The post-FOMC trade (which I typically define as the day of the decision and the session after that) was a risk-off event for the third straight meeting.
Jerome Powell’s insistence on the “higher for longer” narrative got a kicker from a very hawkish Christine Lagarde on Thursday. Toss in a lackluster US retail sales report (not to mention an unfortunate read on domestic demand out of China) and the end result was a meaningful selloff.
If you’re curious as to the “mechanics” (so to speak), Nomura’s Charlie McElligott on Friday flagged one of the largest single-session negative delta flows in a decade, as calls were incinerated and puts went in-the-money.
The -$561.4 billion implied one-day impulse (figure above) was a 0%ile move on a near decade lookback.
The context (obviously) was Friday’s much-discussed expiry, which garnered some flashy headlines on Bloomberg Thursday and even managed to elbow its way above the fold, no small feat during a week chock-full of click-friendly news.
“Lots of call strikes were roasted into their expiration today, and just like that, we find ourselves back in a somewhat ‘short gamma vs spot’ territory, after what had been a nice vol compression period with a rangebound trade due largely to dealer long gamma positioning keeping us fixed around the 4,000 strike,” McElligott said.
The knock-on effect for CTAs was meaningful. They shed $21 billion in equity exposure during Thursday’s selloff on Nomura’s estimates. McElligott had flagged as much as $30 billion in selling, depending on how things evolved. Signals for the S&P and US small-caps flipped from long to short (table below).
Do take a moment to read the text above the table. It offers some helpful context.
Speaking of context, Charlie added some more. “The options market remains absolutely underwhelmed by the move in spot, certainly not believing that it signals any sort of new escalation within the vol outlook,” he said Friday, noting that despite Thursday’s selloff, SPX and QQQ vols were eventually offered following the early move higher.
“Single-names saw considerable over- / underwriting flows into the brief vol squeeze,” he added, noting that skew flattened “yet again,” with calls in demand into the rout relative to puts “for the same reason we’ve seen all year: Clients are sitting high cash and/or low net exposure,” which means they’re more concerned about missing a crash up (i.e., a rally) than they are buying protection against downside in stock exposure they don’t have.
Remember: Large cash overweights are de facto shorts.
