(Bloomberg) — In the days leading up to President Donald Trump’s July 9 tariffs deadline, equity investors having flashbacks of Liberation Day showed little concern.
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The MSCI All-Country World Index reached a peak last week, while gauges of volatility expectations from the US to Europe and Hong Kong have more than halved from their highs in April.
Meanwhile, hedge funds’ net buying of US financial shares climbed to the highest levels in nearly a decade, data compiled by Goldman Sachs Group Inc.’s prime brokerage showed. Rather than covering shorts as they did in recent months, large speculators appeared to be chasing the rally, Michalis Onisiforou, a strategist at Banco Bilbao Vizcaya Argentaria SA, wrote in a note last week.
“Lingering pessimism has left a lot of market participants in the dust,” Onisiforou said.
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Since Trump’s Liberation Day sent markets for a tailspin in April, stocks have weathered events including the conflict in the Middle East and continued tariffs uncertainty, making investors more confident in their ability to recover fast. A recent tech rally and stronger-than-forecast US employment growth pushed the S&P 500 Index to a fresh peak on Thursday, while shares in Asia and Europe Friday held on, even after Trump said his administration would start notifying countries of tariffs up to 70%.
Several strategists noted last week that the options market was complacent. Benedicte Lowe of BNP Paribas Markets 360 said in a message that traders were pricing in a move of little more than 1% for the Euro Stoxx 50 Index on the July 9 tariff deadline and that long gamma trades — when investors buy short-dated contracts while actively adjusting their underlying position to profit from market swings — have become more attractive following a steepening of the volatility curve.
Back in April, similar gamma trades led to big profits following Liberation Day as implied and realized volatility surged. Bank of America Corp. strategists, who recommended at the time to own “cheap gamma” on Germany’s DAX Index, favor the same positioning on the Euro Stoxx 50 now. Separately, Lowe noted her firm’s derivatives-strategy team doesn’t expect similar results the second time around.
