Does Lagarde need to show them how it is done? Market needs the balance sheet to explode higher, not just "sit" at highs…
Refinitiv
European put/call ratio spiked to 2.98 at one point yesterday, the highest level since March. The latest reading looks high in the context of the last one year too, only having been exceeded 6 times over that period
On the other hand, the US put/call ratio recently fell to 0.374 the lowest reading since 2010, and even at the current level of 0.5 has only been lower 3.6% of the time in the last 30 years.
Everybody is bullish the European narrative, the Euro and the cyclical story, but it looks like that view is hedged with puts.
When VVIX (Vix of Vix) moves like this better pay attention. It could be nothing, but if something, usually leads to erratic short term markets.
Refinitiv
Recall the huge options volumes pumping this summer when FAANGs were hot. We have had a few hot names lately as well, but they are not FAANGs (yet).
Retail chasing calls, leading to dealers chasing deltas due to short gamma, reinforcing moves and volatility is gone for now at least.
Let's see what 2021 brings…
JPM
JPM's Kolanovic strikes again;
1, low rates leads to institutions rotating out of bonds into equities
2, creates downward pressure on volatility
3, which in turn creates a positive feedback loop where systematic and disc hedge fund strategies increase allocations to equities (this could play put for most of 2021)
4, if current below average exposure goes to historic percentile would result in $550 bn inflow from systemic and hedge fund strategies
5, add forgotten buybacks to the mix and Kolanovic argues for their 4400 SPX px target.
Below chart shows that average VIX levels closely follow levels of interest rates with a ~18-month lag. Conclusion is basically;
"Given the significant increase of monetary accommodation 9 months ago, we expect it to pressure volatility for most of 2021"
JPM
1, decline in realized correlations due to factor and sector rotation, basically vaccine leads to markets going from growth and momentum stocks to value and cyclical stocks…this basically reduces correlation between stocks, leading to lower realized volatility in a broad index
2, in rising markets dealer gamma tends to be long gamma acting as a mean "reverter" due to delta hedging (TME note, was not the case during the August NASDAQ melt up)
3, the systematic strategies that are into selling options as a strategy got carried out on stretchers post Corona and will most probably return to the game of selling options in 2021, adding to vol supply
JPM
Nomura points out CTAs have "let up" accumulation of Dow longs and switched to "chasing" NASDAQ longs (both obviously net long).
Average net long for this last "batch" is according to Nomura right here, 12320.
Given the reversal in NASDAQ yday and the follow through lower in futures here, CTAs will not be overly happy…
Nomura
Short term traders as according to SG short term traders index, have an average holding period of 10 days and are mainly into "swing trades", flipping between trend following and mean reverting strategies.
Anyway, this crowd has increased longs in equities rather violently over the past few weeks. The reversal in primarily NASDAQ did a lot of damage to the charts, and could "motivate" the short term crowd to reverse longs quickly.
Second chart shows how short term traders have chased European shorts higher over past weeks.
Given the liquidity and the sudden volatility, markets can remain erratic…
Pierre Ferragu has probably been the most successful in calling TSLA mainly on the way up – but also when the stock should take a breather. Therefore it is worth listening here (and probably selling some very expensive 3 month OTM calls):
"We downgrade Tesla to Neutral: after the epic run of the past months, the stock trades above our $578 price target. We expect 2021 to play out strong, with deliveries above consensus and a strong margin trajectory, but we see limited room for near-term valuation upside, even in this euphoric valuation environment. On the contrary, we worry that the stock pulls back once inclusion in the S&P 500 is behind us. We have made strictly no changes to our overall perspective on the company, and still see the stock attractively valued for the long run: Our 2025 target price remains $1,200"
4 key thoughts from MS research analyst:
1) MS $540 target implies slightly more than 10% downside from current price. Among range of inputs, base case valuation based on 3.8M vehicle shipments by 2030 on the auto side
2) While Tesla is a car company, research urges investors to engage with colleagues in software/tech to understand changing business model
3) Elon Musk made comments that he would ‘consider’ buying a legacy car company – MS views potential for merger with legacy auto company as an extremely remote tail-risk
4) Based on actions taken this year, Tesla has ‘war chest’ balance sheet to accelerate industrialization & standard-setting of EVs & storage. MS forecasts Tesla to spend ~$50bn in combined capex + R&D 2021 – 2025. This figure may prove very conservative over time
Refinitiv
Everything benefitting from the vaccine/reopening/reflation/rotation narrative is up lately, but some stuff has been lagging the "underlying" assets for months. One of those are tankers, showing break out attempts today. Main plays Scorpio and Teekay tankers are both laggards, attempting to break out today, and both trade at September levels, when oil was some 25% lower.
Somebody has to ship all that oil the world apparently needs…
Refinitiv
MS economists don’t anticipate any substantive policy actions at the Dec 15-16 meeting. They still don’t expect any extension of the weighted average maturity of UST purchases (market now only assigning a 10-15% probability of this occurring given positive vaccine developments and fiscal support). However, the Fed likely provides forward guidance on its asset purchase program to qualitatively articulate the macro conditions necessary to taper. The language will replace the "over coming months" guidance and offer the Fed more flexibility on the timing of tapering as the economic outlook evolves.
Brazil ETF, EWZ, continues to surge, +4.4% only today.
In early November we outlined our chase dogs logic. Brazil was one of the most interesting dogs, that eventually became stars. In mid November, after the vaccine news, we added to the dogs logic:
"The USD weakness has been a strong narrative, but currencies such as BRL are still dogs compared to the USD.
With Moderna's vaccine now becoming "reality", although the reaction is less euphoric" compared to Pfizer vaccine news, all things equal, the dollar should start fading versus EM FX (ex China). Global demand should be lifting all boats, commodities exporting countries as well,and BRL is a big one in this space."
Our last update on the Brazil logic was updated on Nov 30 when we added:
"BRL moving below the 200 day, EWZ breaking above the big resistance level and the EWZ…"
Below chart showing how EWZ has beaten IWM and absolutely crushed EEM.
We are looking for the next dog as chasing EWZ here "feels" a little late unless you are still in it…
Refinitiv
Systematic strategies' equity exposure remains light. They refuse to leave their house as long as "mommy-VIX" is not leading the way by acting like she is in her teens….The hedge fund bros are already inside the club saying "who needs the nerds" but deep inside they are feeling a inkling of disappointment because they know how fun it can be when the quant nerds really storm the party.
Datastream
© 2020 The Market Ear
You are receiving this email because you signed up for the The Market Ear newsletter using your email content@mrtopstep.com.
If you'd like to unsubscribe and no longer receive this newsletter, please click here.
