Fatigue is in the air as 2021 winds down and rates look to Wednesday as the effective final day of trading for the year.
Exhaustion and any accompanying apathy are set against what Nomura’s Charlie McElligott on Tuesday called “a really treacherous week of event risk.”
In addition to Tuesday’s scorching PPI numbers, retail sales are on deck Wednesday just hours ahead of the Fed meeting, and that’s to say nothing of options expiry.
McElligott attributed some of the weariness across markets to “what feels like a rolling three-month stop-out in both crowded narratives and crowded trades,” on the back of the Fed’s hawkish pivot aimed at reestablishing the Committee’s inflation-fighting bonafides and/or doing their part to shore up Joe Biden’s poll numbers as the countdown to the midterms begins in earnest. Suffice to say the ripple effects of a hawkish Fed continue to manifest across various factors and thematic expressions.
More broadly, McElligott noted that this is a “mega” OpEx, with a setup that opens the door to (and I’m quoting him here) “BIGLY” movement, as the gamma drop off is “chunky.”
“SPX / SPY $Gamma drop-off is substantial enough, with 33.7% of the $2.2 billion positive $Gamma (34.9%ile) coming off, but it’s the ‘long Delta’ that’s the market risk, with $434.4 billion (95.6%ile) and 55% of that rolling off,” he wrote, adding that “QQQ is definitely gonna get weird, because we currently expect to see 61.8% of Gamma roll off, with $Delta 80.9%ile and 60% of it estimated to drop.”
Commenting on the dynamics discussed at length in “The Short Road To A Policy Error,” Charlie flagged inversions in Eurodollars, noting anticipation of aggressive hikes soon and elevated reversal risk thereafter as the ramifications of tightening into a burgeoning slowdown make themselves apparent.
The market’s read is that although the Fed’s hands are “tied” into tightening now (due to inflation overshoots), they’ll be squeezing the economy “during an already maturing economic cycle which indicates a short policy tightening cycle at the very least,” McElligott said, adding that in a worst case scenario, the realization of a policy mistake will require a U-turn and a pivot back to easing.
Who knows, maybe Powell (and Brainard) can time it just “right,” completing the taper in March and bringing forward rate hikes into H1, in order to “free up” space to cut rates and restart QE in September just in time to juice markets and the economy for the midterms.
I’m just kidding. Maybe.
Based on anecdotal evidence, I think the holiday season will be okay to good for retailers but not particularly robust. (Was in a big B&N earlier today and there were piles of stuff sitting around not being bought.)