"Nothing Short Of Astounding": Goldman's Hedge Fund Honcho Reflects On The Week So Far

For fear of repeating ourselves - and for those who have been living under a rock for the last few days - the rate of change these days is, as Goldman Sachs head of hedge fund coverage, Tony Pasquariello puts it, "nothing short of astounding." 

With headlines ruining trades and trends on an hourly basis, Pasquariello attempts a quick - traders' minded - summary of where we are (or were minutes ago)...

1. The market narrative. 

To level set the central issue, I’ll borrow a quote from the same client I referenced last week: “our world is more dangerous and contested now than it has been in decades.” 

I try to avoid hyperbole on these matters, but I think it’s safe to say that planet Earth continues to stack up one geopolitical fissure on top of another. 

2. Market implications. 

As argued before in the context of geopolitics: very, very few people really know anything.  as also argued before: at a certain point, the stock market tends to inure itself; it simply moves on from things. 

As our ISG team points out, over the past four decades there have been 21 US airstrike campaigns in the MENA region, and eight weeks later S&P was higher 95% of the time. 

While that’s a guarantee of nothing, it’s a fact set that’s worth considering as we lunge from headline to headline.

3. The general exception is when the flow of energy is interrupted.  

The most recent example of this was the bear market in European equities when TTF blew sky high over the course of six months in 2022.  therefore, the biggest judgement call now is whether this situation results in a severe and sustained disruption to the flow of energy. 

While that question is wide open, it strikes me that none of the principal actors in the current equation have incentive for impingement to last.  as someone who has been-there-and-done-that remarked: “oil usually finds a way to flow.” 

4. So, this is our current oil call. 

...per Daan Struyven: Brent should trade into the mid-$80s this month.  assuming a gradual recovery in flow through the SoH, it should then trade down to $66 come Q4.  if that’s correct, I’m not so worried about the pinch to equities. 

To be clear, there is a node where flows remain impaired for another month, which risks a move to $100.     

5. What’s most observable in our franchise flows? 

The pattern so far this week is clear: if a position was well-held by the speculative community, it has suffered.  part and parcel of this dynamic, we have seen significant unwinds across a wide range of consensus positions in equities, rates, currencies and commodities.  within that constellation, Asian stock markets -- which are levered to highly cyclical, oil-dependent economies -- certainly stand out.

6. A follow-on point: Korea. 

As you know by now, KOSPI just printed the worst single session in its 46 year history, down 12% overnight.  while Korea is not the most oil-sensitive country in the region, it has suffered a comprehensive VAR shock -- alongside the move in stocks, the domestic bond market and KRW have also sold off. 

Given the magnitude of the equity rally over the past two years (during which time KOSPI has more than doubled), and the popularity of the position (for good fundamental reasons, it is well owned), one can argue this retracement is not a major surprise.  by the way, it’s still up 21% YTD.      

7. This sticks out. 

As I scrolled through my emails yesterday, the tone of market pundits was strikingly downbeat (it was one of those moments where you remember where you were sitting when you read something specific). 

Be it the surge in oil prices, or hard questions around AI disruption, or handwringing around private credit, most every story was shot through with serious negativity.  given all that has been thrown at S&P this week, the fact that it’s nearly unchanged is somewhat remarkable. 

Perhaps that’s a story of impressive resilience -- or, when coupled with point #5 above, perhaps it’s a tell on relative spec positioning.  it’s here I’ll point out that hedge funds had already sold US equities in 9 of the prior 11 weeks.  at the current point, I’m inclined to think that faster money has net exposure pretty well battened down (while gross exposure remains very high). 

8. The chaos below the surface...

So, IN SPITE of all that’s going on, S&P barely budges.  or, maybe it’s the other way around: perhaps BECAUSE of all the action at hand -- and the wicked set of sector and factor rotations that accompany it -- the index can’t move in a coordinated, sustained direction. 

Bigger picture, S&P hasn’t really gone anywhere for nearly six months now. 

It’s here that I’ll paste a few remarkable charts from Brian Garrett, which captures the disjunction between low realized volatility at the index level vs immense realized volatility at the single stock level. 

There are two cuts here, one that shows we’re at the highest level of the GFC / post-GFC era, and one that goes back to include the US tech bubble:

As he pointed out to me, the average stock within the index has been nearly three times as volatile as the index itself (and the implied vol spread suggests the options market believes this will persist). 

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