On Tuesday evening, while recapping the largest two-day gain for US shares since the tumultuous trading around the original pandemic shock, I wrote that “one certainly imagines some of the same second-order flows were in play during today’s rollicking session.”
It was a reference to the knock-on effects from an options-driven rally turbocharged, of course, by policy pivot speculation.
Fast forward to Wednesday, and Nomura’s Charlie McElligott quantified the scope of those second-order flows. Spoiler alert: They were unprecedented.
McElligott described the “un-economical / systematic size-to-buy” over the two-day equity rally as “staggering.” For example, the day-over-day net $Delta add across aggregate US equities (index and ETFs) was almost $240 billion, a 100%ile move (figure below).
Charlie called that “absolutely incredible.” As the table on the right shows, the day-over-day add was anomalous across the S&P, tech, small-caps and the junk product.
As for CTAs, the unwind in legacy shorts was likewise meaningful. Nomura estimated the net buy-to-cover flows across futures on Tuesday at $36 billion and over the past week at almost $55 billion globally.
As the table (above) shows, the adds were 99%ile-rank events. Notably, the S&P is within striking distance of a trigger level. Buy-to-cover flows from CTAs would kick in at 3,826, according to Nomura.
Of course, it could all vanish into thin air, depending on the resumption (or not) of the macro trend trades that have been so oppressive in 2022, where that means dollar strength and ever higher US real yields.
As discussed in the same linked article mentioned here at the outset, the two-day drop in five-year US reals was a big boon for risk, as was a five-day decline in the dollar, which McElligott noted was the sixth worst such drop since 2008.
“The risk is that the ‘impulse easing’ of financial conditions is again premature and making the Fed’s job much tougher,” Charlie said Wednesday, noting that equities vol was picking up a bit, while the bond selloff resumed and the dollar firmed, “proving again just how sensitive we are to the whims of the ebb and flow in financial conditions.”
The bounce back in risk and ensuing loosening at every prospect of easing makes me believe the Fed can’t think about pivoting until we’re in the throes of recession. Markets need worries that aren’t CB related for the Fed to be able to relent without being counterproductive
I would had thought for a 100% percentile move there would be larger daily volumes.
That in and of itself is quite telling.