Finance

Credit a ‘short squeeze’ for the stock market’s big two-day bounce

Published

1 month ago

April 23, 2025

Business Finance News

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., April 22, 2025.

Brendan McDermid | Reuters

A key force at the center of the stock market’s massive two-day rally is the frantic behavior of short sellers covering their losses.

Hedge fund short sellers recently added more bearish wagers in both single stocks and securities tied to macro developments after the whipsaw early April triggered by President Donald Trump’s tariff rollout and abrupt 90-day pause, according to Goldman Sachs’ prime brokerage data.

The increased short position in the market created an environment prone to dramatic upswings due to this artificial buying force. A short seller borrows an asset and quickly sells it; when the security decreases in price, they buy it back more cheaply to profit from the difference.

It can backfire when the security suddenly rallies, short sellers are forced to buy back their borrowed stocks rapidly in order to limit their losses, a Wall Street phenomenon known as a short squeeze.

If the market appeared to be rallying by quite a large amount on no real tangible news, but instead just some walking back of comments on China and the Federal Reserve by Trump, credit this phenomenon.

“Squeeze risk is real today,” John Flood, a managing director at Goldman Sachs, said in an early note to clients Wednesday.

Flood echoed the sentiment of many traders that have said the market appeared coiled for a relief rally because so many hedge funds were caught on the wrong side of this bet.

S&P 500

Short-covering was on display Tuesday and Wednesday as stocks shot up on signs of easing tensions on trade even though no concrete deals have been reached yet. Treasury Secretary Scott Bessent said Wednesday “there is an opportunity for a big deal here” on trade issues between the U.S. and China.

The 30-stock Dow Jones Industrial Average surged another 1,100 points Wednesday at its highs following a 1,000-point gain to end a four-day losing streak. The S&P 500 is up 3.5% week to date after back-to-back winning sessions.

Trump’s quick reversal on Federal Reserve Chair Jerome Powell also fueled the positive sentiment. Trump said he has “no intention” of firing Powell, after saying the central bank chief’s “termination cannot come fast enough” just a few days ago.

But take note the rally was quickly fading with the Dow up just 500 points at latest count midday Wednesday. The fading short squeeze boost evident at the open could be a reason for the pullback off the highs.

Also, Goldman’s Flood said hedge funds haven’t gone from short covering to outright buying on the long side, a sign that the rally doesn’t have high conviction behind it.

“I am closely monitoring to see if HF covers in macro and singles start to evolve into long buys,” Flood said. “Also want to see longer duration investors step in and buy names they view as fair value. We have not seen any of this type of action, yet.”

Finance

Stocks making the biggest moves midday: WOOF, TSLA, CRCL, LULU

Published

20 hours ago

June 6, 2025

Business Finance News

Finance

Swiss government proposes tough new capital rules in major blow to UBS

Published

22 hours ago

June 6, 2025

Business Finance News

A sign in German that reads “part of the UBS group” in Basel on May 5, 2025.

Fabrice Coffrini | AFP | Getty Images

The Swiss government on Friday proposed strict new capital rules that would require banking giant UBS to hold an additional $26 billion in core capital, following its 2023 takeover of stricken rival Credit Suisse.

The measures would also mean that UBS will need to fully capitalize its foreign units and carry out fewer share buybacks.

“The rise in the going-concern requirement needs to be met with up to USD 26 billion of CET1 capital, to allow the AT1 bond holdings to be reduced by around USD 8 billion,” the government said in a Friday statement, referring to UBS’ holding of Additional Tier 1 (AT1) bonds.

The Swiss National Bank said it supported the measures from the government as they will “significantly strengthen” UBS’ resilience.

“As well as reducing the likelihood of a large systemically important bank such as UBS getting into financial distress, this measure also increases a bank’s room for manoeuvre to stabilise itself in a crisis through its own efforts. This makes it less likely that UBS has to be bailed out by the government in the event of a crisis,” SNB said in a Friday statement.

‘Too big to fail’

UBS has been battling the specter of tighter capital rules since acquiring the country’s second-largest bank at a cut-price following years of strategic errors, mismanagement and scandals at Credit Suisse.

The shock demise of the banking giant also brought Swiss financial regulator FINMA under fire for its perceived scarce supervision of the bank and the ultimate timing of its intervention.

Swiss regulators argue that UBS must have stronger capital requirements to safeguard the national economy and financial system, given the bank’s balance topped $1.7 trillion in 2023, roughly double the projected Swiss economic output of last year. UBS insists it is not “too big to fail” and that the additional capital requirements — set to drain its cash liquidity — will impact the bank’s competitiveness.

At the heart of the standoff are pressing concerns over UBS’ ability to buffer any prospective losses at its foreign units, where it has, until now, had the duty to back 60% of capital with capital at the parent bank.

Higher capital requirements can whittle down a bank’s balance sheet and credit supply by bolstering a lender’s funding costs and choking off their willingness to lend — as well as waning their appetite for risk. For shareholders, of note will be the potential impact on discretionary funds available for distribution, including dividends, share buybacks and bonus payments.

“While winding down Credit Suisse’s legacy businesses should free up capital and reduce costs for UBS, much of these gains could be absorbed by stricter regulatory demands,” Johann Scholtz, senior equity analyst at Morningstar, said in a note preceding the FINMA announcement.

“Such measures may place UBS’s capital requirements well above those faced by rivals in the United States, putting pressure on returns and reducing prospects for narrowing its long-term valuation gap. Even its long-standing premium rating relative to the European banking sector has recently evaporated.”