US markets traded with a risk-off vibe to kick off Q4 in the presence of dour-sounding geopolitical headlines out of the Mideast.

At the same time, a smattering of unfortunate manufacturing data underscored US recession concerns, while dockworker strikes threatened to throw yet another supply-side spanner in the disinflation works.

The mere prospect of all-out war in the Mideast long along ceased to be a good enough rationale, on its own, for sharply higher crude prices. It takes a lot to get oil higher these days, where that means you need a “realized” supply shock (think sanctions on Russian crude or Soleimani’s strike on Abqaiq and Khurais five years ago). Crude got a lift Tuesday when Iran launched more missiles at Israel, but I doubt it’ll prove sustainable.

More interesting, to this observer anyway, than oil, was the equities vol space. The figure below shows the 117 October 1 high print on the VVIX.

That’s a pretty good pop, and it’s a reminder of market makers’ risk-recycling challenges, which were part and parcel of the August 5 vol shock and the follow-up tremor on September 3.

“Vol is so stressy and outperforming,” Nomura’s Charlie McElligott remarked. He mentioned the move in vol-of-vol, which he described as evidence of “the brutality of options dealers’ negative convexity problem.” The scope for upside vol moves to self-fulfill is in part a function of dealers’ short VIX call position, which needs to be hedged somehow in the event of a spike.

Meanwhile, Charlie noted that dealer positioning in SPX options is back to something that looks normal, which is to say they’re short downside (i.e., selloff protection) to clients and long upside from overwriters (i.e., systematic call-sellers). The charts on the left show you the profile (click to enlarge, as always).

On the right, you can see skew steepening accordingly.

What does that mean? Well, look at the top pane on the left-hand side, above. Dealers are short gamma down below 5600 SPX or so. A selloff has the potential to become a rout in the event spot moves towards the strikes on that sold-downside, forcing dealers to sell into the hole.