The White House is “always monitoring global markets,” Jen Psaki said on Monday afternoon, as US equities careened lower in one of the worst selloffs of the Biden presidency.
A combination of factors conspired to drive equities lower.
At the macro level, sentiment was severely impaired by developments in China. Or, more aptly, by developers in China.
Market participants are also concerned about Fed communications around the new dot plot. A formal taper announcement is out of the question this week. Lackluster August payrolls and a cooler-than-expected read on core inflation took September off the table for an official unveil. Rapidly deteriorating market sentiment was just one more reason for officials to lean dovish. The concern, rather, is around the SEP and Jerome Powell’s messaging in the press conference.
Beyond the macro concerns, the post-OpEx environment was primed for “movement,” and one point of intersection involves the notion that vol-sellers (who, you might recall, saved stocks from a deeper swoon last month) might wait on the FOMC event risk to pass before reengaging.
But according to Nomura’s Charlie McElligott, some “brave” souls didn’t wait. Instead, they “actively attempted to harvest ‘rich’ index vol and skew [or] shorted it, while others monetized downside hedge gains.”
And why wouldn’t they? Or, put differently, why would they wait? After all, “the back-test on vol spikes tells you that you have under one day before the rally in spot,” McElligott quipped. (Now that’s a market joke which is actually funny.)
Still, any such indirect rescue efforts were overwhelmed Monday, Charlie said, citing what he described as “just a brutal and latent de-allocation flow originating from the systematic target vol / vol control universe” which acted as a “mechanical ‘offer’ all day.”
Meanwhile, those betting on the usual 24-hour turnaround for an upside reversal in spot might have regretted it. “Sell pressure in futs has been relentless and those premature ‘short vol’ / ‘vol harvesting’ trades are hurting, with the VIX complex showing real stress,” McElligott wrote.
Monday’s stress in the VIX complex betrays the scope of the dealer short vol / short skew problem Charlie’s been pounding the table on for months.
Panning quickly back out to the 30,000-foot level, Psaki essentially directed questions about Evergrande’s liquidity crisis and a prospective Chinese property meltdown to Janet Yellen. Treasury “would primarily conduct such monitoring,” she told a briefing.
There are worse answers, I suppose. After all, who better to douse a fire than fairy godmother?
Maybe Powell. “The Evergrande story continues to percolate throughout financial and commodity markets. Of course, there’s a Fed meeting this week, and investors have by now become accustomed to the FOMC having their back whenever things start to look a bit wobbly,” Bloomberg’s Cameron Crise wrote, before suggesting that “won’t necessarily be the case when the source of the market’s angst has a ‘made in China’ label.”
I don’t know about that. Those old enough to remember 2015 might recall that Yellen held off on the first post-financial crisis rate hike due to turmoil in China. The delay came at the September meeting that year. (Ironically, Crise mentioned 2015/2016’s China-driven tumult in a subsequent post Monday.)
Anyway, if you’re wondering whether the 100-DMA might rescue US equities now that the 50-day is derelict in its patriotic duties, McElligott seemed to doubt it. “At this juncture, with so much ‘long’ options delta being ripped through by systematic deleveraging ‘sell’ flows in index futs / ETF and single net-downs, it’s going to be a tough line to hold,” he said.
HA! Janet Yellen…our fairy godmother! She’s perfect!
H-Man, let us see what Wednesday brings to the table.
There are different groups of investors. To a considerable extent, they trade to different rules and systems. The options market-maker unwinding hedges trades differently from the long only relative performance institutional manager. The CTA reacting to recent realized vol behaves differently from the long cycle asset allocator. The retail investor is unlike the corporate treasurer, and the various flavors of hedge fund are unlike either. Other investors trade on technical or algorithmic rules, and then there’s the bloody-minded crusty-grouchy contrarians (bless them).
Maybe we can think of each of these groups as a curve – a jagged squiggle, sometimes – and the market as the sum of those curves.
The curves are somewhat interdependent, because each group of investors has some influence on the others, either mechanically or psychologically. But much of the time, they move semi-independently – one group sells the market off or gooses it up, as far as it can (bounded by how much capital it has to withdraw or deploy, and how liquid the market is) – and then another group takes over when their rules are triggered, either selling or buying as their discipline requires. Sometimes these curves cancel each other, other times they reinforce – visualize waveforms and interference/resonance patterns here.
The more investor groups’ sell or buy rules kick in together, the more the markets fall or rise.
Every now and then, like Feb 2020, a huge external force triggers everyone’s trading rules.
So, which investors’ sell rules got triggered, or are getting triggered? Market-makers last week. CTAs now. Who else. And whose buy rules are getting triggered, or warming up?
The reason to think about this is that one or three groups probably won’t move the market a lot (“a lot” in the old fashioned sense, which isn’t a mere handful of percent).
Some valid points there, on a longer-term perspective. But for shorter periods, I’ve found it pays to focus on which are the largest flows at that time. For instance, while my perma-bear friends were screaming about stretched valuations for the 10 years post-gfc, share buy-backs were all that one need focus on. More recently the big elephant in the room was the vol control boys.
Very recently it appears that, as you suggest, there is more balance among the forces.
A market blurb I saw:
“Bloomberg, citing data from Vanda Research, noted that retail investors bought just over $1.9B worth of assets on Monday, the fourth-largest net buying since the start of the pandemic. Pointed out that buying was largely concentrated in ETFs that track US benchmark indexes. Megacap tech stocks, particularly Apple, along with big US banks also attracted outsized interest, as did meme names. However, retail investors were sellers of reopening plays like airline stocks, which outperformed on the White House travel update. Flow data out late last week revealed that US equities attracted $45.7B in the week-ended 15-Sep, the most since March, while the $28.3B that went into US large cap funds was a record.”
$1.9BN is small relative to the potential CTA selling, but $28BN or $46BN is sizable.
The one known perception in all the unknown perspectives is the long-term realities of how manias plays out.
One great model to always pull up is:
Viavi Solutions Inc
NASDAQ: VIA
Ask yourself who did better, the rubes that held long-term, or the speculators that appreciated the absurdity of peak stupidity. I think we have a ways to go as we head to a top, but, just saying …