That nearly three quarters of respondents polled in the June vintage of BofA’s monthly fund manager survey described inflation as “transitory” (versus “permanent”) is evidence that the Fed’s “Jedi mind trick is working,” Nomura’s Charlie McElligott wrote Wednesday, ahead of the June FOMC meeting.
I variously suggested that media hype notwithstanding, this month’s Fed proceedings are probably a non-event. The dots proved to be hawkish, but Jerome Powell did his best to smooth things over during the press conference.
“Powell will do more of the standard ‘both sides of mouth’ messaging, so it seem[ed] like instead of ‘pre-FOMC drift,’ it [was] really just about the ‘long gamma’ in both equities and rates keeping us very clingy,” McElligott remarked.
On that score, note that Op-Ex is poised to be a big deal, at least as it relates to freeing up stocks to move around a bit. “A massive portion of the Delta- and Gamma- is set to come off, which means the trade into and out of Op-Ex could see [a] much wider range of market movement, as the dealer hedging buffers shrink in significant fashion against a lot of ‘long Delta’ flow to de-risk,” Charlie said.
In simple terms, the gamma drop-off means stocks lose the “pin” — equities are no longer insulated by what amounts to an automatic stabilizer that sees dips bought and strength sold. With much of that “magnetism” gone, a shock that pushes spot materially lower could catalyze self-feeding hedging flows (and vice versa).
Charlie went on to add a bit of additional color, noting that while “SPX index downside put skew remains bulletproof,” there’s some interest in short-dated OTM SPX calls, something he likened to “spotting a unicorn.” He also flagged a higher call skew in big tech (index), which he attributed to some market participants getting “increasingly bullish on the Nasdaq” in anticipation of a new “Goldilocks” regime, as distortions fade out of the inflation data and the labor market takes longer than expected to absorb slack, even as NFP remains solid enough to support a generally upbeat take on the economy. Toss in the rates rally and seasonality in Treasurys, and it’s no surprise that what was a very pessimistic outlook on all things duration-sensitive is now a bit less dour, at least when it comes to big tech.
Speaking of big tech, multiples have “normalized” in FANG-land (figure below).
Of course, “normal” is an extremely relative term. The P/E for mega-cap tech is a middling 47, but there’s something highly amusing about describing a 47 multiple as “middling.”
Still, as Bloomberg’s Katherine Greifeld wrote Wednesday, that’s “almost its exact average over the past five years and down from nearly 59 in mid-February.”
“Cheap” and “expensive” are in the eye of the beholder, I suppose. And remember: Defining what counts as a “bubble” is almost as difficult as developing a working model of inflation.
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