While today's biggest event for both markets and politics will be tonight's highly anticipated first presidential debate between Trump and Hillary, markets are waking up to some early turmoil in both Asia and Europe, with declines in banks and energy producers dragging down stock-markets around the world, pushing investors to once again seek the safety of government bonds and the yen.
"According to our estimates, selling from systematic strategies is now mostly completed. This is assuming that S&P 500 momentum stays positive, and that volatility does not significantly increase further. As the market bounced post Fed and September options expired, the large put option (gamma) imbalance subsided and is no longer pushing volatility higher."
Following the Fed's "hawkish hold" and the BOJ's "confused contradiction", global risk (and non-risk) assets got the green light, and as a result stocks and bonds rallied in Asia and Europe, with US equity futures rising another 0.4%, advancing with oil and industrial metals, as iron surged in Chinese trading.
Equity markets are stronger on the back of financials - helped by BoJ's plan to steepen the Japanese bond curve - but judging by the strengthening in the Yen, FX markets are non-believers. The lack of additional easing is largely being heralded as a disappointment (no lower NIRP and no increased buying) and many are questioning the kneejerk bounce in stocks (as bank balance sheets face trauma from the 'reverse twist' effect on the long bonds).
If yesterday one could "explain" the overnight stock levitation due to the move higher in crude oil, today there is no such catalyst with WTI down modestly, and yet the broader push higher across European stocks and US equities has reappeared following yesterday's muted close on Wall Street ahead of key central bank data on deck.
8 years ago, Lehman's bankruptcy exposed the reality of the global financial system and equity markets collapsed. While the events of that weekend are still in many memories, we suspect few remember the events of September 16th 1929...
"We begin by admitting that we were uncommonly, inordinately, improperly bearish, believing that the weakness that had developed since last Friday’s collapse had merely been consolidated… We were wrong."
After a sudden rout in financial markets that wiped $2 trillion in global market cap over the past week showed signs of easing, overnight stocks tried to stage another "BTFD-type" comeback with European stocks climbing for the first time in five days as oil and metals prices gained. S&P futures were modestly in green, although they faded earlier gains, on the back of a slide in the USDJPY which initially spiked to 103.31 only to fade back to the mid 102-range.
After yesterday's torrid rally, which sent stocks higher the most in 2 months on the back of Lael Brainard surprisingly dovish comments, we have seen an unexpected profit-taking session overnight in ES, with US equity futures down 0.6%, driven largely by a renewed drop in oil prices which slid after the IEA said a surplus in global markets will last longer than initially estimated, persisting well into 2017 as reported previously.
At least according to one advisor, GS Banque's Loic Schmid, it is prudent to keep some volatility protection on after the recent risk-off episode. As a reminder, in mid-July Schmid suggested buying the VIX, a trade that has been profitable ahead of the Friday surge and while he says that he is taking profits on half the position, he is also keeping the other half on for the following reasons.