If bonds manage to rally, it won’t be a moment too soon.
Netflix’s unfortunate quarter put the world’s most important stocks (i.e., US mega-cap tech) on watch ahead of earnings, but a retreat in long-end yields could help soften the blow.
The BoJ did its part, stepping in to defend the YCC cap and announcing a new round of fixed-rate bond-buying. Meanwhile, there are some tactical calls for going long USTs after the 10-year’s 3-handle approach.
“The high level of 10-year rates today results from a high level of 10-year inflation expectations, now around 2.95%, vs 2.00% in November 2018,” BofA’s Ralph Axel said. “While CPI inflation is 8.5%, we believe the market may be overemphasizing inflation risks,” he went on to write, suggesting the US in the throes of an inflation “mania or panic.” Ultimately, BofA thinks current levels on 10s are compelling for a tactical (i.e., three-month) long.
At the same time, Nomura’s Charlie McElligott flagged monetization of profitable shorts, “with some help” from the BoJ and the same kind of tactical calls just described. He noted that Treasury and Eurodollar flows are still skewed to the downside, but to the point made above, any kind of bond rally (or just relief from rising long-end yields), could “boost the mission-critical equities ‘Long Duration’ bellwether Nasdaq at an important time, coming after the Netflix blowup.”
Notably, Tuesday’s rally found Nomura’s Nasdaq futures trade imbalance monitor exhibiting the biggest daily “buy pressure” in a month. “We estimate a ~+$12B of Net $Delta added in QQQ Options [Tuesday], as the (prior) ‘Short Gamma / EXTREME Negative Delta’ provided the setup for a Vanna squeeze as Vol got mushed and Spot rallied,” Charlie wrote Wednesday. As puts bled out with QQQ rallying away from downside strikes, dealers covered short hedges.
The figures (above) show how the rally helped push dealer positioning in QQQ back near gamma neutral. Again: That matters at a time when the Netflix debacle had the potential to destabilize the broader market.
At the same time, McElligott noted that CTAs are in the process of re-leveraging, adding to longs and covering shorts across global equities. Nomura estimated some $6 billion of S&P futures buying Tuesday, and noted that any additional upside could prompt more buying as trigger levels are breached.
The best case scenario would be an extension of any fledgling bond rally/squeeze, as that could then ignite some of the dry kindling inherent in the (still negative) QQQ net delta shown on the top right-hand chart in the four-pane visual (above).
Still, the situation remains fluid. “If we were to get a resumption of sell-the-rip flows in equities and this rally doesn’t hold, the recently-crossed CTA ‘buy’ trigger in SPX is just a sneeze below spot at 4447, where a close below would see a small ‘chop’ back,” where that means a portion of the $6 billion add from Tuesday would be cut again.
Good luck out there.
GOOGL, FB, MSFT and AAPL better bring their A-games next week in those earnings calls.