WEEKLY MACRO NOTE - Riding Gamma

Reading time: 5 mins

TABLE OF CONTENT:

• WEEKLY WRAP UP

• CENTRAL BANK LALALAND

• SENTIMENT

• ECONOMIC CALENDAR

• THE WEEK AHEAD

On Friday, half an hour before the open and options expiry the Wall Street Journal leaked commentary from Fed officials that by Dec it may be opportune to engage in smaller sized rate hikes.

"No Shit Sherlock" excuse my French.

Remember last week when I questioned the markets' expectations of 75bps in December and thought 50bps was more likely?

FedWatch probabilities now agree

Aided by the usual Gamma flows into OPEX, the market embraced the "Pivot" and rallied, but therein lies the problem.

While it is quite clear to me that the Fed pausing rates at the highest level in 15 years is not bullish, nor will it change the trajectory of the economic slowdown or improve the ongoing earnings recession, investors seem desperate for a reason to get long risk.

The Fed Put of the last 25 years has become the Feds' worst enemy.

Powell faces the difficult task of ending the rate hike cycle while managing market expectations. The tone of how he communicates this trajectory at the next FOMC will certainly be interesting.

WEEKLY WRAP UP

Friday’s rally resulted in the strongest weekly gain for equities since June

SPX +4.96%NDX +5.78%DJI +4.89%

The Dow Jones Industrial Average, which everyone loves to quote despite it being far less relevant than the S&P 500, put in its third weekly gain and is +8.5% off the lows.

For the past month, most of the activity in the SPX has occurred within a 6% range between 3550 - 3800, with very little activity above or below.

Despite this, the daily swings have been on average great than +/- 1.50%, which I suppose is not surpassing given that the VIX, during the same time frame, has been trading within the elevated 28 - 35 range.

Volatility has certainly been trending, but at least in equities, it has not been exploding.

The same cannot be said for the Bond Market.The MOVE Index which measures US Bond market volatility just made its highest weekly close since 2008.

Bonds continue to selloff and rates have made a new high across the curve

US3M 4.40%, +8.84% WoWUS30Y 4.34%, +8.63% WoW

German BUNDs at 2.41% are now trading at their highest level since 2011.

Meanwhile High Yield Spreads tightened -36bps this week.HYG gained 1.37%

A reasonable risk I would be willing to assume over the next 6-9 months is that these spreads widen. I think the statement “risk happens slowly and then all at once” may be relevant in this case.

Friday was a crazy kind of day.

On top of the Pivot Narrative and OPEX Gamma flows, there was at least another major piece to the puzzle.

The BOJ intervened in the FX markets selling Dollars and buying Yen.The result was a greater than 3.50% move in the USD/JPY which went from being up +1.20% to closing down -1.65% on the day. At one point is was down -2.67%.

The resulting decline in the dollar inevitably contributed to the rise in Equities.Remember that quite obvious inverse correlation we have been talking about?

Pretty much every major US equity Sector closed up on the week, with Energy standing out as XLE rose +8.28% while WTI declined -1.36% and US Nat Gas was down -18%

The Energy sector is undoubtedly benefiting from what is poised to be a very strong earnings season with meaningful YoY growth.

Meanwhile, the Materials (XLB), Technology (XLK), Communications (XLC) and Financials (XLF) companies which have reported so far, have posted significant earnings declines.

S&P YoY earnings growth has slowed each of the last 2 quarters, and this quarter is poised to not only slow for the third quarter in a row, but may also to turn negative for the first time since 2020.

For those who still own GOOG heading into next week, I recommend prayer.I do not think SNAPs earnings promise well for any company in the Ad space, and I do not think things get better from here, as after Nov 8th there will be no political Ad spend either.SNAP closed down -30% on Friday.

On an international front, we have gainers and losersEurope SX5E +2.81%Canadas TSX +2.92%India SENSEX +2.39%South Africa SA40 +2.16%

Meanwhile, Asia did not join the party withShanghai SSE -1.08%Vietnam VN -3.96%Singapore STI -2.29%Japans NIKKEI -0.74%

CENTRAL BANK LALALAND

We are heading into a busy few weeks with many rate hikes set to happen, so I thought I would share with you the dates and expected hikes.

Oct 26th BOC +75bpsOct 26th BCB +0bpsOct 27th ECB +75bpsNov 1st RBA +25bpsNov 2nd FED +75bpsNov 3rd BOE +100bps

Also

Oct 28th BOJ interest rate decision.Does anyone care to guess what it will be?They are the only central bank in the world which still has negative interest rates.

Expect some volatility in rates and FX over the next few weeks, particularly if Central Banks hike more or less aggressively than anticipated.

As for the Balance Sheets

• Fed Balance sheet down by a mere -16B in Oct

• ECB may announce Balance Sheet reduction plan for 2023

• BOE is likely to also state an intent to start selling assets

One could say that at least the BOJ is consistent in its absurdity.Meanwhile, the BOE & ECB claims of balance sheet reduction are simply Oxymoronic, or Moronic, as both continue to engage in asset purchases, the former to support GILTs and pension funds and the latter to support BTPs etc.

SENTIMENT

Sentiment remains Bearish, but with Bulls gaining some ground.

After weeks of chop, and a strong close, according to the Fear & Greed index sentiment has somewhat normalised from the extreme fear levels of a week ago.

The National Association of Active Investment Managers shows the highest level of long exposure since late August.

By Tuesday last week traders has increased their short bets on the SPX, while reduced their long the NDX.

Interestingly over the last 5 weeks positioning on the EUR has gone from -11K contracts to a new high of +48K contracts. Now while the ECB may be attempting to play some catch up with the Fed do you really think they are going to be able to get anywhere close to the levels of tightness the US has?

Shorts on the Yen meanwhile were at a new high for the year so no surprise that the BOJ was able to wipe a few of those out.

Equity Put/Call ratio declined to 0.58Index Put/Call ratio is 1.14

Meanwhile particularly interesting is the Nations SKEW Index, which not only declined to a new low for the year, but also is at its lowest level in the last 10.As we discussed a few weeks ago, this is a measure of Tail-Risk in the SPX, as you can quite clearly see from the spike in 2020 and late 2018.

As absurd as this may sound, not much Tail-Risk appears to be priced into options.

ECONOMIC CALENDAR

THE WEEK AHEAD

Let's keep things simple.

Equities are now at the upper end of a four-week range.VIX is at the lower end.Volume on rallies has been weak.Put/Call ratios are low.Gamma Flows are over.The pivot narrative may be stopped in its tracks by Central Bank announcements, and positive us GDP.Fed to shrink Balance Sheet by Friday

It seems to me, that risk-reward once again favours the Bears, at least in the short term.

So while I would not rule out a bit of a continuation in early Monday trading, I think any rally will be short-lived.

Looking further afield, three or four weeks ago I floated the idea that in Nov/Dec we could see another major counter trend rally, as peak hawkishness gets priced in, Midterm risk is behind us and monkeys chase stocks.

While I think this is still be a plausible scenario, I do not think that we are there yet.

A meanigfull rally in my opinion can only occur on the heals of one of two outcomes:

A washout and capitulation or excessive bearish positioning, at the moment I do not think we have either.

Let me close by saying this, the possibility of a rally which I have here outlined is pure and utter speculation. It may or may not happen.After all, we are in a bear market and the SPX down only -22% YTD given everything that has happened seems like it is underpricing risk.

As traders, we have to make decisions in the moment.

And right now all I know is that the risk-reward heading into next week once again favours the bears, with limited upside and wide open downside.

I plan to execute on this and leave the guesswork for another day, and if I am wrong, then I am wrong and will move on to the next trade.Such is the life of a trader.

What do you plan on doing?

Thank you for reading,

Antonio C. Nobile

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