Markets zoomed yesterday on a series of reports that implied a potential quick end to the hostilities in the Persian Gulf. Obviously, any cessation of outright warfare would be a good thing – hopefully no one wants to see casualties and major disruptions– but the notion that it might occur without a reopening of the Strait of Hormuz seemed rather incomplete. A ceasefire is a necessary condition for a resolution; reopening the Strait is the only condition sufficient to return global economies to a state of relative normalcy.
Yesterday’s rally was quite stunning, no matter how we look at it. The S&P 500 (SPX) rallied 2.9% and the Nasdaq 100 (NDX) by 3.4%. We haven’t seen one-day moves that large since May 12, 2025, when SPX and NDX jumped by 3.3% and 4.0%, respectively. That was about one month after the giant post-“Liberation Day” rallies of April 9th, when those indices zoomed by 9.5% and 12%. The combination of yesterday’s monster rally and today’s comparatively minor, but still substantial, 1% advance has brought us back to levels not seen since (… double-checks notes…) one week ago.
2-Weeks, SPX (red/green candles), NDX (blue line)
Source: Interactive Brokers
How about that for some “socially acceptable volatility”?
It is difficult to know exactly what led to stock traders’ extraordinary enthusiasm. I suspect it was a combination of factors, with the end of the first quarter playing a significant role.
For starters, crude futures fell, but not to a degree that might have suggested that oil traders viewed an imminent end to the bottlenecks affecting that commodity. But it was also the expiration day for May futures on Brent (COIL) and WTI (CL). Big moves can occur on expiration in already volatile commodities, particularly when there are supply or demand constraints. May Brent futures rose by $4.94 to a life-of-contract high of $118.27 yesterday, while the June contract fell by $3.18. Both months’ WTI contracts fell yesterday, with May -$1.46 and June -$2.98. This morning, both June contracts are down about $2. There is clearly some incremental normality being priced in, particularly in longer-term contracts since last week, but little that signals an imminent return to pre-conflict pricing.
CL Futures Term Structure (top), Today (yellow), Yesterday (orange), 1-Week Ago (red), 1-Month Ago (purple); with Changes vs. Today (bottom)
Source: Interactive Brokers
CL Futures Term Structure (top), Today (yellow), Yesterday (orange), 1-Week Ago (red), 1-Month Ago (purple); with Changes vs. Today (bottom)
Source: Interactive Brokers
The quarter-end seems to have motivated at least some of the buying yesterday in equities. The selling throughout the course of the past month, which accelerated late last week, must have left at least some institutions with higher cash allocations than normal and some traders with uncomfortable short positions. On Thursday, we noted that skews in SPX options had notably changed, with boosted implied volatilities in upside strikes. Some of that was undoubtedly driven by speculators hoping for a quick bounce like we saw last year, but I believe the bulk of that activity resulted from under-invested institutions insuring against underperformance and rally-selling traders hedging against a major reversal. Although traders are not necessarily focused on the calendar, portfolio managers who file quarterly reports are. They probably had second thoughts about appearing poised to miss a potential turnaround by carrying too much cash for their investors’ liking.
Today we see the rally continuing. Some of that may be attributable to the first of the month; some might reflect a change in short-term momentum; some are certainly hoping that the President’s speech tonight could bring a meaningful change to the events in the region. By tomorrow, we’ll get a clearer sense of how to attribute those factors.
Related: Central Banks Turn Hawkish Again as Market Assumptions Unravel