Market Wrap
The S&P 500 closed 2.5 percent higher on Tuesday, driven by growth in general (+2.4%) and mega-cap growth stocks (+2.6%) in particular, while value stocks (+1.6%) were underperforming.
The best performing sector was the energy complex with a gain of 4 percent, after a Credit Suisse upgrade of Exxon Mobil (+6.2%) to Outperform bolstered the sector’s performance.
Today’s move higher was the extension of Friday’s post-OPEX rally, but most gains were achieved in the first 30 minutes and the squeeze stalled out about an hour into the session, as the macro picture is only getting darker:
1) In the US disappointing home sale data pushed Citi’s macro surprise index to it’s lower bound, last seen at the height of the pandemic in 2020 and the New York Fed economic models now telegraphs negative growth for this and next year.
2) In the EU fragmentation risk eased somewhat after the ECB announced it’s new tool, but yield spreads remain highly elevated and in Germany the government is about to trigger an energy alert, which will have profound impact on the economy and prices, as companies would then be allowed to pass higher costs to consumers.
3) The Japanese Yen devalued to its lowest level since 1998, as the BoJ is injecting enormous amounts into the bond market to defend the breaking yield control policy.
Gamma Discussion
SPX option volume was highest for contracts with a strike of 3800 and judging from the gross gamma chart this is the most significant strike to watch.
We continue to see any rally as only temporary, as the Fed and other central banks made it clear that the inflation mandate trumps any other objective for now.
The CBOE Skew Index (inserted below) depicts the probability of a “black swan” event (2+ standard deviation crash) implied by the option markets over a 30-day horizon.
The currently unusual low levels of the chart could either mean that market participants are “complacent” (which would seem odd given the massive challenges ahead), or feel adequately protected.
We tend to believe the latter is true, as a low Skew Index often correlates with heavily overbought markets and extremely negative dealer gamma readings, and this could mean that the squeeze could still have some room to the upside.
However the Skew Index is very hard to interpret and we recommend to stay very cautious.
Outlook
Tomorrow we have more inflation data coming from the UK and Canada, also Powell will give his semiannual testimony to Senate lawmakers on monetary policy.
The best performing sector was the energy complex with a gain of 4 percent, after a Credit Suisse upgrade of Exxon Mobil (+6.2%) to Outperform bolstered the sector’s performance.
Today’s move higher was the extension of Friday’s post-OPEX rally, but most gains were achieved in the first 30 minutes and the squeeze stalled out about an hour into the session, as the macro picture is only getting darker:
1) In the US disappointing home sale data pushed Citi’s macro surprise index to it’s lower bound, last seen at the height of the pandemic in 2020 and the New York Fed economic models now telegraphs negative growth for this and next year.
2) In the EU fragmentation risk eased somewhat after the ECB announced it’s new tool, but yield spreads remain highly elevated and in Germany the government is about to trigger an energy alert, which will have profound impact on the economy and prices, as companies would then be allowed to pass higher costs to consumers.
3) The Japanese Yen devalued to its lowest level since 1998, as the BoJ is injecting enormous amounts into the bond market to defend the breaking yield control policy.
Gamma Discussion
SPX option volume was highest for contracts with a strike of 3800 and judging from the gross gamma chart this is the most significant strike to watch.
We continue to see any rally as only temporary, as the Fed and other central banks made it clear that the inflation mandate trumps any other objective for now.
The CBOE Skew Index (inserted below) depicts the probability of a “black swan” event (2+ standard deviation crash) implied by the option markets over a 30-day horizon.
The currently unusual low levels of the chart could either mean that market participants are “complacent” (which would seem odd given the massive challenges ahead), or feel adequately protected.
We tend to believe the latter is true, as a low Skew Index often correlates with heavily overbought markets and extremely negative dealer gamma readings, and this could mean that the squeeze could still have some room to the upside.
However the Skew Index is very hard to interpret and we recommend to stay very cautious.
Outlook
Tomorrow we have more inflation data coming from the UK and Canada, also Powell will give his semiannual testimony to Senate lawmakers on monetary policy.
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