By Jules Rimmer
Military de-escalation and strong earnings are starting to fade as market propellants
The impasse between the U.S. and Iran over the fate of the Strait of Hormuz remains unresolved. Buy some protection, suggests Deutsche Bank strategists.
Investors should take note of mounting tail risks - the probability of an extreme market event - and buy some insurance against a major correction, advise Deutsche Bank strategists.
Equity markets have recently been driven by the positivity generated by the U.S. first-quarter reporting season, and expectations for a de-escalation of hostilities in the Persian Gulf.
Unfortunately, both of these factors are starting to lose momentum and with fresh drivers not materializing yet, stocks lack support, Deutsche Bank's strategy team of Maximilian Uleer, Carolin Raab and Francesca Mazzali, told clients in a note on Monday.
The best insurance, they say, is to buy out-of-the-money puts on stock markets. These options give investors the right to sell exposure at levels way below the current market and increase in value if the index falls.
The Deutsche Bank Pressure Index is an equally-weighted measure, based on 20-day changes in S&amp;P 500, 10y US Treasury yield, the presidential approval rating and 1-year inflation forward
The strategists explain why markets went up so much and why the fatter tail - the rising probability of an extreme event - suggests they could fall in the near future. Firstly, the positive impact of the earnings season, according to Uleer, is set to dissipate once Nvidia (NVDA), the last major company to announce, releases results on Wednesday.
Uleer explains that the volatility of geopolitics destabilized market equilibrium at the start of March. However, since those first few weeks of the conflict, risk assets have rallied powerfully in expectation of some kind of negotiated compromise between the warring parties and a reopening of the Strait of Hormuz.
While military violence might have subsided, the Strait remains effectively closed and Uleer is not alone among strategists in pointing out the longer it stays this way, the greater the risks to equity markets. One more quarter of political and military impasse and the potential upside to equity markets is almost completely eradicated in Uleer's model.
The last tail risk for risk assets that Steer identifies is concerns about Taiwan, following ambiguous comments about the island's future after the summit between President Donald Trump China's leader Xi Jinping. As the world's most important semiconductor hub, the threat of invasion or even just speculation about it would be extremely disruptive for markets.
Deutsche Bank's proprietary &#34;pressure index,&#34; a measure of how much stress markets are under, using inputs like inflation and presidential approval ratings, is starting to edge higher again.
Uleer notes the volatility component of put-option pricing means the insurance recommended by Deutsche Bank is not so expensive at this stage, making that protection more affordable for investors.
-Jules Rimmer
This content was created by MarketWatch, which is operated by Dow Jones &amp; Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
05-18-26 0623ET

FNCL

Deutsche Bank strategists advise investors to buy protection as market drivers weaken, citing fading military de-escalation and strong earnings. They recommend purchasing out-of-the-money puts on stock markets to hedge against potential corrections. The Deutsche Bank Pressure Index indicates rising market stress, and concerns over geopolitical tensions, particularly regarding the Strait of Hormuz and Taiwan, could further impact equity markets.

Dow Jones

Deutsche Bank AG

Financial Select Sector SPDR Fund

ISHRS Us Brokers & Sec Exchg

VG Financial

Fidelity MSCI Financials Index

S&P 500

NVIDIA

Deutsche Bank AG Subscription Rights

Deutsche Postbank AG

NVIDIA Corporation

As these market drivers start to weaken, it's time for investors to buy protection, says Deutsche Bank