The furious rally in US assets sparked by the tariff détente between Washington and Beijing has caught big investors off guard, colliding with widespread bets against the dollar and Wall Street stocks.
The S&P 500 has rallied 3.3 per cent this week, erasing all of its losses this year, after the US and China agreed to cut tariffs for at least 90 days, signalling an end to the worst of the trade war. The dollar rose too, while US government bond prices have dropped as traders exit traditional havens.
The rush of money back into stocks has stung large asset managers and other institutional investors, who were cautiously positioned on US assets on fears of a dramatic economic slowdown and broader worries over US policymaking.
“I think the market got caught quite offside,” said Robert Tipp, head of global bonds at PGIM Fixed Income. “As the climbdowns and deals started to look more plausible — even though there are still a lot of tariffs by modern standards — that has forced a reassessment and a major position squaring.”
Broader negative bets, including those by trend-following hedge funds, may have exacerbated the moves higher as traders were squeezed out of their positions, analysts said.
A fund manager survey from Bank of America, which was largely completed before the US-China announcement, found respondents had their dimmest view of US stocks in two years.
The BofA survey respondents also had the most negative collective view of the dollar since 2006. That was backed up by Commodity Futures Trading Commission data, which showed that asset managers last week had the biggest bullish bets on the euro since September 2024.
Charlie McElligott, a strategist at Nomura, added, “essentially, every thematic macro trade of the past few months is going [the] wrong way.”
In a sign of the dramatic shifts in sentiment, the Nasdaq Composite has surged nearly 30 per cent from a low just weeks ago, after Trump’s April 2 “liberation day” tariff announcement shook markets.
The CFTC data, which covers the seven-day period ended May 6, also showed that asset managers had their largest ever long position in 10-year Treasury futures, a bet that prices would rise and yields would fall.
The 10-year yield is particularly sensitive to growth expectations, so the trade suggested that investors were betting on higher chances of a recession later this year. It has jumped to 4.45 per cent from a closing low in early April of about 4 per cent.
“There are some institutional investors who had de-risked pretty significantly. And there was loads of cash on the sidelines,” said Gargi Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock.
The dramatic recovery in stocks has been accompanied by a fall in market expectations of volatility. The Vix, Wall Street’s “fear gauge”, is back at pre-liberation day levels. Expectations of swings in the euro-dollar exchange rate have fallen to their lowest since March, according to an index provided by derivatives giant CME Group.
Deutsche Bank data suggests that retail investors may have benefited from buying the dip, snapping up stocks throughout most of April while professional investors held off.
The S&P’s rally over the past month has been driven by buying during regular New York cash trading hours, when amateur investors are most active, the bank said. In contrast, returns during overnight trading, when institutional investors continue to purchase stock futures and derivatives, “have been muted”.
Some asset managers warn that this shift towards trade optimism has run too far. “We should remember the policy chaos damage to consumer and business confidence before getting too optimistic,” said Andrew Pease, chief investment strategist at Russell Investments.
In particular, investors said the dollar, which gave up Monday’s gains on Tuesday and Wednesday, could weaken as the economic impact of the trade disruption becomes clear.
“My guess is that this is a temporary relief for the dollar, and the tariff rates will be high enough to have a stagflationary impact on the US economy, said Athanasios Vamvakidis, head of global G10 FX strategy at Bank of America. “For the dollar to weaken again, we need the US data to weaken — we believe it will.”
Dominic Schnider, head of global FX & commodities at UBS’s wealth management arm, said investors “have yet to see how much the damage [from the trade war] is going to be”.