The S&P 500 declined 0.5 percent on Thursday in a choppy, back-and-forth session, as the underlying growth concerns pressured sentiment.
Reviewing today’s economic data:
1) Initial claims increased by 21K to 218K (consensus 200K). OVerall the number is not concerning, but nevertheless relative to expectations it was a disappointment.
2) Existing home sales decreased 2.4 percent month-over-month in April to a seasonally adjusted annual rate of 5.61 million (consensus 5.65 million) versus a downwardly revised 5.75 million in March.
3) The Philly Fed Index for May crashed to 2.6 points (consensus 16.5) from 17.6 in April.
4) The Conference Board's Leading Economic Index decreased 0.3 percent month-over-month in April (consensus 0.0%) following a revised 0.1 percent increase (from 0.3%) in March.
As growth concerns slowly seem to become the dominant theme, 10-year yields have now lost 43 basis points from the peak only eight days ago and according to Nomura this increases the risk of a destabilizing short-squeeze in the bond markets, as trend following CTAs are significantly underweight bonds.
Gamma discussion:
Dealer gamma decreased by 155MM to -1316MM, so for every dollar the index moves lower (higher) option dealers have to sell (buy) additional futures, which can without warning result in sharp pops or drops.
The implied gamma curve of market makers (see chart below) suggests however, that dealer-side flows abate between 3800 and 3700, which should add a floor.
https://bucket.mlcdn.com/a/3517/3517811/images/75ece9ae1830f11e80a87410dc1d259f5de118c9.png
Put and call Volume was extremely high at 3900, and we now wait for tomorrow's open interest data if markets are indeed starting to rebase lower.
OPEX:
About 27 percent of total gamma will have expired tomorrow, which is equal to -371MM net gamma.
In terms of delta dealer books get rid of about 20B at 4000 and about 7B at 3900, which could lead to a rally IF the puts don't get replaced/rolled lower, or at least some very choppy trade around those levels (also consider the high gamma at 3900).
As most of the delta expires at 4000 our main pivot, it will be interesting to see how investors rebalance.
Reviewing today’s economic data:
1) Initial claims increased by 21K to 218K (consensus 200K). OVerall the number is not concerning, but nevertheless relative to expectations it was a disappointment.
2) Existing home sales decreased 2.4 percent month-over-month in April to a seasonally adjusted annual rate of 5.61 million (consensus 5.65 million) versus a downwardly revised 5.75 million in March.
3) The Philly Fed Index for May crashed to 2.6 points (consensus 16.5) from 17.6 in April.
4) The Conference Board's Leading Economic Index decreased 0.3 percent month-over-month in April (consensus 0.0%) following a revised 0.1 percent increase (from 0.3%) in March.
As growth concerns slowly seem to become the dominant theme, 10-year yields have now lost 43 basis points from the peak only eight days ago and according to Nomura this increases the risk of a destabilizing short-squeeze in the bond markets, as trend following CTAs are significantly underweight bonds.
Gamma discussion:
Dealer gamma decreased by 155MM to -1316MM, so for every dollar the index moves lower (higher) option dealers have to sell (buy) additional futures, which can without warning result in sharp pops or drops.
The implied gamma curve of market makers (see chart below) suggests however, that dealer-side flows abate between 3800 and 3700, which should add a floor.
https://bucket.mlcdn.com/a/3517/3517811/images/75ece9ae1830f11e80a87410dc1d259f5de118c9.png
Put and call Volume was extremely high at 3900, and we now wait for tomorrow's open interest data if markets are indeed starting to rebase lower.
OPEX:
About 27 percent of total gamma will have expired tomorrow, which is equal to -371MM net gamma.
In terms of delta dealer books get rid of about 20B at 4000 and about 7B at 3900, which could lead to a rally IF the puts don't get replaced/rolled lower, or at least some very choppy trade around those levels (also consider the high gamma at 3900).
As most of the delta expires at 4000 our main pivot, it will be interesting to see how investors rebalance.