Hawkish Fed could hobble stock buying spree

Volatility-linked funds estimated to be buying as much as $2 billion in U.S. equities daily are helping drive this year’s rebound in stocks and may ramp up purchases in coming weeks, though a hawkish Federal Reserve could spoil the party.

The S&P 500’s (.SPX) 6.2% surge in January has been accompanied by a drop in measures of volatility across the board. Daily swings in the index over the past month were the smallest since early 2022, while the Cboe Volatility Index (.VIX) also stands near a one-year low.

The drop in market gyrations has triggered a buy-signal for certain computer-driven strategies including volatility control funds, risk parity funds and Commodity Trading Advisors (CTAs).

Broadly known as systematic strategies, these funds have been scooping up between $1 billion and $2 billion a day in US stocks, according to BNP Paribas estimates, helping drive an equity rally that has come despite worries that a hawkish Fed will plunge the US economy into recession.

“This has definitely been more a flow-driven rally than a shift in the overall fundamental backdrop,” said Max Grinacoff, US equity and derivatives strategist at BNP Paribas.