The buyside is woefully underexposed and “terrified” of missing out on any extension of the nascent, and possibly dubious, “Fed pivot” rally.
Rallies predicated on hopes for a Fed pause or, now, a step down in the pace of rate hikes, have been false dawns thus far, but there’s a growing consensus around the notion that officials may decide to telegraph an incremental deescalation following a fourth straight 75bps hike at the November meeting.
Nobody is particularly excited about missing the boat in the event such speculation has merit. Recall that the RBA’s decision to go with a smaller-than-expected rate hike earlier this month helped fuel what ended up being the best two-day rally for US equities in more than two years. If that’s what a step down from the RBA can do, imagine what a Fed deescalation might be worth.
The buyside is imagining just that, and the prospect of not participating is unpalatable. “Overall US equities index implied vol [is] stay[ing] bid in ‘spot up, vol up’ fashion, driven by demand for ‘right-tails / crash-up’ hedges from an underexposed buyside that’s terrified of missing the ‘pivot’ rally,” Nomura’s Charlie McElligott said Tuesday, flagging the huge disparity between absolute returns on upside versus downside days this month (figure on the left, below).
He also noted that it’s rare for “Corr 1” sessions to be upside moves, as they’ve been recently (figure on the right, above). He attributed that to “grabbiness.”
Sill, he wrote, downside expressions (i.e., puts) “remain firm” given extreme macro and policy ambiguity. “There certainly doesn’t seem to be any sort of ‘all clear’ from the market at this point, due to persistent rates and FX vol tension,” Charlie said.
The big question is what constitutes a “Fed pivot” these days. “Is it simply a deceleration in the pace of tightening? A move lower in the terminal rate? Faster normalization once we get to terminal — meaning, fast to cut rates again or end QT once the slowdown hits?” McElligott asked, noting that this question (i.e., the definition of a “Fed pivot”) is “a big deal,” and not just for stocks. It also has implications for a prospective squeeze in rates, where any substantial rally will knock-on into equities.
It looks like ambiguity over what constitutes a Fed pivot may be the primary “wall of worry” stocks climb as yet another mid term election rally forms.
Does anyone else think front-running on the upside a Powell press conference is fraught with peril?
Powerful (derivative) forces rocking the boat….what could go wrong?
Investors will take anything they can get and then we can argue the significance of what (if anything ) it means . Sounds like a group of potential rally eggs are on the sunny hillside waiting to Hatch… Tempting to deploy cash but not without rereading Mike Wilson…
I’m willing to believe in a short term rally but maybe not so much in tech. See tonight’s earnings, pattern of tech – vs non-tech +. I realize, duration etc, but earnings and guides need to not dis-cooperate too much.
They are afraid of missing out on a “Fed pivot,” like a flock of gulls fighting for bits of bread that are tossed into the wind. Interesting to see for the moment, but nothing much will come of it.
Bought lots of calls a few days ago, kept stops tight but they’re paying off. Now just moving stops up, waiting for that sweet rebound off exhaustion volume to close the calls and buy puts in time for the main body of panic selling. We’ll see what happens, but for now I feel good about my positioning. I think I’ll go out to eat next week.