Goldman Sachs warns stocks will tumble 18% in the next 3 months – and lays out 6 risks they think investors are ignoring; Wall St banks’ trading risk surges to highest since 2011

May 11, 2020

Observations & Insight

The Spread: Re-Opened For Business
JohnLothianNews.com

This week on The Spread, several exchanges cautiously open their trading floors, the OCC’s volumes are up yet again, Cboe posts its earnings report, and more.

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Lead Stories

Goldman Sachs warns stocks will tumble 18% in the next 3 months – and lays out 6 risks they think investors are ignoring
Ben Winck – Markets Insider
Several factors stand to pull the S&P 500 lower before it rises into year-end, Goldman Sachs analysts said Friday.
The bank sees the benchmark index closing the year at 3,000 – roughly 2% higher than its Friday close of 2,930 – as the coronavirus threat fades and the economy rebounds. Yet Goldman’s forecast also reflects an 18% downside to its three-month target, with looming threats dragging the benchmark index to 2,400 by the end of the summer.
/bit.ly/3dBd6hn

Wall St banks’ trading risk surges to highest since 2011
Laura Noonan – Financial Times
Daily trading risks at top Wall Street banks hit their highest level since 2011 during the first-quarter turmoil, prompting speculation that their capital-intensive markets businesses would be further scaled back.
The top five Wall St banks’ aggregate “value at risk”, which measures their potential daily trading losses, soared to its highest level in 34 quarters during the first three months of the year, according to Financial Times analysis of the quarterly VaR high disclosed in banks’ regulatory filings.
/on.ft.com/2yL5Gt9

As coronavirus cases grow outside New York, Goldman warns of risks to stock-market rally
Chris Matthews – MarketWatch
U.S. stocks have ridden a wave of optimism over a foreseen rebound in a U.S. economy battered by the coronavirus epidemic, but, as the stock market again reaches historically expensive levels, Goldman Sachs analysts warn that investors should be wary of virus-related risks to the rally.
“In six weeks, as the S&P 500 index SPX, -0.26% has soared by 30%, investors have raced from despair at the market bottom to optimism about the economic restart,” wrote David Kostin, chief U.S. equity strategist at Goldman, in a note to clients, adding that, at Friday’s closing level of 2,929, there is little room for further upside, given a year-end target of 3,000.
/on.mktw.net/35NWfW5

Hedge fund oil bulls switch to buying Brent
John Kemp – Reuters
Hedge funds continued to buy petroleum last week, extending a six-week buying cycle on expectations that the oil industry has now moved through the worst point in the crisis brought on by the volume war and pandemic. Hedge funds and other money managers purchased a further 35 million barrels in the six most important petroleum futures and options contracts in the week to May 5, according to regulatory and exchange data.
/reut.rs/2SUNVi6

Market Volatility Recedes to Lowest Level Since February
Gunjan Banerji – WSJ
Market volatility has abated after a painful stretch of turbulence, flashing a green light for some funds to buy U.S. stocks. The Cboe Volatility Index, or VIX, fell Friday to 27.98, its lowest level since Feb. 26. That was before the stock market suffered its most volatile month in history in March and the VIX jumped to a fresh record high, topping its prior peak hit during the global financial crisis. The options-based gauge tends to rise when markets are falling as investors reach for options contracts to protect their portfolios.
/on.wsj.com/3cp9Y82

Exchanges and Clearing

CME Says Volume Surge Shows Strong Institutional Interest Before Bitcoin Halving
Paddy Baker – Coindesk
Chicago Mercantile Exchange (CME) says record trading activity for its bitcoin derivatives reflects a strong institutional interest in the imminent halving event. In a note sent out late on Sunday, the derivatives exchange said a strong “ramp up” in volumes over the past week showed institutional investors were getting exposure to bitcoin, most likely in preparation ahead of the supply-cutting event.
/bit.ly/3dswSf0

Regulation & Enforcement

EBA relaxes modellability hurdles for market risk capital
Samuel Wilkes – Risk.net (subscription required)
The European Banking Authority has dialled back hurdles in a test for determining whether risks are hard-to-model under forthcoming trading book capital rules, but a restriction remains on the way quotes from the market are used in the test. Derivatives traders are particularly relieved by a change to the way complex risks used to price volatility in options and swaptions will be capitalised, as two previously proposed approaches were found to be impractical.
/bit.ly/2YUhELQ

Strategy

Funds’ bearishness in CBOT corn reaches a one-year high
Karen Braun – Reuters
Speculators have grown the most pessimistic toward Chicago-traded corn that they have been in a year, even as futures prices have generally trended upward over the last two weeks. Money managers boosted their net short position in CBOT corn futures and options to 190,152 contracts in the week ended May 5, according to data from the U.S. Commodity Futures Trading Commission.
/reut.rs/3fDFbGK

Miscellaneous

A day trader who bought hundreds of oil contracts was told he owed $9 million after a trading platform issue meant it failed to show oil’s historic plunge below $0
Shalini Nagarajan – Markets Insider
A day trader who bought hundreds of oil futures contracts during its historic price crash last month was told he owed $9 million after a technology issue prevented his trading platform from displaying negative oil prices, according to a report from Bloomberg.
The record-setting oil crash last month led to traders using Connecticut-based brokerage firm Interactive Brokers being told of huge losses incurred when the commodity went below zero, despite not knowing it was in negative territory.
/bit.ly/2WOgq1J

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