If you like excitement (where “excitement” means harrowing drawdowns and vol events conducive to bombastic media headlines), you were hoping for a hawkish surprise from the Fed on Wednesday.
This week brought fireworks, as the post-OpEx “unclench” did indeed open the door for a wider distribution of outcomes, which in this case is a euphemism for the fairly steep decline in equities that played out on Monday.
Now, though, the door is closing. Or, as Nomura’s Charlie McElligott put it Wednesday, “it’s becoming clear to me that the ‘window for volatility expansion’ will soon be closing again.”
Why? Well, it’s simple, really. Once the FOMC event risk passes, vol-sellers may reengage, hedges will be monetized and, in true “tail-wagging-the-dog” fashion, spot could rally.
After that, the self-fulfilling, virtuous loop can resume. If spot ends up “pinned,” engendering a slow grind higher in sub-50bps daily intervals, the attendant suppression of realized vol will dictate mechanical exposure adds from the vol control universe. And around we go.
“VIX ETN Net Vega has now decreased by 7.2mm over the past 1w into the Vol squeeze,” McElligott remarked Wednesday.
Absent the resumption (and “resumption” is something of a misnomer here, considering we only had one session where spot really moved) of big daily changes, it’ll be hard “to justify UX1 at 23 / 24,” Charlie said.
So, coming full circle (and rather quickly considering my penchant for verbosity), those hoping for fireworks needed a hawkish surprise from the Fed (preferably in the new dot plot), a Jerome Powell communications blunder or both.
That said, McElligott did note that “there’s still ‘energy’ to overshoot in either direction with some very real accelerant flows remaining on account of Dealer options positioning.”
And then there’s Evergrande. Which is buying time with no money.