Markets largely “behaved” (as it were) on Tuesday despite more inflammatory rhetoric out of Iran, where millions of people turned out over the course of a multi-day funeral procession for fallen general Qassem Soleimani.
Risk assets stumbled a bit when Ali Shamkhani, the head of Iran’s national security council, said the leadership is pondering 13 separate options for retribution, but generally speaking, markets look poised to stay… well, poised, up to and until the regime shows its hand.
Local stability for markets in the face of local instability in the Mideast is in keeping with the narrative that says it will take a large supply disruption for crude to rattle a market that has, for years, been conditioned to buy any and all dips (and sell any and all rips in vol.) on the assumption that central bank forward guidance will preserve the gap between market-based measures of volatility and what BofA has called “politicians’ implied vol”.
Nomura’s Charlie McElligott underscores all of this in a short Tuesday note.
“I don’t see a larger US equities selloff unless we see a new / additional macro shock-down catalyst”, he writes, noting that a “larger oil disruption via Iraq being dragged in” could be a development that would set in motion a more serious bout of risk-off behavior.
“Otherwise we do more of what we’ve become conditioned to do over the post GFC period—we desensitize to headlines and short vol. knowing that we are backstopped”, he adds, reiterating the points made above, and expounded last week in “How Bad Would It Have Been Without The Xanax?”
But it’s not just the Pavlovian instinct at work. Locally, there are technical factors at play, something Charlie emphasized on Friday, in the immediate aftermath of the “shadow commander”‘s demise.
“And the same song remains—SPX Dealer ‘Gamma flip’ level is meaningfully below market”, McElligott writes, noting that the dreaded “flip” point is around 3,188 on the S&P.
Meanwhile, Charlie also reiterates that US equities have to plunge meaningfully to push spot below key levels that would trigger CTA selling. Specifically, Nomura’s QIS model doesn’t see the potential for systematic trend deleveraging until way down at 3,147. “The +100% long position remains deeply ‘in the money’ and in-trend”, he writes.
There are some countervailing factors, even as they’ve been overwhelmed by the above. McElligott notes that the gamma long has kept things largely pinned near the 3,250 strike despite negative flow impulses from the following:
- L/S, MF and Macro Funds all took their “Beta to S&P” down last week
- Options positioning data showed the $delta decline pretty significantly (still $333B which is 91st %ile since 2014, but down from $392B)
- Futures positioning data shows that Asset Managers did in fact begin selling from their prior “100th %ile” notional
- VIX ETNs showed small net Vega buying +2.1mm and net long remaining 93rd %ile after last week
Oh, and another factor which has likely helped cushion the blow from the geopolitical tumult: Old faithful – the corporate bid.
“Corporate buybacks [are seeing] their standard acceleration prior to the looming / imminent blackout”, Charlie goes on to say.
Three quarters of the S&P will be in the blackout by the end of this week on Nomura’s estimates. “So they really pick up repurchase activity ahead of that”, McElligott notes.