"THIS IS NO DRILL, with Spooz -88 handles to 3250 last", Nomura's Charlie Mcelligott wrote, in a pre-dawn note on Monday as US equity futures tumbled along with European shares amid acute concerns about the spread of COVID-19.
The good news from a systematic flows perspective is that de-leveraging levels for CTAs are likely still below spot. On Charlie's model, that's "due to the exclusive loading of longer-term windows only, with no current weight for 2w / 1m windows".
The potentially bad news is the $190 billion, 100th percentile, asset manager long in SPX and US equities futures. That's one helluva overhang.
That needs to be considered against a post-Op-Ex reality that finds the "gamma pin" (colloquially: the force that's kept spot "sticky" and acted to damp volatility) losing a good bit of its influence.
"Dealers have 'generically' had to buy weakness / sell strength to remain hedged [and] thus provided us a natural counter-flow 'buffer' to large market shocks in any direction", McElligott reminds you.
"Option dealers were long S&P 500 convexity (gamma) most of the year, and this cushioned selling in the S&P 500 (‘buying the dip’)", JPMorgan's Marko
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