Market Wrap
Recap: The SPX closed 1.2% lower on Tuesday, but was able to recover some of its losses in the after market, after Alphabet reported mixed Q2 results that were interpreted as overall positive.
Today’s economic data came in below expectations and exacerbated existing growth concerns and worries about the Fed’s rate hikes leading to a possible recession.
On the “Fed Pivot”: Right now the market is pricing in a terminal rate of 3.25-3.5% that could be reached in December, before the Fed will slowly start to pivot, possibly in May.
Nomura’s Charlie McElligott doesn’t buy this view and thinks that the Fed will stick to its game plan by delivering a hawkish package tomorrow.
Bill Ackman was tooting the same horn today saying, that the more the market believes that the Fed will immediately reverse course, the less effective raising rates will be in moderating inflation, and the more the Fed will have to raise rates, as “inflation has become imbedded in the economy and is front of mind for every American”.
Gamma situation: Dealer gamma in the SPX option complex is -359M (down from -136M), which means market makers are liquidity takers again after flirting shortly with a more neutral stance.
Support is found at 3910/3900 (-40M combined gamma notional) and 3800 (-52M gamma notional), while resistance can be identified at 4000/4005 (+44M combined gamma notional).
Gamma flips positive above 4000 points.
The big question: A negative gamma environment is not bearish per se, but rather provides signal whether liquidity is low and therefore volatility is high or vice versa.
The current short gamma environment therefore provides a platform for either a sharp pop or drop in the underlying tomorrow at 14:00 Eastern.
Will the market sell-off on a Fed that dismisses the recession risk, or will the market move higher and force more systematic players into the market?
According to Nomura’s McElligott CTA have so far covered 44.4B over the past two weeks, while the “vol control” complex should take the systematic “reallocation” baton in the coming days, which could lead to mechanically buy backs upwards of $10-13B over the next two weeks and close to $20-30B over the next month.
Today’s economic data came in below expectations and exacerbated existing growth concerns and worries about the Fed’s rate hikes leading to a possible recession.
On the “Fed Pivot”: Right now the market is pricing in a terminal rate of 3.25-3.5% that could be reached in December, before the Fed will slowly start to pivot, possibly in May.
Nomura’s Charlie McElligott doesn’t buy this view and thinks that the Fed will stick to its game plan by delivering a hawkish package tomorrow.
Bill Ackman was tooting the same horn today saying, that the more the market believes that the Fed will immediately reverse course, the less effective raising rates will be in moderating inflation, and the more the Fed will have to raise rates, as “inflation has become imbedded in the economy and is front of mind for every American”.
Gamma situation: Dealer gamma in the SPX option complex is -359M (down from -136M), which means market makers are liquidity takers again after flirting shortly with a more neutral stance.
Support is found at 3910/3900 (-40M combined gamma notional) and 3800 (-52M gamma notional), while resistance can be identified at 4000/4005 (+44M combined gamma notional).
Gamma flips positive above 4000 points.
The big question: A negative gamma environment is not bearish per se, but rather provides signal whether liquidity is low and therefore volatility is high or vice versa.
The current short gamma environment therefore provides a platform for either a sharp pop or drop in the underlying tomorrow at 14:00 Eastern.
Will the market sell-off on a Fed that dismisses the recession risk, or will the market move higher and force more systematic players into the market?
According to Nomura’s McElligott CTA have so far covered 44.4B over the past two weeks, while the “vol control” complex should take the systematic “reallocation” baton in the coming days, which could lead to mechanically buy backs upwards of $10-13B over the next two weeks and close to $20-30B over the next month.
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