We’ve spent a ton of time here over the past week documenting the extent to which the G20 summit represented a “binary nightmare” for traders.
The sheer number of embedded contingencies makes it virtually impossible to craft a “strategy” and when you throw in the fact that the outcome of the OPEC+ meeting was likely decided in advance this weekend as Crown Prince Mohammed bin Salman presumably chatted with Vladimir Putin about what the “appropriate” response to plunging crude prices should be, the cross-asset picture becomes more complex still.
Nomura’s Charlie McElligott delivered a characteristically colorful assessment of the setup on Friday, flagging the tightly clustered CTA de-risking/re-risking levels and outsized SPX and S&P ETF deltas and gammas, a scenario he described as a “dangerous overlapping.”
The bottom line: the stage is set for momentum chasers and trend followers to push critical assets into key strikes triggering gamma effects around a massive geopolitical powder keg.
Well, in case things needed to get any more complex, Donald Trump has now canceled a post-G20 press conference “out of respect” for the Bush family in the wake of Bush senior’s death. To wit:
I was very much looking forward to having a press conference just prior to leaving Argentina because we have had such great success in our dealing with various countries and their leaders at the G20. However, out of respect for the Bush Family and former President George H.W. Bush we will wait until after the funeral to have a press conference.
Presumably, that means the “official” word on what is or isn’t decided between Trump and Xi on trade will be delayed even though the timing here is ambiguous (that is, they’re having dinner so it’s not clear whether the press conference Trump just canceled would have contained anything concrete anyway, but who knows). Obviously, news of what transpires between the two will leak, but if it’s soundbites from the President himself you’re after, it appears you’ll have to rely on Twitter for the time being.
Further (and perhaps more importantly from a mechanical/technical perspective), Trump has declared December 5 a National Day of Mourning, which means the stock market will be closed in observance.
This potentially complicates things. “Options will have a day less of time value [and] there’s a lot of Dec7th paper out there”, Pravit Chintawongvanich tweeted on Saturday morning.
On Friday, he underscored just how indeterminate things were headed into this weekend. “The setup really reminds me of the ‘binary’ events we had during the Greek crisis”, Pravit tweeted, adding that for his part, he “can’t remember a single one that didn’t end up with vol getting smoked.”
That, combined with the dynamics we outlined on Friday, could have entailed a pretty epic rally. “With lower vol risk premium usually comes lower equity risk premium (i.e. stocks rally)”, Chintawongvanich noted.
Recall this from a Friday evening post here:
There would appear to be considerable scope for re-leveraging from [the fundamental/discretionary crowd] assuming they have the P/L to play with after an abysmal October and when you throw in the possibility of CTAs piling on, you’re left to ponder the prospect of a sharp move to the upside on any positive news out of Buenos Aires.
Now, you can throw in an unexpected market closure and the cancelation of a post-G20 presser. Here’s Chintawongvanich one more time:
Only thing I'd add is the buildup of near dated upside options positions is really key. Dealers who sold those calls could be buying on the way up to hedge. Mkt reaction post Powell speech is a giveaway to positioning.
— Pravit Chintawongvanich (@Pravit_C) December 1, 2018
Best of luck with all of this.