Wondering why equity markets are melting up like yesterday's fears never happened. Nomura's Charlie McElligott has some ideas.
This morning's ramp has lifted The Dow, S&P, and Russell 2000 into the green for the week (erasing yesterday's losses) and Nasdaq is also soaring...
All the majors are hovering at or near key technical levels (S&P at 100DMA, RTY at 50DMA, and NQ at 100DMA)...all of which raise the question of whether stonks can extend from here or have run out of ammo.
Because, as McElligott notes, after yesterday’s selloff in spot, the negative $Gamma- and negative $Delta- ranks are “off the charts” across major index- and ETF- options... which will make for “jumpy” overshoot flows in either direction, lower or higher:
SPX / SPY consolidated: Gamma -$9.7B, 5.9%ile, neutral “flip” line above at 4366; Delta -$253.6B, 5.9%ile, neutral “flip” line up at 4382
QQQ: Gamma -$1.3B, 0.1%ile, neutral “flip” line all the way up at $370.64; Delta -$36.0B, 0.0%ile, neutral “flip” line up at $369.93
IWM: Gamma -$221.1mm, 15.8%ile, neutral “flip” line up at $222.58; Delta -$7.0B, 15.6%ile, neutral “flip” line up at $225.93
EEM: Gamma -$78.8mm, 8.4%ile, neutral “flip” line up at $50.91; Delta -$2.9B, 10.4%ile, neutral “flip” line up at $52.66
Dangers from here continue to sit in the “cratered and crowded” duration-proxy Nasdaq / QQQ and hyper “Secular Growth” ARKK (and underlying names), especially with as much negative Gamma is out there with Dealers short a ton of downside there, which could get weird if the UST / Rates selloff were to further extend on say a big NFP print, or continued “right tail” behavior in the Energy / tradeable inflation complex.
Critically, the Nomura strategist notes that 'net/net', it sure feels like risk has TACTICALLY pivoted to the upside now in Equities, despite the Rates overhang risk...for now.
Turning to Rates, the post FOMC selloff has taken on a new angle (from initial bear-flattening, as front-end / belly was hit on “hawkish Fed” fast-taper and dot plot….to, more recently, a bear-steepening on seeming market receptiveness to “reflation”)...
McElligott notes that this was largely thanks to the “boiling” dynamics across Energy- and Commods- complex seeing a dramatic reacceleration in prices, as doubts on “transitory” continue to build, Delta cases / hospitalizations / deaths “roll over” and hence, Breakevens widening sharply...
The interesting thing with the UST yield curve bear-steepening isn’t now just the move in the long-end though (on the Energy boost to traded inflation - Crude and Nat Gas in particular), but also too that the front-end seems to be quite confident in fading the “hawish” Fed dots, at least the front stuff - i.e. Reds still unable to price more than 1 hike before end 2022...
And this “Schrodinger’s Cat” dynamic between these seemingly opposing narratives at long-end vs front-end is a danger - where from speaking with folks inside the Rates space, it’s almost looking like a completely binary distribution:
Either inflation is transitory and concerns over still pretty crappy Jobs / Labor dynamics are keeping Fed (and market) from being able to get there on hiking t+1 year-ish fwd lookahead;
OR, conversely, “reflation 2.0” this time around is really “stagflation” or “badflation” (my colleague Andy Chaytor’s phrase, who has spoken brilliantly to this theme re. BoE), and could even induce a negative forward growth shocks (i.e. Energy price spillover)…which would instead mean HEIGHTENED risk of a surprisingly AHEAD-OF-PACE hiking cycle from central banks.
That's the choice the market faces, and for now, it appears the latter scenario is being favored... though it's tight either way.