The week has begun with a spike in risk appetite across major U.S and European equities as the U.S. and China have made a deal to significantly reduce tariffs and ease trade tensions that had previously rattled the markets. The U.S. managed to surprise the market again by lowering tariffs on Chinese goods from 145% to 30% for a 90-day period versus expectations of c.50%, while China cut tariffs on U.S. products from 125% to 10%. The SPY is now trading above its 200-day MA and close to the major resistance level of 580 we previously expected the market to eventually retest, but we were premature in our proposed Apr25 570/580 call spreads. Although the accompanied spike in US Treasury yields, oil and the USD would otherwise be bad news for risk assets, the upward recalibration of growth expectations amidst the prevailing bearish sentiment currently outweighs any bearish technicals.
Positioning remains favourable for equity markets due to a widespread underexposure among institutional and hedge fund investors. Despite a strong market rally, many metrics still indicate lingering scepticism about the current advance, as Hedge fund net leverage is near five-year lows and mostly short US equities, while systematic strategies remain under-positioned, sitting approximately 1.2 standard deviations below their historical average, leaving considerable capacity for additional equity allocation. Flows into foreign domiciled US equity funds have spiked over the last week while the hedge fund cohort has started adding back exposure to single stocks for the first time in the past month. CTAs have added over USD100bn in the last week to global stocks, pointing to early signs of a broader reallocation to equities. In terms of CTA trigger levels, the SP500 is now trading above both medium and short-term CTA buy trigger levels of c.5600 and 5780, respectively, in continued low top book liquidity and broadly negative dealer gamma across the board. Although the current negative gamma is mainly focused on the downside, we anticipate that institutions will likely choose to play the upside via options given the lingering scepticism, further increasing negative dealer gamma to the upside. In addition, with the VIX falling below 20, we would expect volatility control funds to slowly start adding back exposure. In terms of buybacks roughly 90% of the SP500 are now in an opening buyback window, with YtD buybacks running c.+20% YoY.
Although we believe the tariff agreement will likely overshadow any economic news, the key events during the week are the US CPI on Tuesday, US Retail sales and PPI on Thursday, and the UMich report on Friday. For the US CPI, the market expects both headline and core to rise 0.3% MoM (Prev -0.1% and +0.1%) and the YoY rate to remain stable at 2.4% and 2.8% respectively, driven by a rise in vehicle prices on the back of strong new vehicle sales in prior months. For the PPI, economists expect a 0.3% monthly print for both headline and core and Retail sales are expected to remain unchanged (prev. +1.5%). However, the retail control group that feeds into GDP is expected to increase +0.3% MoM.
We close our calls in BMW set out in Bounce or bust? Cautious upside bias for a 4x return on premium employed. Spot is now c.27% above our entry point at an RSI 71 and at first resistance level with delta on calls now at 0.67 vs 0.29 at open. We reiterate our running call ideas on Novartis, Rio Tinto, BP, LVMH, Carrefour, BASF and Adyen.