Investors watch for quarter-end rebalancing in US stocks, bonds and options

12:59 am Tuesday, June 27th, 2023

By Saqib Iqbal Ahmed

NEW YORK (Reuters) -Investors are watching a large hedged-equity fund’s quarterly refresh of its options positions and quarter-end rebalancing by portfolio managers to potentially influence U.S. stock moves as the first half of the year winds down this week.

The nearly $16 billion JPMorgan Hedged Equity Fund, which holds a basket of S&P 500 stocks along with options on the benchmark index, is expected to roll its options positions on Friday.

While the trade is anticipated by many market participants, it can exacerbate or suppress daily stock market moves, especially during times of poor market liquidity, analysts said.

For now, the trade may be helping suppress volatility in stocks. That is because the March 31 refresh of the fund’s positions involved about 120,000 S&P 500 options contracts set to expire on June 30, including the sale of nearly 40,000 S&P 500 options contracts with a strike price of 4,320, just below where the index is trading today.

With the S&P 500 just above the 4,320 level, the sold call options mean options dealers – in this case large banks or financial institutions – are induced to buy equities when the index drops underneath that level and sell when it moves above it, said Brent Kochuba, founder of options analytics firm SpotGamma. That may help curb market volatility, analysts said.

Meanwhile, there could be a fair amount of buying and selling in the markets in the last days of the quarter as money managers, pension funds and other investors adjust their asset allocations to account for the quarter’s moves in stocks and bonds.

The MSCI All-World index, a gauge of stocks across the globe, is up nearly 4% for the quarter, on pace for its third straight quarterly gain, while the Bloomberg Global Aggregate bonds index is down about 1%.

JPMorgan strategists earlier this month estimated the rebalancing flows could total about $150 billion worth of equity selling and a similar amount of bond buying – factors that may already be impacting markets over recent sessions.

While equity gyrations have on the whole been muted, with the Cboe Volatility Index falling to a three-year low last week, some market participants expect a measure of turbulence in coming days.

“There might be little bit of noise,” said Michael Purves, chief executive officer at Tallbacken Capital Advisors. “The rest of the week is going to be choppy and weird and probably not that significant in terms of signaling broader trends.”

(Reporting by Saqib Iqbal Ahmed in New YorkEditing by Ira Iosebashvili and Matthew Lewis)