"Frustration Is Everywhere": Goldman Says Today Was A Huge Pain Trade For Hedge Funds And Institutions

There was a comically circular element to the stated reason behind today's market meltup, which - according to most superficial takes - was due to "debt ceiling optimism" (according to JPM TMT trader Ron Adler, "There is more optimism around the Debt Ceiling this morning as futures reclaim most of yesterday’s late day sell-off"). It's comical, because the only motivation Washington has to get a debt limit deal done is pressure from the market (i.e. a sharp drop in stock prices) and by rising instead, the impetus to get any deal done disappears even if it makes a technical default - and a market puke - that much more likely. Then again, in a market where 0DTEs dominate and set the market's "momentum mood" on an hourly basis, even if makes zero sense, nothing surprises any more.

This is how Goldman trader Michael Nocerino explained it in his post bell note:

While no official verdict on the debt ceiling has been reached and regional banks are not out of the woods yet, incrementally positive headlines drove an outsized move to the upside today. Early on, WAL reported that deposits had grown by more than $2bn since the end of the quarter, which helped  lift regional peers higher (KRE +7.5%... Best day since Jan 2021). Also hitting the tape this morning was a report from Politico citing that Joe Biden and Kevin McCarthy said the two sides remain far apart but agreed on a new system for staff level negotiations... Followed by the president announcing a Sunday press conference on the matter, and McCarthy claiming that getting a deal done by the end of the week was doable. The combination of the regional banking boost in sentiment and renewed faith in debt negotiations made for a steady chug higher all session.

Our Cyclicals vs. Defensive basket had its best day YTD (+2.2%), with our PB data illustrating exposure to Defensives sits at its highest level in the last 2 years while short exposure to cyclicals remains close to its 3 year high - highlighting the heavy defensive tilt in the market and squeeze that ensued today.... This is clearly a function of the long cyclicals trading climbing the "wall of worry" in that regional banks (+7%) on WAL deposits, Airlines (+4.3%) also rallying on back of a firmer consumer backdrop (also see TGT qtr being bot and TJX miss)... EVEN HD was UP on the DAY!... Semis +2.5% as well while MAGMA is only up 30bps (equal weighted). Continue to think this Semis vs MAGMA spread will collapse and wouldn't be surprised to see Cyclicals vs Defensives gain MORE steam from here given positioning + sentiment around key macro events improving.