than 30 billion of US equities and ETFs, and about 60% of these flows were concentrated in individual stocks and in particular concentrated within the so-called Magnificent 7.
We’re not necessarily seeing strong signs of conviction in Europe and Japan, but that largely reflects the fact that those Magnificent 7 stocks are concentrated within the US. And to your point, institutional investors continue to take that wait and see approach because of the elevated uncertainty. And I think the best evidence of this was actually in the March Bank of America fund manager survey. Where we saw a record number of fund managers want to shift their allocations away from the US. So we had a net 36% underweight to US equities, and that was relative to a 17% overweight in the month of February. And that was the largest position shift on record. So I think that does capture this dispersion that we’re seeing in terms of investor base, but as well, just the degree of uncertainty that I think is prevailing in that institutional investor mindset.
Jo Gallagher Could this retail divergence have knock-on effects to volatility and liquidity across global equities?
Laura Cooper I think that is the case because markets tend to like themes and we are seeing concentration risk as a result of those themes. And I think inherent is just risk on the back of that. To our mind, kind of from a bigger picture perspective, contagion is a clear risk in this environment and that really stems from two key concerns. The first is around just the amount of net worth that has been wiped out of both equities and fixed income. Since that Liberation Day announcement, it’s quite staggering, and this could actually force liquidation. And then the second component is what I alluded to earlier around the US dollar. Its safe haven properties are clearly being tested in this type of uncertain environment. Typically in times of crisis, we tend to see investors kind of flock to cash that tends to drive that US dollar appreciation and that is kind of the inherent bias that portfolios are built on.
In this current backdrop, where we are seeing that stock-bond correlation rise, the fact that the US dollar is coming under pressure, I think really is uncharted territory for investors. The longer that this uncertainty persists, the greater the risk is that we’re going to have more bouts of volatility. And the dollar, I think the characteristics around that will be really crucial to watch for going forward.
Jo Gallagher Thank you, Laura, for your insight, and of course, you for watching. This has been Trader TV This Week.
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