Markets Increasingly Looking Past Peak Uncertainty

By Michael Msika, Bloomberg Markets Live reporter and strategist

Odds of a swift resolution to the Iran war remain the equivalent of a coin toss, but after fast-money positioning was flushed out, peak uncertainty for stocks seems to have passed.

Confronted by days of contradictory headlines, investors have been determinedly glass-half-full. Conviction is growing that the US is leaning toward de-escalation, while central banks may prove less hawkish than feared as they deal with conflict fallout. Whatever the outcome is, it will have longer-term repercussions for equity exposure. This suggests that following a strong bounce as hostilities die down, the market may move sideways for some time.

“Overall, positioning is cleaner but not depressed, as the ‘Trump put’ still prevails,” say Barclays strategists led by Emmanuel Cau. “Investors remain skewed toward the de-escalation scenario, with recent newsflow suggesting uncertainty may have peaked. So while the tactical risk-reward for equities around the Iran war has likely improved, in our view, the left tail arguably remains under-priced.”

Long-only investors haven’t really capitulated, retaining relatively elevated exposure, even when it comes to futures positioning. Yet, hedge funds and CTAs have sold equities in size this week on both sides of the Atlantic, according to data from Goldman Sachs prime brokerage. US equities recorded the largest one-day de-grossing since September on Monday, while CTAs sold about $146 billion of global equities in the last month, including $68 billion in Europe. 

CTAs are now short $16 billion across DAX/SX5E and CAC with significant upside convexity, says Goldman trader Ioannis Blekos, who pegs the first triggers for the Euro Stoxx 50 around 5,750 points. The blue-chip benchmark has held major support levels this week after sliding into oversold territory, including its 200-day moving average and 38% Fibonacci retracement.

Iran has kept up missile and drone attacks on Israel and Arab Gulf states, even after the US floated a plan to end the war. There is no certainty an agreement will be found, yet the risk-reward has drastically improved in the eyes of investors, with positive headlines now having a stronger impact on stocks than negative ones. 

“We are closing our tactically bearish call and moving to neutral,” say the JPMorgan Market Intelligence desk led by Andrew Tyler. They note that Monday’s trading signaled a market with an asymmetric risk-reward toward a move higher. “Barring escalation, we expect markets to chop sideways, but it does seem more likely that we will get a decisive move shortly, either steps toward a ceasefire or another wave of escalation.”

Still, oil settling around $100 is not a positive for inflation and the path forward for interest rates doesn’t look great. The European Central Bank may have sounded less aggressive than some expected on Wednesday, but there are still at least two rate hikes priced by the end of the year. Meanwhile, the Federal Reserve is now expected to remain on hold over the next 12 months.

Consequently, rate volatility is still very elevated, which doesn’t bode well for stocks in general, unless it reprices lower quickly. That might deter long-term investors from increasing exposure right now, leaving them in wait-and-see mode, and the market at the mercy of fast-money flows. 

Against this backdrop, derivatives strategies may be the right call to avoid being whipsawed by headlines. JPMorgan strategists led by Davide Silvestrini recommend zero-cost June DAX put spread collars — with puts struck at 95–90% and funded by 110% calls set near pre-war levels — seeing them as attractive hedges.

“Middle East conflict risk remains binary and fast-moving: Trump’s shifting ultimatum and ceasefire signals, along with the US force build-up, keep markets pricing in two tail outcomes,” they say. “A ceasefire, even if announced, would likely be fragile, and a full normalization of energy markets appears unlikely, capping upside potential.”