Deutsche Bank Investor Flows & Positioning

As volatility declines, systematic strategy positioning has been steadily increasing; however, overall positioning still remains low. Following the Liberation Day announcement, systematic strategies were nearly -2 standard deviations (sd) below average but have since improved to approximately -1.2sd below average. This leaves ample room for systematic strategies to increase exposure, especially as both realized and implied volatility continue to decrease.

Discretionary investor positioning has remained relatively stable over the past two weeks, hovering slightly below neutral. Initially, discretionary positioning dropped nearly -1sd below average after the Liberation Day announcement but rebounded following the announcement of a 90-day pause. This upward trend continued for two weeks, supported by further exemptions, assurances against firing the Federal Reserve chair, and ongoing updates on trade deal negotiations. Currently, discretionary positioning aligns with earnings growth nearing zero but does not account for outright earnings declines. If tariffs remain in place, significant downside risk to earnings could emerge. Present near-neutral discretionary positioning suggests an assumption that tariff impacts will be modest and temporary (Tariffs And Equities: Lowering Estimates And Target, Apr 23, 2025).

The market is now anticipating the third stage of a trade policy reversal. We foresee this reversal unfolding in four stages: piecemeal exemptions and rollbacks, announcements of trade deal negotiations, the signing of binding trade agreements, and finally, confidence that trade escalations will not reoccur—likely requiring Congressional action. Notably, discretionary positioning and equity markets have shown only muted reactions to recent bilateral confirmations of US-China trade talks and the US-UK agreement, implying that the market has already priced in the first two stages. The focus now shifts to stage three, the delivery of binding trade agreements. Historically, during Trade War 1.0, the market remained range-bound for 18 months, only breaking out after the Phase 1 US-China deal was announced alongside progress on the USMCA in Congress.

Recent US equity fund outflows primarily reflect seasonal trends. For the fourth consecutive week, US equity funds experienced outflows (-$9.3bn), while equity funds targeting international markets saw inflows ($11.6bn). These outflows are consistent with typical seasonal patterns observed in April and May. Notably, they have been driven by US-domiciled equity funds, whereas funds domiciled outside the US have continued to attract inflows.

The market rally over the past month has predominantly occurred during New York cash trading hours, with overnight returns remaining muted. Earlier this year, the S&P 500 selloff was concentrated in overnight trading, reversing the trend of previous years. However, the recent rally has largely unfolded during cash trading hours, signaling a shift in market dynamics.