The risk-off fueling stock markets’ rally this year is likely to sour, with headwinds from banking turmoil, an oil shock and slowing growth poised to send stocks back to their 2022 lows, according to JPMorgan strategist Marko Kolanovic.
“The Fed has signaled no intention to cut interest rates this year, however, risky assets are showing an unprecedented rally, with European stocks trading near all-time highs and US stocks recouping recent losses,” Kolanovic wrote in a note to clients. “We expect a reversal in risk sentiment and a re-test of the market to its lowest level last year in the coming months,” he said, according to “Bloomberg” and viewed by “Al Arabiya.net.”
In his view, the inflows into equities over the past few weeks have been “senseless” and have been largely driven by methodical investors, pressure from short sellers, and a dip in the Cboe’s volatility index, or VIX.
Systematic investing is an investment approach that emphasizes data-driven insights, scientific testing, and disciplined portfolio creation techniques to seek diversified portfolio outcomes.
While the term “short pressure” or “short squeeze” refers to purchases driven by closing open sales positions for short sellers, when the percentage of shares sold on the short exceeds the number of shares available for trading, and stock prices or derivatives begin to rise, and therefore it is difficult for sellers to stop They lose their losses and are forced to buy to close open positions, which increases the price of shares.
The VIX is also known as the Fear Index, which measures the volatility in stock options contracts in the largest options market in the United States.
A drop in the VIX below 20, the level associated with less stressful periods, indicates that investors believe the banking crisis has been contained in the near term. However, Kolanovic describes the current market backdrop as “the calm before the storm”.
Kolanovic was one of the biggest Wall Street optimists during most of the market sell-off last year, and has since reversed his view, cutting his stock allocations in mid-December, January and March due to the poor economic outlook this year.
Stocks have remained resilient this year despite rising interest rates that have hit corporate earnings, slowed growth and unleashed a series of bank meltdowns in the United States and abroad. The benchmark S&P 500 rose 7% in the first quarter after dropping nearly 20% in 2022, while gains across technology stocks pushed the Nasdaq 100 up 20% since the beginning of January into a bull market.
The technology sector’s outperformance has become more exaggerated recently as traders pile up bets that banking system stresses will push the Federal Reserve to hit the brakes on its monetary tightening campaign.
US stock futures were flat on Tuesday, with contracts on the S&P 500 down less than 0.1%, while futures on the Nasdaq 100 were down 0.2%.
“It is worth noting the accordion-like nature of risk sentiment, as restrictive rates created a problem for many margin trades and the ensuing decline in yields relieved some of the pressure,” Kolanovic wrote. “Although central banks continue to tighten, there is a floor to cover the fight against inflation and respond to the market assumption with cuts, so the original source of pressure, higher rates for longer, could change the picture.”
Citigroup strategists, including Chris Montagu, said net positions have clearly shifted to the upside of the S&P 500 over the past week. They wrote in a separate note on Monday that there remains $15 billion in pressure deals for short sellers, which could support markets in the near term.
