With MSCI World back at all-time highs, and major US and EU indices just shy of their highs, many ask if this unexpected-even-to-bulls move has gone too fast too soon.
The Bad: At first glance, the recent significant advance in stock markets may be inorganic due to several technical and sentiment-driven factors. Extreme short positioning by CTAs and hedge funds, combined with low top-of-the-book order book liquidity, suggests a potential short squeeze fuelled by thin trading volumes. Negative dealer gamma indicates dealers have been amplifying price moves on the way up while oversold conditions across global equities reflect an overly bearish sentiment, often a contrarian signal for sharp reversals. Additionally, investors remain heavily positioned in defensive stocks, indicating a lack of broad participation in the rally, further questioning its sustainability.
The Good: Despite EU and US indices being just shy of previous ATH highs, institutional positioning still remains broadly bearish, with long-only asset managers refusing to chase the current rally, while hedge funds, although showing signs of adding to risk over the last few weeks, remain broadly short equities. Systematics are slight long equities but far from the max lenght leading up to the Liberation Day sell-off, which will likely have to add further length with a continued upward move. However, risk parity funds are still close to historic low positioning. Dealer gamma is currently negative to the upside, suggesting institutionals are gaining exposure to the rally through calls.
The Better: Looking ahead, several fundamental and macroeconomic factors paint a more optimistic picture for stock markets. Broadly positive tariff news headlines signal diminished trade tensions, fostering a supportive environment for risk assets. Hard data remains resilient, with steady GDP growth, resilient job numbers, and solid corporate earnings providing a strong backdrop. Soft data, such as consumer and business sentiment, is showing signs of improvement, reflecting growing confidence. Inflation continues to decline, easing pressure on monetary policy, while weakness in the USD and oil prices further bolsters risk assets by reducing input costs and currency headwinds. Despite lingering fiscal concerns, yields appear to have found a ceiling, offering stability and encouraging further investor participation in equities. Together, these dynamics suggest a more sustainable path for market gains, building on the tentative optimism seen in the current positioning.
Key Events This Week: The market's focus this week centres on inflation data releases from the US and China, with the US CPI expected to carry more weight. Investors are closely monitoring for any signs that Trump’s tariffs may be driving price increases, which could prompt a more hawkish stance from the US Federal Reserve. Looking at live Trueflation data, inflation increased from 1.3% in April to c.2% in May, as tariffs have begun to impact core goods in categories like household supplies. Consensus expects headline and core to rise 2.5% and 2.9% YoY, respectively in May. The 5Y5Y US inflation swaps remain broadly flat since liberation day, suggesting the market views the one-off tariff led price hike as transitory.
We continue to see risks to the upside despite close to previous ATH and maintain our Long QQQ Jan26 565 calls.