Markets Are In A 'Calm Before The Storm,' Warns JPMorgan

Kolanovic wrote in a note to clients Monday: "In spite of the Fed's assurances that interest rates would not be cut this year, risk assets are displaying an unprecedented rally. European stocks are trading near all-time highs, while US stocks have recovered recent losses. Our prediction is that risk sentiment will reverse over the coming months and the market will retest last year's low."

‍

His analysis of the recent stock market inflows was that they were primarily driven by systematic investors, a short squeeze, and a decline in the Cboe Volatility Index over the past few weeks, all of which he believes was a coincidence.

‍

In his view, the present market backdrop is characterized as a calm before the storm, as the VIX index has dropped below 20, which is a level associated with less stressful periods. However, Kolanovic describes the present market backdrop as "the calm before the storm.".

‍

Despite Kolanovic being one of Wall Street's top optimists throughout most of last year's market sell-off, he has now reversed his position, cutting his equity allocation in mid-December, January, and March due to an economic outlook that is softer than most people expected.

‍

Even though interest rates have risen this year, which have dented corporate profits, slowed growth, and triggered several banks collapses in the United States and overseas, stocks have remained resilient this year. After a nearly 20% drop in the S&P 500 in the first quarter of 2022, the Nasdaq 100 has gained 20% since the beginning of January as technology stocks have pushed it into a bull market after a 20% gain in the first quarter of 2022.

‍

Traders have recently stepped up their bets on the possibility that the Federal Reserve will opt to pause it's tightening campaign in the face of banking system stresses, which have exacerbated tech's outperformance in recent weeks.

‍

Stock futures in New York were similarly steady on Tuesday, with S&P 500 contracts dipping less than 0.1% and Nasdaq 100 contracts moving with a 0.2% decline by 3:51 a.m. By 3:51 a.m., nothing had changed for the S&P 500 and Nasdaq 100 contracts.

‍

In Kolanovic's opinion, the accordion-like nature of risk sentiment was noteworthy, where restrictive rates caused a problem for some carry trades, but the pullback in yields helped alleviate some of the stress. Despite the fact that central banks are still communicating, there is still a lot to be done on fighting inflation and countering the market's assumption of cuts, so the original source of stress, higher interest rates for longer, can be addressed again."

‍

On Monday, Citigroup Inc. strategists, such as Chris Montagu, wrote in a separate note to clients that net positioning for the S&P 500 had turned clearly bullish over the past week. There is still $15 billion worth of short positions to be settled, which could help support the market in the near term.

‍