(April 1): Wall Street’s largest trading desks say the extremely bearish positioning in equity markets going into the end of the quarter was the main driver of Tuesday’s big rebound in US stocks, rather than a shift in investor sentiment over the Iran war.
The S&P 500 Index surged 2.9% on Tuesday, the sharpest gain since May. The moves continued on Wednesday in Asia, where stocks soared the most in almost a year, a rally fuelled by comments by US President Donald Trump overnight that the war could end soon. Europe’s main equities benchmark advanced by 2%.
Traders at Goldman Sachs Group Inc and JPMorgan Chase & Co suggest this was mainly a squeeze: the sudden bounce was more about the unwinding of negative positioning by various market participants.
Hedge funds and trend-following funds such as CTAs had been aggressively shorting stocks. Trading desks also projected that pension funds were poised to direct large month-end flows towards buying equities, while the pressure point of short gamma among options dealers would roll off with Tuesday’s expiry, providing a further bullish impulse.
In short, fast money was just waiting for a spark to light the fuse for a rally and Trump’s reference to the war potentially ending within two to three weeks proved enough.
The Nasdaq 100 jumped 3.4% on the day, while the Magnificent 7 cohort of tech megacap stocks added more than US$700 billion in value, their third-biggest one-day gain since 2020. Benchmark Brent crude oil prices dipped below US$100 a barrel. Wall Street’s gauge of stock volatility, the VIX Index, is down more than six points so far this week.
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“Investors have been counting on a swift off-ramp to war essentially since it began, but I think from a market or global economy perspective it’s important to define what the true clearing event to revisit risk and take down recession odds really is,” wrote JPMorgan industrials sector specialist sales Paige Hanson. “How do we define this ‘ending’ as it pertains to what we collectively care about for stocks and global economy path forward?”
The volume of shares traded failed to match the euphoria evident at the index level. Traders at Goldman described Tuesday as only a four out of 10 in terms of overall activity.
On Goldman’s derivatives desk, traders described seeing “large hedges unwound” in the S&P 500, Nasdaq and VIX and ETFs. Trader Shayna Peart observed “positioning being taken off as the day went on”.
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For this bounce to be sustained, investors might need to see more detail and clarity on the path to de-escalation. Trump will give an address at 9pm on Wednesday, providing an update on the war, White House press secretary Karoline Leavitt said.
Traders have questions about how soon the Strait of Hormuz can reopen to shipping and how deep and prolonged the drop in oil prices can be. Meanwhile, the earnings season is approaching, where the market will look for signs of how the conflict affected first-quarter results and the wider economy.
Brian Heavey of JPMorgan said the bank’s traders dealing in tech and media stocks reported quiet flows on Tuesday, with short gamma positions helping to push indexes higher.
“Nothing in our flows would suggest this is more than an oversold/tactical bounce — yet,” he said.
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