Market narration over the past month (and, really, over the past year) has revolved primarily around rates.

Of course, it all depends on who your narrator is. If your preferred flavor of market analysis is “plain vanilla,” where that means you’re only interested in where the S&P closes and how your favorite blue chips fared during a given week, you’re never going to encounter a shortage of generic stock commentary.

But the action resides in rates. Bonds were the sponsor of recent risk events (plural). Two of the safest assets on Earth were the proximate cause of panics — a multi-sigma surge in gilt yields nearly collapsed the UK LDI complex in October, and awareness of unrealized losses on US government paper blew up a midsized California bank last month. It’d be funny if… well, I’m going to skip the “ifs” for once. It’s funny. With apologies, it is.

In addition to the irresistible allure of documenting the rates fireworks show, another reason equities found themselves relegated to below-the-fold coverage in 2022 was the lack of a “real” selloff. As discussed on countless occasions in these pages, this was the “crashless” bear market.

It remains so to this day. Thanks to a solid first quarter, the S&P is just one or two bank failures away from new record highs (that’s supposed to be funny).

Many top-down strategists, including some of the more well-known names, continue to suggest that US equities will retest the lows for a variety of fundamental reasons, including and especially assumptions about negative operating leverage and the read-through for corporate profits.

But, as ever, it’s important not to lose track of the fact that much of what you see in terms of equities price action is the product of positioning and flows. Clearly, macro developments play into positioning, which can in turn influence flows, particularly when key investor cohorts are caught offside. But the point is that attempting to explain equities purely by way of corporate fundamentals paints an incomplete picture, even as the very same macro developments which inform positioning and asset allocation decisions also go a long way towards explaining the ebb and flow of revenues and profits.

Nomura’s Charlie McElligott spoke to some of the above on Wednesday, while offering a bit of color on the recent rebound for equities (which appears to have stalled in April).

“For the most part, US equities vol in 2023 has continued the ‘positive spot / vol correlation’ that was the story of 2022 as well, where persistently high cash levels running concurrent with low historical net / gross exposure levels meant remarkably flat index skew in a ‘crashless’ selloff, with negligible demand for downside when you have little to hedge [and] a tendency to see spot up, vol up as under-positioned clients ‘grab into’ upside on chase-y rallies,” he wrote.

The point: When nobody “has it on,” so speak, there’s less demand for left-tail hedges when equities are falling than there would be otherwise, and there’s more demand for right-tail hedges when equities are rising.

More recently, the equities vol story has “become more nuanced,” Charlie said. Thanks in no small part to the tumult associated with the banking drama, “we began to see index skew / put skew steepen rather sharply off the mat, as new left-tail scenarios drove fresh demand for ‘accident’ insurance, along with amplifying and accelerating ‘hard landing’ probabilities and timing,” he went on, calling attention to the surge in vol-of-vol documented here on several occasions last month.

That’s indicative of a wider outcome distribution or, more aptly, the perception that the distribution could be wider in light of events.

As the above-mentioned positive spot/vol correlation returned to the more familiar negative relationship (i.e., stocks down, vol up) amid bank jitters, “fear of missing out” was replaced by plain old fear.

But things quickly calmed down thanks to policymaker intervention and, crucially, the assumption that the worse things were, the more forceful the intervention would inevitably be. That too had immediate knock-on effects for the vol complex, which then “wagged the dog” in spot equities.

“Upon interventions from financial authorities, alongside the market pricing-in the end of the tightening cycle, ‘rich vols’ [were] again taken to the woodshed from opportunistic vol sellers, overwriters, income funds and the yield enhancement space,” McElligott said.

Those are all manifestations of short vol, and the read-through for stocks was straightforward. It “spur[red] a powerful spot rally that is now contributing to painful ‘stop-in’ pressures for some under-exposed investors,” Charlie wrote.

As JPMorgan’s Marko Kolanovic put it earlier this week, “As the days went by without bad news on banks, volatility ground lower and mechanically raised stock prices.”

So, selling rich vols worked again, and you didn’t need to be any kind of savant to understand the thesis. In McElligott’s words: “The worse it gets, the more asymmetric the response from central bankers.”