Unfortunately the assessment was right, and markets performed a spectacular U-turn on Thursday, and reversed the post FOMC gamma squeeze.
The SPX was forced 3.6 percent lower, mainly driven by mega cap growth stocks (-5.1%), which were pressured by exploding yields (10Y +15 bps).
Bonds in turn were mainly sold due to rising inflation expectations, and the weakening Yen, which is forcing japanese investors out of the market, due to rising hedging costs.
According to future markets the probability of a 75 bps hike moved from 74 percent yesterday to 85 percent, so clearly Powell was either not entirely transparent when he claimed that "additional 50 basis points increases should be on the table” (at the next meetings), or he is still behind the curve.
On a side note: The US Senate passed the so-called “NOPEC bill” today, which could render the OPEC cartel illegal and result in potential unintended consequences, in a push to drive oil prices lower (no OPEC = more oil). It is unlikely that the president will sign the law, but it is certainly a warning shot.
Implied dealer gamma fell by 480MM to -887MM, while “gamma flip” moved down slightly to 4385.
Where do we go from here?
Put options with a strike of 4000 and 3700/3600 were heavily traded, and we expect an increase in open interest at those out-of-the-money levels, which will push implied dealer gamma further into negative territory, therefore providing a setup for a high volatility environment on Friday.
Resistance can be identified at 4100 and 4000. While another big down day is certainly possible (just recollect May 2020), I do not think it’s highly probable given the already extreme positioning and the flattening-out of the gamma curve at around 4000.
The SPX was forced 3.6 percent lower, mainly driven by mega cap growth stocks (-5.1%), which were pressured by exploding yields (10Y +15 bps).
Bonds in turn were mainly sold due to rising inflation expectations, and the weakening Yen, which is forcing japanese investors out of the market, due to rising hedging costs.
According to future markets the probability of a 75 bps hike moved from 74 percent yesterday to 85 percent, so clearly Powell was either not entirely transparent when he claimed that "additional 50 basis points increases should be on the table” (at the next meetings), or he is still behind the curve.
On a side note: The US Senate passed the so-called “NOPEC bill” today, which could render the OPEC cartel illegal and result in potential unintended consequences, in a push to drive oil prices lower (no OPEC = more oil). It is unlikely that the president will sign the law, but it is certainly a warning shot.
Implied dealer gamma fell by 480MM to -887MM, while “gamma flip” moved down slightly to 4385.
Where do we go from here?
Put options with a strike of 4000 and 3700/3600 were heavily traded, and we expect an increase in open interest at those out-of-the-money levels, which will push implied dealer gamma further into negative territory, therefore providing a setup for a high volatility environment on Friday.
Resistance can be identified at 4100 and 4000. While another big down day is certainly possible (just recollect May 2020), I do not think it’s highly probable given the already extreme positioning and the flattening-out of the gamma curve at around 4000.