A significant market surge has been driven by a large-scale short squeeze. On the evening of April 1st, U.S. stock markets opened with strong gains, fueled by rising optimism that the Middle East conflict could be nearing an end.
Investors are assessing statements regarding the direction of the war. On Wednesday, it was stated that attacks on Iran would only be reconsidered after the Strait of Hormuz reopens. Earlier in the week, a prediction that the U.S. would end the conflict within two to three weeks had already sparked a powerful stock market rebound.
Regarding this global stock market surge, trading desks at major Wall Street institutions indicate that a massive short squeeze was the primary driver behind the sharp U.S. stock rebound, rather than a fundamental shift in investor sentiment about the Middle East war's prospects.
Analysis points out that the overnight surge in U.S. stocks, marking the largest gain in over ten months, might suggest investors suddenly became highly optimistic on Tuesday about an imminent end to the Iran conflict. However, another factor was at play, making it difficult to gauge the true extent of investor confidence in peace prospects—a substantial short squeeze.
During the session, a basket of 50 of the most shorted stocks, compiled by Goldman Sachs, surged 7.1%, recording its second-largest gain in nearly a year and more than doubling the gain of the S&P 500 index. An index tracking unprofitable technology companies also rose by 6.6%.
Traders from Goldman Sachs and JPMorgan noted that news suggesting the U.S. and Iran might seek to end the month-long war triggered a wave of concentrated short-covering. Previously, as market pessimism deepened, institutional short bets on S&P 500 component stocks had approached three-year highs. Similarly, the number of shares sold short in U.S.-listed ETFs had reached record levels.
An analyst stated, "Some investors had been aggressively betting on a new downturn for the S&P 500. But as volatility decreased and market sentiment improved, they were forced to cover their positions rapidly. Short sellers have been vulnerable for some time; any sign of a potential downturn reversal prompted a swift market rebound."
In short, fast-moving capital was waiting for a catalyst, and the mention of a potential conflict resolution within two to three weeks served precisely as that trigger.
At Goldman Sachs' derivatives trading desk, traders reported observing "large-scale hedging positions being unwound" across the S&P 500, Nasdaq indices, the VIX, and ETFs. Trader Shayna Peart commented, "As the trading session progressed, market positions were continuously being closed out."
For this rebound to be sustained, investors will likely need to see more details and certainty regarding a path towards de-escalation. It was announced that an update on the war's progress would be given on Wednesday evening at 9 PM local time.
Traders still have many questions: How soon will the Strait of Hormuz reopen to navigation? How far and for how long will oil prices fall? Concurrently, with earnings season approaching, the market will also focus on the conflict's impact on first-quarter results and the broader economy.
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