Market Wrap
The SPX was not able to stage a meaningful rally based of his post-FOMC gains and lost 3.3 percent today in a slow and steady decline with vol behaving relatively nicely.
The stage was set before today's open with several central banks announcing a shift to more aggressive policies:
The Swiss National Bank announced a surprise rate hike of 50 basis points, which sent shockwaves through the markets, as this is a rather dramatic pivot from one of the most dovish banks with a bloated stock portfolio.
Also, the Bank of England increased its key rate by 25 basis points and Brazil's central bank raised its key rate by 50 basis points.
Treasuries faced some selling at the start of the session, but they rebounded strongly as stocks struggled, sending the 10-yr yield lower by nine basis points to 3.31 percent while the 2-yr yield fell eleven basis points to 3.16 percent.
Today's rather bleak US data points at a glance:
Housing starts declined 14.4 percent month-over-month in May, while building permits declined 7.0 percent. The key takeaway from the report was the broad-based softness in single-family starts and permits.
Initial jobless claims for the week ending June 11 decreased by 3,000 to 229,000
The Philadelphia Fed survey fell to -3.3 in June from 2.6 in May, the new orders component crashed from 22.1 to 12.4 and prices paid declined to 64.5 from 78.9.
Gamma Discussion
Total dealer gamma crashed by 345 million to a new yearly low of minus 1469 million dollars.
It was notable that the monster gamma strike at 3700 which had a notional amount of over -150MM attached did not hold at all and there was not even an attempt to defend that crucial level.
Now we all buckle up for option expiry tomorrow, when about 540MM in put gamma will roll off, which would - all else equal - bring gamma notional back to 917MM (which is still a lot).
Option dealers are in general long the market by owning calls and selling puts and sell futures to offset that risk. If the short exposure of investors shrinks, because their options expire, dealers have to buy back futures.
Yesterday we said there is a path for a rally and this did not come to pass, so let’s try again, shall we:
Tomorrow as stated above about 540MM in put gamma is rolling off (about 40% of total), mostly at 3700/3650 and 3600, which could provide some fuel to spark a move higher, if we leave the 3700 behind.
A major risk event will be the BoJ interest rate decision tonight, as the JGB yield swings recently were wild to say the least. Should this risk be cleared then we only have Eurozone CPI data and industrial production (US) left and the market could try to position for a constructive start into the new week, when everybody on Wall Street had a nice weekend in the Hamptons.
Overall we stay bearish and the evaporation of delta/gamma will only give option dealers more balance sheet to again offer affordable puts, which could then take the market lower again.
The stage was set before today's open with several central banks announcing a shift to more aggressive policies:
The Swiss National Bank announced a surprise rate hike of 50 basis points, which sent shockwaves through the markets, as this is a rather dramatic pivot from one of the most dovish banks with a bloated stock portfolio.
Also, the Bank of England increased its key rate by 25 basis points and Brazil's central bank raised its key rate by 50 basis points.
Treasuries faced some selling at the start of the session, but they rebounded strongly as stocks struggled, sending the 10-yr yield lower by nine basis points to 3.31 percent while the 2-yr yield fell eleven basis points to 3.16 percent.
Today's rather bleak US data points at a glance:
Housing starts declined 14.4 percent month-over-month in May, while building permits declined 7.0 percent. The key takeaway from the report was the broad-based softness in single-family starts and permits.
Initial jobless claims for the week ending June 11 decreased by 3,000 to 229,000
The Philadelphia Fed survey fell to -3.3 in June from 2.6 in May, the new orders component crashed from 22.1 to 12.4 and prices paid declined to 64.5 from 78.9.
Gamma Discussion
Total dealer gamma crashed by 345 million to a new yearly low of minus 1469 million dollars.
It was notable that the monster gamma strike at 3700 which had a notional amount of over -150MM attached did not hold at all and there was not even an attempt to defend that crucial level.
Now we all buckle up for option expiry tomorrow, when about 540MM in put gamma will roll off, which would - all else equal - bring gamma notional back to 917MM (which is still a lot).
Option dealers are in general long the market by owning calls and selling puts and sell futures to offset that risk. If the short exposure of investors shrinks, because their options expire, dealers have to buy back futures.
Yesterday we said there is a path for a rally and this did not come to pass, so let’s try again, shall we:
Tomorrow as stated above about 540MM in put gamma is rolling off (about 40% of total), mostly at 3700/3650 and 3600, which could provide some fuel to spark a move higher, if we leave the 3700 behind.
A major risk event will be the BoJ interest rate decision tonight, as the JGB yield swings recently were wild to say the least. Should this risk be cleared then we only have Eurozone CPI data and industrial production (US) left and the market could try to position for a constructive start into the new week, when everybody on Wall Street had a nice weekend in the Hamptons.
Overall we stay bearish and the evaporation of delta/gamma will only give option dealers more balance sheet to again offer affordable puts, which could then take the market lower again.
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