Headline Risk Hits New Highs After Manic Monday

Authored by Jan-Patrick Barnert via Bloomberg,

Calling yesterday “Manic Monday” seems an understatement, given the way headlines with absurdly short shelf lives whipsawed markets.

Wild swings like these certainly don’t remove risk, and leave investors facing expensive hedging choices as they seek protection from continued unpredictability.

At least there is no longer any doubt that this is a market crisis on a par with any of the major boilovers of recent years.

Price action saw the Stoxx 600 lurch to its biggest intraday moves since the height of the COVID selloff.

Oil traded more like a meme stock than a commodity critical to the global economy.

In a time of conflict, newsflow is vital for traders and the threat of confusion is unusually high.

But the chaos caused by contradictory pronouncements landing within minutes of each other has taken things to a new level, even by the erratic standards of Trump’s second term.

The sharp moves across assets on Monday also showed how investors were scrambling to be prepared for upside, the frantic pace of positioning underscoring how nobody wants to miss the rally if the all clear eventually comes.

At the same time, it’s proving challenging to be hedged for downside risks.

Last week saw a short-lived relief trade as concerns that all the doom talk was overdone and that an end to the war could be close triggered the unwinding of hedges and an almost flat VIX futures curve.

That was all shaken up on Monday, first by reaction to Trump’s Strait of Hormuz ultimatum and then again later when he backed away from it.

Buying expensive hedging looks unwise on paper and the question arises of whether there is even any point in it, given that short-term market flip-flopping plays out within minutes rather than weeks.

“To say the cost of hedging is high relative to realized is an understatement,” Goldman Sachs’ Brian Garrett said in a weekend note.

Pricing for shocks in equities is sticky, with the cost of a one-month 5% S&P 500 Index put at 1.2% and even 1.9% for the Russell 2000 Index, as the week began.

“The break-evens of these when combined with the % declines already occurred would put US indexes well into ‘correction’ territory, and around levels you should ‘probably be buying,’” according to Garrett.

Given that about half of leading global equity benchmarks are already in or near a 10% correction from pre-conflict levels, it’s fair to ask whether investors should rather ride out the turbulence.

That’s unless the longer term view is that a deep recession is on the way, caused by higher energy prices and persistent uncertainty in the Middle East. A possibility, but not one with much evidence to support it yet.

Positioning, meanwhile, has shifted further as hedge funds sustained a net-selling stance on global stocks for another week.

Flows from systematic investors don’t show the group cutting exposure sharply.

“Equity positioning is now clearly underweight in our reading, although not yet close to the bottom of the band,” notes Deutsche Bank’s Parag Thatte.

“The current selloff is in the vicinity of a typical bottom in size and time,” he says, pointing to the historical average three-week drawdown of 6% to 8% during geopolitical shocks.

So, while Monday’s bewildering newsflow failed to provide a fully clear setup, it might at least have hinted at a more constructive overall tone.

From here, investors could opt to retain some defensive rotation as they wait for the oil price spike to move through fundamental data and look forward to a time when headlines aren’t repeatedly turning the market on its head.