Institutional Insights: Goldman Sachs - Dollar, Equities & Options Expiration
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The Connection Between a Declining Dollar and Falling Equities
A weaker Dollar accompanied by falling stock prices isn't particularly rare. However, there are only a few instances where this trend persists over a prolonged period, and the current situation appears to be aligning with some of the most significant and enduring episodes from the last quarter-century. Nevertheless, this phase could extend even further due to the significant overweight in US assets, particularly if worries about the US outlook (alongside more attractive returns abroad) continue to dominate.
We anticipate a revival of Dollar strength this year based on our projections for broader tariffs, as well as the observation that the markets seem to have factored in larger shifts in the growth outlook for both the US and Eurozone compared to our current estimates. However, we find value on both sides of the Dollar spectrum and consider FX volatility to be generally low. Tactically, we have suggested a short position on AUD/JPY with a target of 90.5, as it appears that the markets may take time to ease their concerns regarding the US outlook. We envision potential improvements in US equities if there is a reduction in US policy uncertainty, if hard data continues to show resilience, or if underperformance in global fiscal policies dampens expectations for a more even global growth landscape. Nevertheless, any relief for the Dollar appears to be a more distant prospect.
Today marks the expiration of an estimated $4.7 trillion in notional options exposure, including $2.8 trillion in SPX options and $645 billion in notional single stock options. The options set to expire account for a notional value of 8.2% of the Russell 3000's market capitalisation, which is comparatively lower than that of March 2024. When analysing S&P Gamma, we anticipate it will remain flat (against a historical average of long positions between $5-8 billion). However, we project that approximately $2 billion in long positions will expire tomorrow, suggesting that, under all conditions, the Gamma scenario is likely to shift to a minor short position.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!