Investors usually treat rebalancing their investment portfolios at the end of the quarter as a routine procedure, but the quarter that ended Wednesday likely witnessed widespread movements, as the sharp decline in bond prices led to imbalance in many portfolios, according to analysts.
The decline in bonds over the past quarter is in stark contrast to the performance of stocks, which remained hovering near record high levels. Therefore; It is expected that investment portfolios that adhere to a specific ratio to distribute assets between stocks and bonds will have made large-scale changes to restore balance to target levels, according to Reuters.
Jordan Jackson, global markets strategist at JP Morgan, said: “I believe that the rebalancing process this quarter will be very important, and similar to any process we have witnessed historically. Due to the high levels of volatility and the large deviation from the targeted asset allocations.”
The number of managers who adjust their exposure to assets this week, versus those who find reasons to wait, will determine the course of stock and bond trading at the end of the quarter. Which may support fixed income markets and put pressure on corporate stocks.
According to a report issued by Goldman Sachs on Monday, US pension funds alone were expected to sell shares worth $33 billion in the days surrounding the end of the quarter, simply to align their actual distributions with the target ratios, with the resulting proceeds directed towards buying bonds.
These estimates place the third quarter, which just ended, at the 98th percentile, within the top two percent of cases, compared to all similar estimates recorded since January 2000 in absolute dollar terms. This means that estimates exceeded the $33 billion mark in only two percent of the previous quarters.
The full effects of the rebalancing are likely to become clearer during the first days of the fourth quarter.
Although it is difficult to track these financial flows in real time, Jackson indicated that he observed indicators of rebalancing in flows of mutual funds and “exchange-traded funds (ETFs)” in recent weeks, as investors emerged as larger buyers of bonds.
Quarterly portfolio reviews are part of the risk management practices followed by many investment managers and advisors, whether they manage large or small portfolios. When markets witness severe volatility, investors can adjust their positions at a faster pace, while some may avoid rebalancing for a quarter or two as long as allocations do not exceed specific levels.
Michael O'Rourke, chief market strategist at Jones Trading, a brokerage, banking and investment firm, said: “Investors should be bolder than usual in rebalancing. Because the sell-off in Treasuries is creating a more attractive investment opportunity than we've seen in decades, while stock prices look sky-high. But I fear that many will find it more difficult than usual.”
Is it time to buy bonds?
Investors and analysts acknowledge that rebalancing a losing asset class is always a psychological challenge. The bond market deteriorated steadily as the quarter progressed; This led to the largest increase in the 10-year Treasury yield since the second quarter of 2009. At the same time, US stocks fluctuated near their highest levels.
Michael Gates, lead portfolio manager for BlackRock's Targeted Allocation ETF portfolio, said: The world's largest asset manager, he's overseeing some of the rebalancing, tilting portfolio models toward classes of stocks and bonds that he sees as offering less risk and greater profit opportunities as the end of the year approaches.
Gates added: “We are keen to manage risks in a balanced way by not allowing our models to increase their investments in stocks excessively at this stage.”
For financial advisors working with individual investors, it can sometimes be difficult to overcome their aversion to investing more money in underperforming assets.
“The biggest challenge is behavior,” said Mike Casey of AE Advisors in Alexandria, Virginia. “Clients by nature want to let profitable assets grow.”
Chinese oil refineries have suspended exports of petroleum products to markets outside Hong Kong and Macau until further notice from Beijing, in a move aimed at protecting domestic supplies, but it may increase pressure on global fuel markets that are already suffering from a shortage of supplies coming from the Middle East and Russia.
Four people familiar with the matter said that Chinese refining companies have not yet received the green light from the authorities to continue exporting petroleum products to foreign markets, coinciding with the start of the week-long National Day holiday.
PetroChina, one of the country's largest state oil companies, on Wednesday canceled a number of shipments of gasoline and jet fuel that were scheduled to be exported during October, according to three sources.
The company concluded most of the shipping deals that were canceled during the past two weeks. The move indicates that Beijing is giving increasing priority to securing the needs of the local market in light of the uncertainty surrounding global energy markets.
Zhejiang Petrochemical Company, one of the largest private refining companies in China, also refrained from scheduling any shipments of petroleum products during the holiday week, according to an informed source. PetroChina, Zhejiang Petrochemical and the National Development and Reform Commission did not respond to requests for comment, in light of the National Day holiday.
There is still uncertainty surrounding whether Beijing will allow exports to resume after the holiday ends on October 7. The sources said that the decision may depend on the levels of local fuel stocks and the volume of refinery production.
China is the largest oil refining center in the world, and therefore its exports of diesel, gasoline and jet fuel represent an important source of supplies, especially in Asian markets. The continued suspension of shipments would reduce the quantities available for trade at a time when markets are already suffering from supply disruptions from major production areas.
The effects of concerns quickly appeared in the Asian diesel market, as diesel refining margins rose to the highest level in a week at about $75 per barrel. The price difference between October and November contracts also rose to the highest level in two weeks, indicating an increase in the value of spot supplies as fears of a supply shortage grow.
The Chinese move gains additional importance in light of the disruption of flows of petroleum products from the Middle East and Russia. The absence of Chinese shipments for a longer period may lead to intensified competition among Asian buyers for available supplies, and fuel prices in some markets to rise to new levels.
The suspension does not necessarily mean a permanent shift in Beijing's policy towards exports of petroleum products, as the Chinese authorities have been using export quotas for years as a tool to achieve a balance between the needs of the domestic market and the goals of the refining sector. But the timing of the decision makes inventory levels and domestic production the most important factors in the coming days. If authorities see domestic supplies as comfortable after the holiday ends, they may allow exports to resume, while continued concerns about stocks could lead to restrictions being extended.
As for global markets, attention after October 7th will focus on any new directives from Beijing to major refineries. The continued absence of Chinese products, even for a limited period, could further tighten the Asian fuel market, and raise refining margins and prices, at a time when the flexibility of global supplies has become more limited.
A survey showed that growth in the manufacturing sector in the euro zone continued to accelerate in September, recording its fastest pace in more than 4 years, as strong demand pushed new orders and production to levels not seen in the region for years, despite the continuing conflict in the Middle East.
The Eurozone Purchasing Managers' Index for the manufacturing sector, issued by Standard & Poor's Global, rose for the third month in a row, to 52.9 points in September, compared to 52.7 points in August. The index thus reached its highest level since May 2022, exceeding the initial reading of 52.7 points, according to Reuters.
“This recovery is due to increased demand for investment goods, such as machinery and equipment, as production of these capital goods grew in September at the fastest pace since the recovery phase that followed the Covid pandemic 5 years ago,” said Chris Williamson, chief economist at Standard & Poor’s Global Market Intelligence.
He added: “This reflects an increasing demand, especially for equipment related to artificial intelligence and the defense sector.”
Growth included various parts of the economic bloc, with the Netherlands at the forefront of this expansion. Germany, the largest economy in the region, recorded strong growth, while expansion was modest in France, Italy and Spain.
New orders recorded their fastest growth rate since early 2022, supported in part by increased exports, which reached their highest level in more than 4.5 years.
The production sub-index also rose to 53.6 points, recording its highest level in 55 months, which boosted business confidence to its strongest levels since February.
After ending more than three years of job cuts in August, manufacturers ramped up hiring in September, albeit at a modest pace.
However, the increase in prices may pose a threat to the recovery path; Inflation in input costs and prices of final products accelerated over the past month, indicating growing inflationary pressures. Official data scheduled for release on Friday are expected to show the inflation rate rising to 3.6 percent in September, from 3.2 percent in August, to record its highest level since September 2023.
Expectations of continued high inflation have increased the chances of the European Central Bank raising interest rates further, as markets are currently pricing in three interest rate increases by mid-2027.
Williamson added: “Demand for consumer goods is still declining... as high costs of living constitute a burden that limits household spending.”
He continued, saying: “It is therefore worrying to see both input costs and selling prices rise again at an accelerated pace in September, which will fuel speculation about the possibility of the European Central Bank raising interest rates again.”
German manufacturing maintains its momentum
The German manufacturing sector maintained its recovery momentum in September, with production and new orders recording strong growth again, despite renewed inflationary pressures from global energy markets.
The final Standard & Poor's Global Purchasing Managers' Index for the German manufacturing sector fell slightly to 53.9 points in September, from 54.3 points in August, but remained above the initial reading of 53.8 points.
Production rose for the ninth month in a row, slowing only slightly after recording its fastest pace of expansion in more than 4.5 years in August. New orders also increased for the fourth month in a row, with export sales growing again, driven by demand from Asia, Europe and the United States.
Phil Smith, associate director of economics at Standard & Poor's Global Market Intelligence, said these numbers reinforce the prevailing view that economic conditions are holding up better than expected in the face of rising energy prices and rising long-term interest rates.
Cost pressures intensified in September after declining over the previous three months, as input price inflation rose to its highest level since June, while final product price inflation rose slightly to reach its highest level in 3 months.
Producers' expectations for production over the next 12 months also reached their highest level since February.
French manufacturing is expanding
The French manufacturing sector expanded for the second month in a row in September, although the pace of growth slowed due to a decline in new orders.
Standard & Poor's Global reported that the French manufacturing purchasing managers' index fell to 50.6 points in September, from 51.1 points in August.
However, the final reading of the index in September was stronger than the initial reading of 50.3 points. Standard & Poor's Global indicated an increase in industrial production, despite the decline in new orders for the fifth month in a row, adding that inflationary pressures remain a source of concern.
Data published this week showed consumer prices in France rising more than expected, with headline inflation reaching 3.4 percent.
“With rising inflation, a worsening energy market crisis and tightening financial conditions, the French manufacturing sector was able to achieve growth in September,” said Joe Hayes, chief economist at Standard & Poor’s Global Market Intelligence.
He added that this “reflects a remarkable degree of flexibility,” although the decline in new orders, low inventory levels, and weak expectations raise questions about the sustainability of this expansion.
