The SPX closed one percent lower on Thursday and below the critical level of 3800.
The risk-off sentiment was clearly driven by growth concerns. Some factors:
According to Fed Funds Futures, the Fed will now be forced to start easing in August (see chart below), a thought that was less than two weeks ago unthinkable (for mainstream Wall Street that is).
Nomura jumped on the VIX-is-to-cheap bandwagon meanwhile, and stated that “clients are more worried about missing the “right tail” (e.g. some sort of “dovish pivot” scenario from the Fed) than “left tail” (e.g. crash).”
We would go a step further to say that not (only) the VIX is an issue, but more importantly the Skew index, which is abnormally cheap in comparison to the implied volatility.
As we said before here – only the Skew index (see chart below) captures pure “left tail black swan risk” and current option positioning suggests the market is not anticipating anything beyond a controlled sell-off at the moment. CB tightening – yes, credit event – no way.
Gamma Discussion
Put volume was above trend, driven by the JHEQX roll, who resulted in a new 3580/3020 put spread, which is financed by a 4005 call.
Tomorrow we will have again about 10 percent of gamma expiring in weeklies, which is not much, but together with the ISM Manufacturing Index we could again see some volatility.
CFTC data will be interesting as we might get some hints how CTAs and hedgefonds are positioned.
The risk-off sentiment was clearly driven by growth concerns. Some factors:
- RH (see yesterday’s newsletter)
- Weaker than expected Manufacturing PMI in China
- Weak industrial production Japan
- Bitcoin down over 6 percent
- Energy crisis Europe/Germany
- Personal spending declined 0.4 percent in May
According to Fed Funds Futures, the Fed will now be forced to start easing in August (see chart below), a thought that was less than two weeks ago unthinkable (for mainstream Wall Street that is).
Nomura jumped on the VIX-is-to-cheap bandwagon meanwhile, and stated that “clients are more worried about missing the “right tail” (e.g. some sort of “dovish pivot” scenario from the Fed) than “left tail” (e.g. crash).”
We would go a step further to say that not (only) the VIX is an issue, but more importantly the Skew index, which is abnormally cheap in comparison to the implied volatility.
As we said before here – only the Skew index (see chart below) captures pure “left tail black swan risk” and current option positioning suggests the market is not anticipating anything beyond a controlled sell-off at the moment. CB tightening – yes, credit event – no way.
Gamma Discussion
Put volume was above trend, driven by the JHEQX roll, who resulted in a new 3580/3020 put spread, which is financed by a 4005 call.
Tomorrow we will have again about 10 percent of gamma expiring in weeklies, which is not much, but together with the ISM Manufacturing Index we could again see some volatility.
CFTC data will be interesting as we might get some hints how CTAs and hedgefonds are positioned.