China's Start to the Q4 wasn't as solid as the PMIs suggest. China's factories are starting to draw on inventories,indicating wariness over demand in the short run. Subdued M1 growth suggests that the spike in the Caixin manufacturing PMI ultimately will lose steam.
This would be an absolute stab-to-the-heart to the global bull if China faltered. China higher & stronger for longer is one of the strongest consensus convictions out there.
Pantheon
Epicentre of Chinese speculation, ChiNext, adds 2.8% overnight. Note the consolidation ChiNext has traded within since late July. A close above the resistance, and things could probably get dynamic to the upside, again.
Chinese margin trading debt, huge driver of risk, is currently breaking to new recent highs.
Refinitiv
The pickup in Banks’ relative N12M EPS trends has supported the sector’s recent outperformance. Maybe not just a dead cat bounce this time around. Buy into the upcoming divvie re-reinstatement…?
Refinitiv
Banks look extremely cheap on most valuation measures. The chart below shows
Eurozone Banks 12m Fwd PE relative
JPM
The majority of the previous stimulus package was saved, and not spent. Policymakers fearing a repeat of global financial crisis have unleashed bazooka after bazooka. However, perhaps due to their efforts, this is not the financial crisis. This is something very different. Corporate bankruptcies, despite several negative prognostications, have barely budged. And new business formation has soared.
Exane
GS Prime Brokerage: Net leverage ended the week at the highest level on our record for both the overall book and Fundamental L/S managers.
So hedge funds bought into the election and continue to buy post the election. Year-end-melt-up pre-hedge is on!
JPM
Is retail the ones that will create the year-end melt-up? Chart shoes cumulative US EQUITY fund flows around US presidential elections since 2004. Seems a little too simple that history will repeat itself
Goldman
Market has caught most by surprise lately. Not only has the squeeze from "box" lows been violent, but rotations across "plays" has been huge. P/l volatility has been big for most, but returns not great. The feedback loop of frustration has continued.
With major indexes approaching the range highs, we think timing is great for thinking about hedges. You can make the arguments for market having extended to much, or that this is the start of the real rally. Irrespective of you directional bias here, the prudent investor should think about the risk/reward and how to play it.
VIX and all global vols have collapsed post "the event". VIX is not low on a historical time horizon, but there are still uncertainties that will take time to "resolve", so expecting a much lower level of VIX looks a bit to hopeful in our eyes.
Replacing longs with upside calls is starting to look like an interesting trade here. The possible Blue Wave occurring in January should not be dismissed. Lock downs etc are other risks that are not vanishing. The question to ask here is if you are willing to replace longs with some cheap(er) upside call plays, or even call spreads (to make it cheaper)?
Replacing longs with calls, giving away some possible performance should this turn lower, while making sure you have upside convexity should the Santa rally squeeze makes sense to us here given the recent vol reset.
Refinitiv
NASDAQ futs practically trading back at ATHs. The squeeze and the post elections rotation has been very powerful. The big difference compared to the squeeze to ATHs in August is the great vol reset post the elections.
As we pointed out earlier today hedge funds are "all in", but retail is just warming up. If we are to follow history, there should be plenty of retail buying coming up. . What if retail mania start loading up on upside calls like they did this summer? Remember the dynamics of massive retail call buying, leaving dealers short upside gamma, having to chase deltas higher and higher?
Liquidity and call mania could become one of the next narratives, feeding on "itself", and year end liquidity won't be improving…
First chart showing NASDAQ futs vs VXN and the second chart by Chir Cole of Artemis showing just how massive the options markets have become.
Reshuffling big books will soon be "impossible" as all moves will be exaggerated on even small volatility events, not to mention today's px action.
Watch the end of day MOC even closer…
Both up some 15 bps from day lows, but German from -0.65% to -0.5%.
This is a huge move for the bund.
The most direct play from this Bund move is people have rushed into chasing Euro banks, +13.5% toay….
Refinitiv
SOX was +12.6% last week to the highest daily and weekly close in the history of the index (outperforming the S&P 500 for four days straight), and now +30% over SPX in the last 12 months.
Refinitiv
Kolanovic proclaims seven7 7th heaven points:
1. The equity market is facing one of the best backdrops for sustained gains in years.
2. Biden victory with a likely legislative gridlock as a goldilocks outcome for equities, a “market nirvana” scenario.
3. Global central bank policy remains very supportive (rates to remain at zero with ongoing QE).
4. The prospect for another round of fiscal stimulus has improved as well, though scope and size should be narrower.
5. Corporate earnings (i.e. 3Q) and labor market recovery (i.e. October jobs) continue to come in ahead of expectations.
6. Equity positioning remains at below-average levels with ample room for mechanical re-leveraging as volatility levels subside
7. we see the S&P 500 reaching 4,000 by early next year, with a good potential for the market to move even higher (~4,500) by the end of next year.
…all in 10 sessions, and some stuff is becoming very overbought (Eurostoxx 50 is one).
Erratic moves in a low liquidity market with lot of options risks creates this "special" environment.
Our long gamma logic due to headline risks remains intact.
Refinitiv
US 10 year putting in a huge move today, creating a lot of p/l pain across assets. The question is if this is the start of something bigger, or just a "bounce"?
If yields are to catch up to US manufacturing PMIs, then this is the start of something bigger.
If this bigger scenario unfolds, the duration risk in tech looks vulnerable.
VIX down, but even more important is the implosion of the 2/8 months VIX futs spread.
As we outlined, pre elections, the spread showed relatively smaller stress than the "simple VIX" look.
Protection is out of fashion as vols reset further, but as we wrote earlier today, before all the vaccine news, replacing longs with upside calls makes sense.
As vols continue crashing, replacing longs with cheap upside optionality looks attractive.
Refinitiv
NASDAQ "comfortably" inside the big range, reversing perfectly in the upper part of the range. Note VXN "hammering out" and now in green.
So much positioning frustration today in a lot of books.
Refinitiv
© 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.
