From panic to euphoria and back: How one comment turns the entire day in the markets

Shortly after headlines featuring Bessent pushed stocks higher, Politico reports that the White House is close to reaching agreements with Japan and India to avoid massive U.S. tariffs. However, according to one of the sources, “it may take months to finalize the deals,” adding, “these things are complicated.”

Even worse, the optimism sparked by the initial Bessent headlines quickly vanished as his actual comments turned out to be far less encouraging:

BESSENT: The real shift of the Chinese economy towards consumption and the U.S. towards production within two to three years would be a “huge win.” – Reuters

BESSENT: Negotiations with China will be “exhaustingly lengthy,” describing the current bilateral trade situation as an embargo – a person who attended the JPMorgan session.

So, all gains immediately evaporated…

U.S. markets were already climbing after massive short positions accumulated the day before were reversed, turning into a “short squeeze,” forcing systematic funds with insufficient exposure to get involved. A headline from Bloomberg suggests… the obvious – that the trade war with China cannot be sustained long-term, according to Bessent:

BESSENT: A de-escalation with China is expected; the situation is unsustainable.

…this pushed U.S. stocks to their daily highs – with a 3% rise…

…and completely erased the losses from the previous session.

The general move towards risk sent the dollar up, hitting the yen and the euro. USDJPY surged above 141 (after falling below 140 overnight), and EURUSD dropped to daily lows, with a 0.5% decline. The yield on 10-year U.S. bonds is at its lowest for the day – down by 3 basis points. Gold also crashed, falling below $3,400 after previously hitting a record high of $3,500.

While gold falls, Bitcoin crossed the $91,000 mark…

Today’s rally is already shaping up to be the largest since the Trump-era tariff reversal on April 9. According to UBS S&T, capital is returning to the high-momentum group (High Momentum {UBQQHMTM}), with a 3.5% rise. Sectors like investment banking and mergers ({UBXXMABK}, +2.8%) and artificial intelligence ({UBXXVOLT}, +3.4%) are also benefiting.

Rotation Towards Risk

Visible rotation towards risk: volatility ({UBPTVOL}, +2.5%) rises, while quality ({UBPTQLTY}) drops by 1.4%. The weakest-performing segments so far are recovering the strongest – De-SPACs ({UBXXDSPC}) with +3.5% and low-quality credit ({UBXXCRED}) with +3%.

Sectors adjusting from tariffs ({UBXXTTL}) are up by 2.8% and stabilizing. This basket performed better during Monday’s sell-off – a sign of clearing negative positions.

Large defense companies ({UBXXPRME}) are down by 3%, but around two-thirds of the drop is due to weak results from Northrop.

Another reason for today’s growth is precisely the reversal of yesterday’s crash, as panicked systematic funds rush to buy back. According to Cullen Morgan from Goldman Sachs, the systematic macro rebalance is already complete – global exposure to stocks has dropped from about 8 out of 10 (at February peaks) to just 1 out of 10 at the moment. This equates to $53 billion in short positions from CTA/trend funds and the lowest exposures from risk parity and volatility strategies.

As a result, according to Goldman’s modeling, CTA funds will be net buyers in any scenario – both for the next week and the next month.