The probability of a rate hike has soared to 35%, while hedge funds' sensitivity to U.S. stocks has climbed to a five-year peak. Bloomberg warns of chain reaction liquidation risks due to VaR.

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Leverage and long positions in the US stock market remain elevated. If selling momentum intensifies, the market faces the risk of a larger correction.

On July 27, Bloomberg macro strategist Simon White analyzed that despite continued pressure from Fed rate hike expectations, speculators have increased their net long positions on US equity indexes, and the proxy measure of hedge fund holdings even hit a five-year high.

Meanwhile, the scale of equity leverage supplied by banks to the market is close to historic peaks, further amplifying potential downside risks.

Against the backdrop of tightening liquidity and rising interest rates, the currently high positions and leverage mean that if there is a single risk trigger in the market, a sudden surge in correlations may cause a VaR shock, forcing banks and leveraged funds to quickly unwind risk positions.

Long positions continue to accumulate, rising risk of contrarian bets

Bloomberg, citing the US Commodity Futures Trading Commission (CFTC) position report, shows that as of last Tuesday, speculators’ net long positions in US stock index futures are still rising. This trend has not been interrupted by a sideways market or increased expectations of rate hikes.

The proxy measure for hedge fund holdings, the sensitivity of macro fund returns to S&P 500 returns, touched a five-year high last week before only pulling back slightly.

Simon White noted that this indicator suggests funds may be indirectly increasing equity exposure through instruments highly correlated with the S&P 500, but a more direct interpretation is that their actual stock exposure is rising.

While falling yields briefly eased pressure, the stock market failed to regain an upward trend, reflecting ongoing directional pressure on longs.

Bank leverage supply remains high, lurking liquidity risk

Banks' equity financing to the market, mainly hedge funds and leveraged ETFs, is still near elevated levels.

Current stock financing rates have somewhat declined, swap spreads remain stable, indicating bank balance sheets are not yet under pressure and the likelihood of proactive tightening in the near term is low.

However, history repeatedly shows that this situation can change abruptly. Once banks are forced to tighten financing, high-leverage positions will face margin call pressure, and selling may accelerate in a non-linear way.

Meanwhile, liquidity is being squeezed and the interest rate environment keeps tightening. The Fed’s policy meeting this Wednesday is highly anticipated, with rate futures currently pricing in a 30%-35% chance of a hike, adding further uncertainty to the market.

VaR shock risk not to be ignored, SpaceX as risk barometer

Simon White warns that US equities currently face multiple “single point of failure” risks. Once triggered, market correlations could jump suddenly, pushing the VIX volatility index higher and causing a VaR shock, prompting banks and leveraged players to rapidly reduce risk exposure.

A VaR shock (Value at Risk Shock) refers to violent market moves breaching preset risk value model (VaR model) thresholds at investment institutions, resulting in collective, forced, and indiscriminate asset selling to reduce risk exposure, eventually triggering a self-reinforcing “sell-off” spiral where falling prices spur more selling.

Simon White singled out SpaceX as a microcosm of the current market’s potential risk theme: accumulated leverage, excess speculation, and the phenomenon of tech firms shifting from stock buybacks to selling their own shares.

According to Bloomberg, the price of Musk’s SpaceX has continued to fall, breaking below its IPO issue price. Compared to recent major IPOs, its performance is significantly weaker, reflecting a market reassessment of highly valued tech assets.

For investors, the core contradiction now is that elevated positions and leverage may magnify the destructive power of any negative catalyst, and once triggered, the speed of deleveraging is often faster than expected.

Risk Warning and DisclaimerThe market carries risks; investment should be cautious. This article does not constitute personal investment advice and does not take into account any individual user’s special investment objectives, financial circumstances or needs. Users should consider whether any opinions, views, or conclusions in this article apply to their specific situation. Investment based on this article is at your own risk. ```