This is like the inverse of "taking a ride on the flat-line" (ie dead) – we have found a new permanent level of euphoria….Levkovich’s Citi Panic/Euphoria Model will stay parked at the top end of this chart forever. Or maybe we need a bigger chart..
Refinitiv
MOVE is down big since Fed started expanding in March. The most recent pre elections hiccup in MOVE index has reverted back lower as all global vols have crashed, but one of the biggest vol "equalizers", Fed's balance sheet, has to break out higher if you want to see lower vols.
Our most recent logic is that basically cross asset vols have come down to attractive levels to start using for long volatility plays, be it hedges, replacement positioning or pure speculation.
Refinitiv
1. In the US, HFs have now been reducing gross for ~2 straight weeks
2. most of the reductions on the long and short side since last Friday coming from Equity L/S and Stat Arb / Quant funds.
3. Even with the recent de-grossing Nets globally remain very elevated – US 59% (95th%tile TTM, 93rd%tile since 2010), EU 52% (100th%tile TTM, 97th%tile since 2010) and Asia 67% (95th%tile TTM, 98th%tile since 2010).
4. Gross leverage for the respective regions are – US 199% (98th%tile TTM, 100th%tile since 2010), EU 195% (45th%tile TTM, 71%tile since 2010) and Asia 142% (59th%tile TTM, 80th%tile since 2010).
The Value rally now registers on a "valuation" chart vs Growth….
Goldman
Flows into mutual funds and related investment products showed continued demand for pro-cyclical assets, including EM bonds and equities.
EPFR
One of our more sensitive "indicators" when it comes to the lock down/reopening narrative is the XM/UBER ratio. The ratio starting moving sharply lower before people even started talking about the rotation trade. Note that the ratio has bounced recently…Watch this closely for the overall rotation trade, especially as the super spreader event of the week is in full motion.
Refinitiv
JPM: "Gold’s overvaluation relative to real interest rates has fallen from $200/oz in October to $80/oz currently, which is suggestive of position liquidation"
Chart shoes gold price versus mispricing in $/oz (actual minus predicted) from fair value model regressing price on real US 10Y rates.
JPM Cross-Asset
So many markets haven’t been this expensive so early in an expansion in at least 20 years
Real Fed funds rate vs percentage of 70 Equity and FICC markets trading more than one sigma above long-term average based on 1Y forward P/Es, credit spreads, real 10Y rates, real FX rates and real commodity
JPM Cross-Asset
SPX has come up to the "sticky" gamma land. Lot of long gamma among dealers here, and not much realized volatility, at least not for SPX. First chart shows how "sticky" this area is and any attempt to move will be met with dealers hedging deltas, market up they sell, market down they need to buy…
Second chart showing 1 month realized vs implied vols. Realized 1 month still with a "lag" as the most recent boring period is not recording, while implied have reached new lows.
Let's see what happens, but long dealer gamma frustration and markets not moving is like Chinese water torture as the book bleeds theta every day.
Given the vol implosion, there should be "motivated" dealers that must puke vols cheap next week…which is setting up as an interesting long vol play for upcoming events, super spreader incubation period, Fed meeting in Dec, Dec quarterly derivatives expiry and later in Jan the early Jan vote…
Nothing really new, but as Spotgamma points out in the Palantir case, huge call volumes driving a lot of the hedging activity as the stock has moved higher.
Monday low at 18.57, Friday high at 33.5…good luck hedging short gamma. Lot of "greeks" expired on Friday, so maybe a short term reversal in a spectacular move…
Nothing really new to TME readers, but the below paper is worth a read, and not only for the options nerd.
On gamma, liquidity, gamma holes, risk, flash crashes and much more.
Full paper here.
Central bank balance sheet expansion in 2021 might be only half of 2020, but that pace would still be associated with asset price inflation
Chart shoes year-on-year returns of a multi-asset Equity & FICC portfolio versus year-on-year growth in G10 central bank balance sheets. Asset purchases of $4trn in 2021 and $500bn in 2022 are JPM estimates
JPM Cross-Asset
Below charts need little commenting. People continue to see Dr Copper as one of the preferred rotation, reflation, vaccine is here trades. is this just breaking up on the longer term chart?
One thing "emerging" that could start to bother copper bulls is the gap between copper and inflation as of late (chart 3).
…when it decided bouncing violently. The DXY close below big levels on Friday and everybody seems to think the DXY must collapse asap, but imagine a "sudden" DXY reversal here, not a reversal of a trend, but a violent m¡bounce?
That would cause huge p/l pain, especially as everybody has piled into the weak USD long inflation/rotation trade.
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.
