Weary market participants hungover from one of the more rollicking stretches in recent memory get a data reprieve in the week ahead.
The US macro docket’s almost entirely empty. The only notable release is ISM services.
Of course, ISM services could be interesting. If it looks anything like last week’s appalling ISM manufacturing report, the update on services activity could move markets.
Consensus is looking for 51 from the services headline. Another contraction-territory print (i.e., sub-50) could elicit more dovish price action at the US front-end, although to reiterate: I think the overshoot in rate-cut pricing seen late last week on the Sahm scare will be faded eventually absent evidence to support the imminent recession inherent in pricing for 125bps(!) of cuts by year-end.
Equities are obviously on the back foot. Typically, you’d see dip-buyers right about now, but the dreaded August seasonal challenges that assumption. Equities saw inflows in the week to July 31, but this is the worst month of the year for stock-fund flows and the VIX seasonal’s daunting too.
The vol complex went haywire last week, as dealers appeared to get caught in a gamma spiral and market participants grabbed for hedges into the rates/recession panic.
The vol-of-vol spike illustrated above is… well, something to see, for lack of a better description.
That’s another place where last week — and everything to do with it — looks overdone. Traders’ muscle memory says vol’s a sell on virtually any expansion, and a screaming sell on the kind of spike seen in recent sessions. And that’s just the “discretionary”/opportunistic trade. Unless and until systematic vol-selling strategies see outflows (e.g., AUM shrinks in premium income ETFs), there’s a structural vol supply overhang that any spike has to contend with too.
It’ll be “key to watch VVIX here for signs that the worst of panic hedging is over, as vol-of-vol tries to catch its breath,” Nomura’s Charlie McElligott said, adding that “these events tend to end when the vol-sellers smell max blood and hedgers monetize, taking down rich vols, putting a floor [under] the market [and] getting dealers back their gamma.” “The issue,” he wrote, is that “we haven’t seen many bouts of deleveraging of this magnitude” over the past year.
Put as a question: Can the Pavlovian response function overcome the prevailing sense of angst engendered by this nascent — but suddenly very acute — recession scare? Charlie also flagged the figure below.
That’s what you don’t want: Everything headed in the same direction when that direction is down.
“The other big issue for the VIX is that we’re finally getting that proper ‘Correlation 1’ de-risking in single-name equities, with longs and shorts both going lower in unison in a mega net-down,” McElligott went on.
So, who knows. Classical, “central bank put” conditioning says you buy equity dips and sell vol rips, and it’s probably fair to assess that the “Powell put” is now very much in play, not because SPX is through the strike, but rather because the jobless rate is. And yet, it’s August. Liquidity’s thin. The VIX and flow seasonals are against you. And valuations remain very demanding.
The last 30 minutes of equity trading on Friday hinted that the panic hedging had run its course for the moment.
I wonder how much “dry powder” was raised by the vol fund managers last week. I recall you recently showed a chart from Mr. McElligot showing vol sales had reached a high percentile before this round of caution started. The ETFs are more permanent, but I wonder how sizable they are relative to the big players who are moving hundreds of millions in and out of the market every few days. Or so it seems. And how much dry powder do the ETF managers normally sit on so they can grab oppoutunities like this.
The market seemed to follow the playbook I have observed on big sell off days. The final leg down is between 2-3pm when the margin calls go out. Between 3-3.30pm you often see the bottom and then a bounce up into the close after the bodies have been carried out to the morgue.
That was in the “good old days” when humans rather than algos dominated the markets.
My biggest concern in the markets is the fact that credit default swap costs are increasing. If credit spreads continue to widen, I would read that as a confirmation that a bigger problem is in the process of taking hold. A us treasury bond yield curve inversion, then steepening/ un- inversion followed on with credit widening is almost a lock for an economic downturn. Throw in the Sahm rule trigger, shake and stir.
We are not there yet, and the unemployment numbers, despite some denials could have been influenced by hurricane Beryl. This is all likely to shake out by September and the next FOMC meeting.
Strangely enough, these are also the lyrics to a King Crimson song from the early 70s. I believe it was on “Starless And Bible Black”.
Uh, maybe you are mixing it up with that roof top sequence near the end of Blade Runner? Where Rutger Hauer spoke of all the amazing things he’d seen out in the galaxies? Didn’t he mention volmagedon?
(I sympathized with the character. I mentioned to a colleage and friend of many years about how, on a much smaller level, we’d also witnessed and been part of some really wild market events.)
Mmmmmmm, I see your point, but I don’t think so. If I was going to get Rutger Hauer mixed up with any King Crimson vocalist, it would have been Adrian Belew. Not Greg Lake.
For a second I did think at first it might’ve been from a track off of Genesis’s “Nursery Crime”, though.
Not Missing Foundation’s “Your House is My House?” Peter Missing’s vocals sound a lot like both of them, with a bit of John Denver thrown in.