We were predicting a wild week ahead on Friday but the reality is, that we had of course no clue how bad it was going to get. The world is on fire and the hits are starting to come at all angles it seems.
Let’s start the recap in the far east: The Bank of Japan is apparently in great danger to lose control over its yield target for long-term bonds, and has to pump big amounts of money into the market, which caused the Yen to plunge to the lowest level since 1998. According to analysts from Deutsche Bank, Japan could be on the verge of a systemic collapse with unpredictable outcomes.
Moving further west, South Korean truckers remained on strike for the seventh day in a row and exports through the first ten days of June were down 12.7 percent year-over-year, while in China shutdowns might be back due to the detection of new Covid cases.
Over in Europe the spread between Italian and German bond yields is widening fast (+12 bps Monday, +50 bps since the beginning of the month), as bond investors are testing the commitment of the ECB to hold the fragmented currency block together.
In the US we continue to see wild swings in the bond market (2-year yields +50 bps over the last two sessions, 10-year +32 bps), which have caused a re-flattening of the yield curve and spillover effects into the stock market among other things.
A good portion of today’s yield spikes occurred after the Wall Street Journal was telegraphing a 75 basis point hike on Wednesday, but there is some speculation that the real surprise will come in the form of a 100 point hike.
According to the future markets the probabilities for 50 and 75 bps hikes stand at 74 and 26 percent respectively.
Gamma discussion
Implied dealer gamma decreased by 188MM to 1293MM relative to Friday, while put activity was heavy at 3700/3550 and 3400, which will likely result in a substantial increase in open interest tomorrow.
Extreme gamma readings suggest high realized volatility and unstable markets with low liquidity ahead.
With another important JGB session tomorrow, the FOMC meeting and VOLEX coming up on Wednesday, and OPEX on Friday it is not realistic to make directional predictions, but from a gamma standpoint we can say that between 3700 and 3600 at least dealer flows should start to die down and then even become a supportive factor at lower strikes.
Under more normal circumstances OPEX on Friday should theoretically spark some buying as option deltas in the amount of 600 billion are expiring, but first FOMC risk has to be cleared.
Looking ahead
Tomorrow investors will receive industrial production data (Japan), new inflation numbers and the important ZEW economic sentiment index (Germany), and the PPI print in the US.
Investors will also closely monitor the Japanese Yen and JGB yields, as the BoJ has pledged to conduct additional purchases.
Let’s start the recap in the far east: The Bank of Japan is apparently in great danger to lose control over its yield target for long-term bonds, and has to pump big amounts of money into the market, which caused the Yen to plunge to the lowest level since 1998. According to analysts from Deutsche Bank, Japan could be on the verge of a systemic collapse with unpredictable outcomes.
Moving further west, South Korean truckers remained on strike for the seventh day in a row and exports through the first ten days of June were down 12.7 percent year-over-year, while in China shutdowns might be back due to the detection of new Covid cases.
Over in Europe the spread between Italian and German bond yields is widening fast (+12 bps Monday, +50 bps since the beginning of the month), as bond investors are testing the commitment of the ECB to hold the fragmented currency block together.
In the US we continue to see wild swings in the bond market (2-year yields +50 bps over the last two sessions, 10-year +32 bps), which have caused a re-flattening of the yield curve and spillover effects into the stock market among other things.
A good portion of today’s yield spikes occurred after the Wall Street Journal was telegraphing a 75 basis point hike on Wednesday, but there is some speculation that the real surprise will come in the form of a 100 point hike.
According to the future markets the probabilities for 50 and 75 bps hikes stand at 74 and 26 percent respectively.
Gamma discussion
Implied dealer gamma decreased by 188MM to 1293MM relative to Friday, while put activity was heavy at 3700/3550 and 3400, which will likely result in a substantial increase in open interest tomorrow.
Extreme gamma readings suggest high realized volatility and unstable markets with low liquidity ahead.
With another important JGB session tomorrow, the FOMC meeting and VOLEX coming up on Wednesday, and OPEX on Friday it is not realistic to make directional predictions, but from a gamma standpoint we can say that between 3700 and 3600 at least dealer flows should start to die down and then even become a supportive factor at lower strikes.
Under more normal circumstances OPEX on Friday should theoretically spark some buying as option deltas in the amount of 600 billion are expiring, but first FOMC risk has to be cleared.
Looking ahead
Tomorrow investors will receive industrial production data (Japan), new inflation numbers and the important ZEW economic sentiment index (Germany), and the PPI print in the US.
Investors will also closely monitor the Japanese Yen and JGB yields, as the BoJ has pledged to conduct additional purchases.