Yesterday, while stocks were surging in the aftermath of the Powell presser during which the Fed chair took away the possibility of a 75bps rate hike, we joked that the bullish market reaction is precisely the opposite of what bulls - or Powell - want...
Start the countdown to the intermeeting 75bps rate hike— zerohedge (@zerohedge) May 4, 2022
... as the easing in financial conditions (i.e., higher stocks) would undo almost all of the tightening from the incremental 50bps rate hike (first of many... or not many, now that the BOE confirmed that all developed central banks are hiking right into a recession). And just to make sure the market understood what was going on, we repeated it again this morning.
Six Fed speakers tomorrow. They will make it very clear that Powell does not like stocks surging— zerohedge (@zerohedge) May 5, 2022
Which brings us to today's remarkable U-turn in stocks, and the complete reversal in stocks observed yesterday.
But first, a quick recap of what sparked the post-Fed rally, which as we explained yesterday was nothing more than the latest giant gamma squeeze, an observation confirmed this morning by Nomura's Charlie McElligott who writes the following:
I believe the scenario which might have scared [Powell] the most would have been going so hard with the potential “50bps May / 75bps June / 75bps July” which would have gotten them to “Neutral-ish” by end of Summer and stuck sitting on their hands…but then, risk being caught in a situation where the MoM inflation data stays persistently higher while unemployment data makes new lows—which would then see the market “expect even more” again, off what was already a “75bps hikes prior” and risking an enormous “policy / communications error” hawkish-escalation “hard landing” accident
As this was clearly then perceived by a VERY front-footed “hawkish” market as “UNDER-delivering” on said expectations for a “hawkish messaging,” we then saw Stocks blow higher thereafter, thanks to a massive “Short Gamma” squeeze and the corroborated “Vanna sling-shot” feedback loop we have been discussing, as implied Vols were just clobbered with the “hawkish left-tail” then viewed as almost essentially “removed” from the scenario distribution going-forward.
Precisely what we said yesterday, but recall we also said the following: "while it is easy to turn optimistic here, a warning: the last thing the Fed wants is for its 50bps rate hike - the biggest in 22 years - to be viewed as a green light to more risk on. In fact, if we indeed see stocks surging in the next few days, we fully expect the next crew of Fed talking heads which will hit the mic as soon as Friday to warn that not only is a 75bps - and even as 100bps - rate hike on the table, but that an emergency, inter-meeting announcement is distinctly positive if algos ignore the Fed call at their own peril."
Which brings us to the even more important question of "where to from here" which prompted a witty rejoinder Charlie McElligott who writes today that "a client said something which struck me two days ago: “Bulls and Bears both want a rally.”
That, of course, corroborates with what we said yesterday and Nomura's feedback from many in the “impulse FCI tightening” bear-camp, who have been saying they wanted to fade a large post-Fed relief / mechanical rally.
To the Nomura strategist, this then means the best way to continue trading this environment is “Short Vol, Short Delta.”
Practically, key levels for Bulls to reclaim from here are the “Zero Gamma” lines—where it truly feels that “THE” force which continues to drive the market are these “short Gamma” hedging pinch-points, where particularly SPX and QQQ are within reach—but still below—reclaiming this as a “stabilizing” force moving-forward:
- SPX / SPY $Gamma -$1.2B (jumping up to 24.2%ile now), “Zero Gamma” neutral line up at 4314 (currently nearing “Neutral Gamma vs Spot” but still “Short”)
- QQQ $Gamma +$139.9mm (jumping up to 60.0%ile now), “Zero Gamma” neutral line up $327.02 (currently nearing “Neutral Gamma vs Spot” but still “Short”)
- IWM $Gamma -$96.1mm (jumping up to 36.4%ile now), “Zero Gamma” neutral line up at $200.93 (currently still VERY “Short Gamma vs Spot”)
Charlie then looks at history to make an “analog” observation; specifically he took a look at days when the Fed hiked Rates and the SPX was up by more than either +1% or more than +2%. The read? Both show forward returns are locally “mixed at best” with a median SPX trade that is LOWER out 3m thereafter for both “triggers” (which is very rare for 3m windows in SPX tbh)…while revealing some especially “cringe” dates on the backtest:
1% moves on Fed hikes:
2% moves on Fed hikes:
McElligott concludes by noting that the Fed's “reset” of expectations to “buy time” for data to fit their view "feels risky to me — I mean, we are talking an attempt at threading the needle, but with a MOAB — as it risks both another “hawkish escalation” down the road which would almost certainly then see the market price “policy error / hard landing” bets even more aggressively, as the Fed would then be pushing into outright “restrictive” territory."
Of course, by extension if a market rally is the opposite of what bulls wanted yesterday, pushing into "outright restrictive" territory - i.e., accelerating the next recession - is just what the bulls need, as it means rate cuts and a fresh QE can't be far behind. In fact, today's crash is precisely what the bulls want...
More in the full note available to professional subscribers in the usual place.