WEEKLY MACRO NOTE - Chasing Noise

Reading time: 10 min

Welcome to the first edition of my WEEKLY MACRO NOTE.

Long-time followers will be quite familiar with the initial format of this article although, as they read on, may be pleasantly surprised by some new content.

TABLE OF CONTENT:

• WEEKLY WRAP UP

• CHART OF THE WEEK

• SENTIMENT

• THE WEEK AHEAD

• ECONOMIC CALENDAR

• FOR THE SAKE OF SPECULATION

As we enter the final innings of the 3rd quarter, as Summer winds to an end and Autumn approaches, this monumental poem by Ungaretti comes to mind.

This year we have had a war break out in Eastern Europe, the highest inflation levels the West has experienced in 40 years, the fastest global liquidity tightening on record, an Emerging Market food and debt crisis, an energy crisis in Europe, an earnings recession underway and plenty more….

Despite all of this, the market, as measured by the SPX, is down just over -15% and future expected volatility, as measured by the VIX, currently stands at the lower end of this year's range, and has yet to break out in a meaningful way.

As Autumn approaches, and Winter waits but round the corner, those leaves seem fragile and awfully susceptible to even the slightest bout of wind.

Before we go and dig into this week's numbers let me set a more jovial tone for this article

Now substitute Ketchup for Volatility…….. I think you get the point.

WEEKLY WRAP UP

Following 3 weeks of declines, last week equity markets staged an impressive W/W rally, particularly in the USSPX +3.65% NDX +4.05% DJI +2.66%RUT +4.04%

Europe was a lot less impressiveUKX +0.96%SX5E +0.72%

Below is a chart I shared about 6 months ago when the DAX was at its first line of resistance, we currently stand at the second. Long-term followers know I like to keep TA simple, lest it should border on Astrology. It doesn’t get much simpler than areas of significant support or resistance.

Most Global Equity markets were also up W/W, albeit not as much as in the US.

Two things can be pointed toward which may be playing a role in supporting US equities over others:1) The relative strength of the US vs other economies may be attracting capital flows as the only safe bet in town (Relative not Absolute as the US economy is also weakening significantly);2) The largely more speculative nature of the US markets due to record retail participation which continues to drive stocks via YOLO options bets and Reddit-driven mass trades.

Thursday and Friday saw squeezes in some of the most speculative stocks, which I will here group under the Cathie Wood umbrella:

ARKK, ARKW, ARKF all rallied +10%

The squeeze was not confined to equities with BTC & ETH both staging a 10% rally, which in turn drove moves of over 20% in BTC proxies such as RIOT, MSTR, COIN, CAN etc.In my experience, such moves are neither healthy nor sustainable, particularly when not supported by any meaningful fundamental catalyst or change.More on this later, but first let's finish the weekly wrap-up.

DXY declined -0.58% leaving intact the inverse correlation between King Dollar and Equities.EUR +0.92% reclaimed parityGBP rallied +0.68% after being pounded over -5% the previous 3 weeks

Despite a weaker Dollar, there was no reprieve for the major Asian currenciesJPY -1.72%KRW -1.23%CNH -0.28% (USD/CNH touched the all-important 7 level)

As central banks continue to tighten, yields on the short end continue to make new highs, both in the US and Europe.As a reminder last week:RBA +50bpsBOC +75bpsCB of Malaysia +25bpsECB +75bps

The Feds balance sheet shrunk by a meagrely -4B this week, which is not unexpected. The trend has been for the big moves to occur at the middle and end of each month due to when maturities come due. Thus if we are to believe the FED we should expect an acceleration of QT over the next week or so.

The CRB commodity index was flat on the week with most agricultural commodities rallying, while the energy components broadly declined.

Live Cattle +0.78% continues to make new highs; Wheat also stands out with a +7.65% move;Oil made new lows and reached $80 before rallying +4% on Friday and closing the week at $86, down only -1.37% W/W;US Nat Gas declined -10% W/W, and in the last two weeks has wiped out all of August's gains.

On the energy front, it is worth noting that both Uranium and Uranium stocks such as CCJ are on the move and have made significant gains over the past few weeks.

While chasing is never advisable, in the long term, the realisation that Nuclear is one of the only viable alternatives for ample and cheap energy seems to be setting in and this most likely bodes well for the likes of URA, and these stocks may be beneficiaries for years to come.

CHART OF THE WEEK

A truly astonishing data set was making the rounds this week, presented in the two charts below. It would appear that put buying in single stocks spiked to record highs, which might normally be interpreted as panic buying of protection/hedges.

I am always quite weary of reading too much into any single metric, for if we look at the market as a Dark Forest, more may be at hand than meets the eye.

Various observers have pointed out that more than indicating extreme fear this data set is broadly a symptom of the speculative nature of the trading which since Covid has been gripping the US, where option volumes are at record highs. Shall we call it the Robinhood effect, where anyone with a few hundred dollars can open an account and trade complex derivative products which were previously reserved for only the most experienced?

Allow me to say that I am far from an expert when it comes to options and volatility trading, so take all thoughts presented in this section with a pinch of salt and always DYOR.

My understanding is that Institutions are more likely to hedge with options on indices such as the SPX and ES, and as I noted at the start, the most obvious measure of this is the VIX, which at 22.7 is far from pricing in panic or extreme volatility in the near term. Note that the Vol of Vol, the VVIX is also making new lows.

Another contrasting signal from the options market is the Nations SKEW DEX which just this week closed at the lowest levels since before Covid.

“SkewDex Indexes compare the implied volatility of at-the-money options to that of put options struck one standard deviation out-of-the-money, they gauge a market’s willingness to accept a one standard deviation loss“ Nations.

The simple interpretation of this low reading of the SKEW INDEX is that institutional investors are actually not very hedged, and the amount they have been willing to pay up for protection has been declining all year.

SENTIMENT

Let me add to the previously opposing signals from the option market with some sentiment metrics.

AAII Investor Sentiment shows the most Bearish sentiment read in over last 10 weeks.

Meanwhile, the CNN Fear & Greed indicator has flipped back to Neutral.

Both of these indicators can be found online for free, but I will be including them in my weekly note going forwards, as it may be useful for you to have everything in one place.

So let us turn to CFTC Speculative positioning:

Speculators remain short S&P500 but long the Nasdaq, positioning which I would not exactly call extremely bearish.Interestingly investors reduced their Euro short while they doubled down on their Pound short, by increasing their position by -70%.

Brazil stands out once again, with the long BRL position moving up from 1k contracts to 30K contracts in 4 weeks.

To avoid being overly lengthy I will let you analyse the table for yourselves and in the future will only discuss and bring up changes which jump out at me.

Once again you should never read too much into any one of these indicators and the CFTC Net Speculative Positions only reflect a small part of market flows, 99% of the market is always and everywhere Long and passively so. (More on this possibly in a future article, suffice to say that US Equity inflows for 2022 remain strong and at record highs).

Equity Put/Call ratio declined from a high of 0.90 on Sept 1st to 0.75 on the 7th to a summer low of 0.52 at Friday's close.

SPX Put/Call ratio at 1.36 is at the lows for the year reinforcing the idea earlier discussed that actually institutions are not hedged.

THE WEEK AHEAD

Tuesday we get US Inflation data with expectations for CPI to slow to 8.1% and Core to rise to 6.1% reflecting the declining energy prices but increasing food and other basics prices.

The coming week is likely to be very Noise ladened, with a lot of people expecting a rally if CPI slows more than expected.

I would stress that it is impossible to predict what the reaction may be and that regardless one would do better to zoom out beyond a couple of sessions and focus on the true signals. The Fed has been clear that two months' worth of slowing inflation is not going to be enough to change their current stance. Moreover, declining inflation as a function of slowing demand is not a sign of health in the economy, quite the contrary.

So chasing a lower inflation print, except for a short-term trade, may result in being baited by Noise into a very unfortunate trap.

ECONOMIC CALENDAR

*This table includes only some of the more important events for the week.** Weekly recurring data such as MBA & Jobless Claims has not been included for sake of simplicity.

Note that the BOE has postponed its interest rate decision due to the passing of the Queen from Sept 15th to Sept 22nd, and so will be reporting in 2 weeks' time together with the Fed.

FOR THE SAKE OF SPECULATION

Looking at the week ahead it appears to me that a lot of people seem to be expecting a rally fuelled by a lower-than-expected CPI and some sort of Gamma squeeze. While this is certainly possible, I do wonder with SPX currently trading at 4065

a) How much upside is there?

a) Has the rally been front-run and already happened?

b) What if CPI comes slightly hotter than expected?

Could a move above say 4100 open for a squeeze to 4200? This would equate to 4% upside, while should the rally falter and 4000 give way to 3900, IMO that would quickly open for a retest of the June lows at 3700, or -8% downside.

Either way, as we approach MOPEX the move will likely be exacerbated by Gamma, which do not forget can push both ways.

On a slightly longer time horizon should the market break below 3800/3900, I do not think 3700 will provide much support and we may instead be looking at 3500/3600, which would equate to a 30% decline in the SPX from it’s ATH.

I would also like to remind folk of what happened at Jackson Hole, where after the latest bear market rally J Powell came out quite hawkish and hit the market with a hammer. Should we rally into the week of the 19th what tone do you expect the Fed to set after the FOMC and a 75bps hike?

The golden rule remains, don’t fight the Fed.

Let me know what you thought of this first article, with it being the first one the format is undoubtedly yet to be perfected, and I am open to suggestions of things which may be worth adding or removing for the next editions.

Antonio Nobile C.

I am not a Financial Advisor & this is not financial advice

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