To Nomura's Charlie McElligott, "another sloppy selloff in Global Rates," feels like UST 10Y running to 2.00 is the “right move” now with the US economy tracking ~6% in Q1.
And as such, the Cross-Asset Strategy MD warns that “Secular Growth” (bond proxy) Nasdaq is being commensurately repriced LOWER relative to peers with more “Cyclical Value” / economic-sensitivity
So let’s recap the drivers of this latest surge:
USTs bear-steepening after the predicted Fed “greenlight,” regardless of the median ’23 Dot location, because JaPo simply stayed on message about not tightening ahead of meeting the Employment and Inflation mandates—check
And as in parallel with the bear-steepening, more of the same US Equities thematic “Cyclical Value over Secular Growth” we expected (Nomura Cyclical Value Factor +0.6% yday and now +31.1% YTD, versus Nomura Growth Factor +0.1% yday and -6.5% YTD)—check
In the meantime as we await Friday’s Op-Ex, $4.9B of Dealer (Long) Gamma in SPX at 3350 holding us tight like a rubber-band—check
Looking-forward and as discussed in recent days, a monster $9.2B $Gamma sits up at 4000 (with a lumpy $4.2B remaining after $4.9B rolls-off front week) which feels like a “round number” inevitability in conjunction with a bullish seasonal for April / May and Spring economic reopening green-shoots for sentiment, so I’ll keep pounding the table on scooping Equities upside into any temporary post Op-Ex Gamma unclench & Delta de-risk lower, particularly if it comes in conjunction with a Rates mini-tantrum that is occuring now.
Thing is, QQQ / Nasdaq looks very different still from SPX, with QQQ Gamma vs Spot remaining “Short” alongside -$1.5B of “Short” $Delta as well—so potential for further slop remains in Nasdaq / Tech
McElligott notes two “wows” with the Fed yesterday:
The RRP counterparty limit adjustment, which could just be a tweak to offset expected decline in TGA that will zoom bank reserves, or a sign that they will be raising both RRP and IOR soon, as some expect—but as Lew Alexander notes, “…it could also mean that they are not going to extend the SLR exemption and they want to create more outlets for reserves” (and likely that it comes after the close Friday) - FWIW, Lew’s potential “NO EXTENSION OF SLR” interpretation of the RRP limit adjustment is also what Zoltan Pozsar is now thinking too
The Fed’s explicit shift to a much stronger outlook, particularly with their 2021 inflation forecast coming in HOT (above majority of Street)…which is frankly a savvy move, as it will allow them to say that if we DO get the inflation impulse to realize as many expect, it still would not alter their policy outlook—per Lew again, “It is an expression of faith inflation being “anchored.””
This Rates price-action should again remind us that the next phase will be a “bear-flattener,” as the market masses digest the pivot from “reflation” to “tightening,” with the Belly as the most acute “pain point” into the QE tapering pull-forward.
So, how do we trade that today? SpotGamma is warning that along with large strike shift, the Vol Trigger has moved up to 3920 and the picture <3900 is a “no mans land”. The Call Wall and large resistance remains at 4000.
But Nasdaq is more precarious, as SpotGamma points out that we must acknowledge the fuel for downside here. The QQQ gamma remains quite negative down to the 300 level and it appears there is little in the way of support <3900 in SPX. You can see how this QQQ selling accelerates when you add in a shift higher in implied volatility (this is shown by the dealer hedge requirement shifting from the red line to black line, explanation here).
Said another way, “buying the dip” is not advised if SPX breaks 3900.