US rates and stocks are “chopping their way to nowhere fast,” Nomura’s Charlie McElligott said, in a Wednesday note.
The sideways “chop” comes courtesy (in part anyway) of what McElligott described as a “full-throttled resumption” of vol-selling behavior, which has left the market to “choke” on a surplus of gamma.
The macro narrative hasn’t changed, but perceptions of where we are in the trade may have. In simple terms, there are questions about whether the reflation trade is nearing (or past) its sell-by date.
“Markets are discounting machines and often anticipate changing dynamics long before they become obvious,” Morgan Stanley’s Mike Wilson wrote this week, before reminding folks that “eventually such changes do become obvious and priced, at which point a reset is required or evidence the higher expectations are not only achievable, but beatable.”
That latter point is key. Although Morgan was an early (and loud) proponent of the “V-shaped” macro narrative, Wilson suggested Tuesday that market participants’ inflation “obsession” may have run ahead of reality, at least in the very near-term.
Read more: ‘An Obsession’
For his part, McElligott ventured that some popular reflation themes may have “over-realized,” especially with economic surprises now at a one-year low (Bloomberg’s index). “We’re now seeing more PNL management in paring back directional / high-beta trades associated with ‘reflation’,” he remarked.
Increasingly, market participants are prone to adopting carry, roll, and short vol expressions, pending key incoming data which will shed light on the validity of the economic boom narrative and help traders assess the timing of the Fed pivot. Or not. We’ll see.
In the meantime, McElligott delivered a straightforward (well, it’s straightforward if you’re fluent) assessment of the prevailing landscape. Short vol in equities “has resumed full-tilt,” he said, citing “ongoing ‘Gamma Hammer’ flows on index (selling Strangles), and also a major pick-up in overwriting / underwriting in single-name.”
That, in turn, insulates the benchmarks, triggering re-leveraging and exposure adds from systematic strats. Toss in monetization of long vol trades in the VIX ETNs (declining net vega) and you’re left with the price action witnessed over the past several sessions.
What breaks the spell or snaps us out of the early summer lull? Well, McElligott suggested the “stasis” stays until either the data shows the economy can sustainably realize what’s priced in (read: expected) or at least until a post-OpEx gamma unclench.
Morgan’s Wilson noted that although earnings revisions have likely peaked, and despite what the bank sees as “peak rate of change” for both growth and policy, the implication isn’t necessarily that growth and revisions will turn negative. Rather, it’s just that some deceleration is probably in the cards.
“The adjustment for markets means lower valuations, a process that began in Q1 for the most expensive stocks,” Wilson wrote Tuesday. “We think that de-rating will now broaden out, which means investors must find stocks where expectations can still rise more than P/Es fall, or about 15%, in our view.”
Oh, and speaking of things that can’t possibly live up to what’s priced into the shares, the figure (below) is comical.
Apparently, everyone on the planet will be going to movies multiple times every week for the rest of… well, for the rest of forever I guess.
AMC on Wednesday said shareholders “will receive an initial offer of a free large popcorn when attending a movie this summer, with more benefits to come.”
If the shares come back down to Earth, don’t say AMC never did anything for you.