The broader sell-off continues with the main US indices breaking below their support and 200MA as anxiety grows around policy uncertainty from the ongoing tariff war and reduced fiscal support. Although the sell-off over the last few weeks was mostly seen in the Mega Tech US stocks, the market appears to be de-risking positions from the broader cyclicals sectors as growth concerns exacerbate. Despite the recent bullish sentiment about Europe, weakness in European cyclicals has also followed the US, even if to less of an extent.
10Y yields continue to fall on the back of the stock market weakness, as the market is now pricing in 80bp of cuts in 2025 compared with only c.35bp a month ago, possibly also reflecting comments from both Trump and Bessent that pain is likely necessary in the shorter term as DOGE attempts to ‘clean-up’ the extreme fiscal spending by the previous administration, before any positive effects from deregulation and tax cuts cuts kick in.
This coming week is quiet in terms of economic data, with market attention focused on the US CPI on Wednesday. Economists expect both headline and core to come in at +0.3% MoM vs. +0.5% previously for headline and +0.4% for core. YoY CPI growth is expected to drop to +2.9% from +3% for headline and to +3.2% from 3.3% for core. In spite of the increased inflationary pressures expected from potential tariffs, pressures, namely from freight costs, high energy prices and China input costs, have all fallen significantly, reflected in a big drop in live inflation data, as shown in the Trueflation index. As such, we expect market focus to be on the growth narrative going forward and less on inflation.
In terms of positioning, the recent trend in selling from the Hedge fund cohort has accelerated, reflected in gross leverage exposure reaching record highs, while net exposure continues to decrease and the long-short ratio has dropped to a 5Y low. Selling has mainly been focused in Financials, Tech and Energy, while Staples was the sector most bought. Mirroring the ongoing flow into Europe funds, the EU was the only region not sold by the cohort, while selling in Chinese equities follows the bearish US activity. The long-only cohort has also continued to reduce its overall risk from US equities, rotating mostly into defensive Health Care and Utilities, while retail has continued buying into the weakness over the last few weeks, despite the generally negative market sentiment.
For systematic positioning, although for global equities the cohort is estimated to be sellers over the next few weeks, as far as US equities are concerned, the pressure could be broadly overdone with the cohort now estimated to have unwounded its long positions and now positioned short in the region. With the SPY losing 8.5% over the last few weeks, outpacing the implied move from our liquidity indicator, and with dealers in negative gamma we now see more favourable risks to the upside and propose SPY Mar25 570/580 Call spreads with a 3x max payout