Ukraine Lesson Playing Out Again in Iran? Goldman Sachs: Exercise Caution on Dip-Buying, Ceasefire News May Be Best Exit Opportunity

Although the situation in the Middle East has not made substantial progress, the market rebounded at the start of this week. However, Goldman Sachs One-Delta Trading Desk head Rich Privorotsky remains cautious, warning investors not to rush into bottom-fishing. He points out that short-term optimism during geopolitical crises is common, and betting on a bottom too early often backfires.

Privorotsky stated in his latest client report that once a ceasefire negotiation announcement is made through intermediaries, it could become the market’s first major catalyst. But he reminds investors to refer to market patterns during the Russia-Ukraine conflict — ceasefire news often triggered sharp rebounds, but these did not materialize in the end. He warns that the day after a ceasefire announcement is usually a good time to reduce positions at the highs, not a window to chase the rally.

Meanwhile, the credit market continues to weaken, with European XOVER credit spreads approaching recent highs again. In Privorotsky’s view, this is the fundamental reason why stock market rebounds remain fragile. He considers the credit market the most important indicator right now.

Ceasefire Expectations vs. Market Pricing Discrepancy

Privorotsky notes that the betting market estimates about a 35% chance of a ceasefire before the end of April, and this probability is still declining, while stock market pricing seems to assume a faster resolution, creating a clear gap.

Regarding oil prices, Privorotsky observes that WTI crude oil remains under significant pressure above $100, and market sensitivity to oil prices is decreasing — larger oil price shocks are needed to trigger stock sell-offs. Notably, despite ongoing Middle East conflicts, oil exports from Harker Island currently do not appear to be materially disrupted.

Institutional investors have significantly de-leveraged, accumulating index shorts

Last week, institutional positions saw notable adjustments. According to CFTC data, asset managers sold nearly a record amount of S&P 500 futures. Privorotsky points out that fundamentals-based long-short strategies have shifted heavily toward index hedging, with many portfolios now structured as “long individual stocks, short futures.”

This positioning directly results in a peculiar market phenomenon: the index is being driven higher by short covering, while high-quality stocks remain stagnant. Goldman Sachs’ prime broker data shows that the total leverage of fundamental long-short strategies decreased by 5.1 percentage points in a single week — the largest drop since October 2024 — down to 218.1%, placing it in the 87th percentile over the past year. Global stock net sales reached the largest since the “Day of Liberation” in April this year, marking the fourth consecutive week of net selling.

Privorotsky also notes that commodity trading advisor models indicate about $70 billion worth of stocks are scheduled to be sold this week, which would bring their positions to neutral. He believes that market sentiment is extremely bearish, with investors generally feeling fully hedged. Short covering is inevitable, but the rebound will ultimately be a selling opportunity.

A Week of Central Bank Meetings, Rates Still a Market Pain Point

This week, global financial markets face a series of key events: the Federal Reserve, Bank of Canada, Bank of England, European Central Bank, and Swiss National Bank all hold monetary policy meetings, along with an important industry conference for Nvidia.

Privorotsky notes that most central banks are expected to keep rates unchanged, but the Bank of England’s decision carries significant uncertainty. He emphasizes that interest rate trajectories remain a market pain point — every client he interacts with is watching European rate directions: those not yet invested are waiting for an entry point, while those already in are generally at a loss.

He believes that European and U.S. policymakers are still influenced by the near-term bias from 2022’s inflation experience, afraid to fall behind the curve again. Although the drivers of current inflation differ, last week’s CPI data already led to a noticeable upward revision in core PCE expectations.

He warns that commodity inflation pressures, including declining logistics management indices and soaring metal prices in January and February, though not wages or core services inflation, have created an unfavorable backdrop before the surge in oil and refined product prices.

Credit spreads widening, stock market rebound lacks solid foundation

Privorotsky considers the credit market the most critical indicator to watch now. He points out that although the European Stoxx index has rebounded from lows, the XOVER credit spreads have approached recent highs again, and the persistent widening of credit spreads is the fundamental reason why the stock market rebound feels so fragile.

Regarding risk appetite, he believes Nvidia’s upcoming conference could temporarily energize the tech sector. He also mentions that if opportunities arise, the market might attempt to buy into emerging markets, with Brazil particularly worth noting — candidate Flavio’s poll support has approached Lula’s, and Brazil’s long-term structural advantages in agriculture and oil, its geographic distance from the Strait of Hormuz, and the longer the supply disruptions last, the more structural benefits it gains.

Additionally, if interest rates stabilize, defensive sectors should also perform, making a reasonable case for allocating to quality assets.

Risk Warnings and Disclaimers

        Markets are risky; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.