SPX Gamma Wrap
The SPX closed one percent higher today, after traders saw the FOMC Minutes as an invitation to hit the buy buttons.
The paragraph that triggered the move higher was found towards the end of the release:
“Many participants judged that expediting the removal of policy accommodation would leave the Committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.”
What it all means in English is that the Fed will raise interest rates in June and July by 50 basis points, followed by smaller 25 bps hikes in September, November, December and February and then a pause.
The Federal Fund Rate futures didn’t move much however, as this strategy of frontloading and pausing/slowing down was telegraphed already three days ago by Raphael Bostic. But nevertheless: In such a fragile short-gamma environment it doesn’t take much to spark volatility.
The crux of the matter of course is that this approach would leave us with a rate of only three percent at the end of the year and the Fed therefore needs a healthy dose of external help to bring down inflation substantially. If this doesn't happen? Well then all bets are off.
The macro picture meanwhile keeps deteriorating as illustrated by the Atlanta Fed GDPNow tracker that dialed down it’s growth estimate for the second quarter from 2,4 to 1,8 percent.
Gamma discussion:
Despite the extreme short gamma environment which should be very supportive of bear market rallies in theory, the SPX was not able to climb over the resistance at 4000, which can be construed as a bearish signal.
Total dealer gamma improved by 88MM to -756MM today, and the "gamma flip" (the point where dealer gamma turns positive) level remains anchored at 4250.
While nothing can be ruled out when dealers are short gamma, which forces them to trade cyclically with the market (selling weakness, buying strength), we continue to see resistance at 4000 and support at 3900.
The paragraph that triggered the move higher was found towards the end of the release:
“Many participants judged that expediting the removal of policy accommodation would leave the Committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.”
What it all means in English is that the Fed will raise interest rates in June and July by 50 basis points, followed by smaller 25 bps hikes in September, November, December and February and then a pause.
The Federal Fund Rate futures didn’t move much however, as this strategy of frontloading and pausing/slowing down was telegraphed already three days ago by Raphael Bostic. But nevertheless: In such a fragile short-gamma environment it doesn’t take much to spark volatility.
The crux of the matter of course is that this approach would leave us with a rate of only three percent at the end of the year and the Fed therefore needs a healthy dose of external help to bring down inflation substantially. If this doesn't happen? Well then all bets are off.
The macro picture meanwhile keeps deteriorating as illustrated by the Atlanta Fed GDPNow tracker that dialed down it’s growth estimate for the second quarter from 2,4 to 1,8 percent.
Gamma discussion:
Despite the extreme short gamma environment which should be very supportive of bear market rallies in theory, the SPX was not able to climb over the resistance at 4000, which can be construed as a bearish signal.
Total dealer gamma improved by 88MM to -756MM today, and the "gamma flip" (the point where dealer gamma turns positive) level remains anchored at 4250.
While nothing can be ruled out when dealers are short gamma, which forces them to trade cyclically with the market (selling weakness, buying strength), we continue to see resistance at 4000 and support at 3900.
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