All Noise And No Signal Makes Jack A Dull Boy

I assume this is obvious by now, but just in case: You can’t divine much, if anything, from the daily price action currently.

Thanks to the 24-hour news cycle and the many “miracles” of modern market structure, most days are more noise than signal, but right now, the ratio is hopelessly skewed. It’s almost all noise.

US equities were sharply higher Tuesday ahead of the Fed, but it was another manic session. You’re currently witnessing the power of extreme Greeks. “Eye-wateringly extreme ‘short delta’ across options positioning is still the primary reason there’s scope for near-term supportive flows and sharp rallies into and around OpEx,” Nomura’s Charlie McElligott said.

“So much of the expiring optionality is puts, which have high potential to be de-risked into expiration, theoretically driving ‘positive delta’ hedge-covering flows,” he went on to write. Dealers are deep in short gamma territory, which means selling into weakness and buying into strength. Hence exaggerated directional swings, exacerbated and facilitated by day-trading in short-dated options.

Recently, I noted that equities had become almost perfectly negatively correlated with front-month crude. Oil has, of course, crashed over the past several sessions, careening more than $40 lower (figure below) from the highs hit last Monday, following initial reports that the US was poised to ban Russian energy imports.

Again, I’d be cautious about overinterpretation. The market’s thin. The spread between bids and offers for WTI is twice normal and open interest has fallen dramatically.

There was some fundamental news to trade Tuesday. The Iran nuclear deal is apparently back on, after headlines suggested Sergei Lavrov’s eleventh hour demand (which nearly torpedoed a done deal late last week) won’t prevent an agreement after all.

At the same time, Vladimir Putin said Ukraine isn’t “serious” about finding a “mutually acceptable” solution to the conflict. If the situation weren’t so tragic, you’d be compelled to emit a wry chuckle. Russia invaded Ukraine, not the other way around.

I’ve heard some suggest the commodities rally is over — or at least the portion triggered by the war. I’d say it’s far too early to draw anything like definitive conclusions. The simple figure (below) gives you a bit of context. The grey shaded area marks the days following Russia’s invasion.

Even if the worst is over, pressure on the US consumer isn’t going to abate materially any time soon. The odds of recession in the world’s largest economy are much higher than they were a month ago.

Retail sales, due Wednesday a few hours prior to the Fed, “will further refine expectations for first quarter growth with GDPNow tracking at just 0.5%,” BMO’s Ian Lyngen and Ben Jeffery remarked, adding that “the risk of higher food and energy costs undermining consumption was already poignant before Russia invaded Ukraine [and] while oil has pulled back from the highs, the surge in average gas prices combined with food costs that are +7.6% YoY is diverting household balance sheets to necessity spending as opposed to discretionary consumption.”

Do note that over the past three weeks, we’ve seen food, energy, logistics and the global financial system all weaponized, something Rabobank’s Michael Every discussed at length on Tuesday. “Until a global winner emerges, massive daily volatility looms,” he concluded.

Speaking of massive daily volatility, I’ll give the last word to McElligott who, in the same Tuesday note cited above, wrote that as long as dealers are “still in deeply ‘short gamma’ territory” and the associated short delta remains massive, we’ll “chase and overshoot in all directions [with] brutally sloppy dynamic hedging in futures act[ing] like an additional source of synthetic ‘short gamma’ that has to buy rips and sells in the hole.”