Despite the rising geopolitical instability broad equity indices continue edging higher as markets shrug off the situation in the Middle East potentially due to the fact that Iranian oil exports have been largely unaffected and the country has signalled willingness to return to the negotiating table as long as the U.S. does not join the affray.
Oil prices continue to retrace from their range highs, as the spike had been partially driven by CTAs forced to cover overly bearish Oil positioning ahead of the weekend, paired by golds retracement reflecting resumption of the risk on sentiment ahead of what could be potentially another strong US earnings season and an improving global liquidity impulse supportive for risk assets. Dovish macro data last week such as the CPI/PPI misses, are also supportive, pointing to the market’s likely overestimation of the impact from tariffs on inflation.
Absent any further escalation in the middle east, we still remain constructive on equities for the remainder of 2025 as previously set out in last week’s note, The bad, the good, and the better, however the short term technical backdrop in terms of flows is not as supportive as it has been over the last several weeks. While retail flows continue buying the dip at any opportunity, the buyback blackout window begins this week and runs for another five weeks with July being the seasonally weakest month of the year for buybacks. Hedge Fund net leverage across all strategies has also seen one of the biggest increases over the last two months, and although one could argue this could signal broader risk on momentum reignition, the pace of releveraging will likely subdue amidst the ongoing geopolitical tensions. We also enter quarter end Pension fund rebalancing which will likely see substantial selling given the recent run up and proximity to all-time highs likely capping any upside before the end of the month.
In terms of key events for the week, outside of the Middle East tensions which we believe will continue to dominate investors’ attention, Powell's press conference on Wednesday is expected to be a non-event, as he will likely reiterate the ongoing uncertainty and a cautious, wait-and-see stance, especially following the recent oil price spikes. Nonetheless the market anticipates no cuts at the upcoming meeting and is still pricing two cuts for the remainder of the year. Consensus also expect rates to remain unchanged at the BoJ and BoE meetings on Tuesday and Thursday respectively.
Despite our ongoing bullish stance on equities, given the ongoing risk of further escalation in the Middle East, the markets swift discounting of this risk, and the fact that the majority of our open ideas are calls we propose DAX Sep25 23000 puts costing 2.3% of underlying (Spot ref 23,699, Fut ref 23,820) as a hedge to the performance of our tracked ideas. We choose the DAX due to its limited to no exposure to Oil & Gas names that would likely benefit from an escalation, as well as the economy of Germany’s susceptibility to higher oil prices.