Market Wrap
The SPX closed 2.8 percent higher on the last day to trade expiring VIX options.
If there was anything unusual about the behaviour of iV, then that the VIX was unusually "expensive" relative to historical correlations with the SPX (see chart below).
https://bucket.mlcdn.com/a/3517/3517811/images/951f629b4f88d55ac6ce0550b217912195d93d52.png
Fundamental data was mixed with Housing Starts below, and Building Permits above the Wall Street consensus, but the sentiment was boosted by BofA's Fund Manager Survey, which showed the lowest equity allocation since Lehman, and the highest cash levels since 2001.
A second boost was provided by reports, that Russia will restart (limited) gas deliveries via Nord Stream 1, which were confirmed by Putin in the afternoon - we will see.
Another interesting observation from BofA's FMS (in our view) was, that only 10 percent of all surveyed fund managers perceive a systemic event as a tail risk and only 7 percent think the same of the war in the Ukraine.
The chart below depicts the spread between VIX and VOLI, which allows us to extract the priced in "semi tail risk" (as opposed to SKEW for instance), as unlike it's more famous counterpart, the VOLI only captures ATM options aka "immediate risk".
https://www.tradingview.com/x/ZWytajhT/
How come the markets are so "complacent"? Don't possible credit events down the road and a proxy war between two nuclear superpowers deserve a little bit more attention?
Or is the risk just being masked by other factors, like the popularity of yield enhancing products that force dealers to sell short-term vol?
More obvious explanations would be of course the record high cash levels, other hedging vehicles like commodities, and the bet on a pivoting Fed, but still we keep wondering..
Gamma Discussion
The overall gamma situation gets a little bit more interesting again, as the infamous "gamma flip" is finally within reach after months of sometimes extreme short gamma imbalances.
A supportive factor tomorrow to achieve that goal could be the normalization of the relatively "expensive" VIX, especially in the wake of the expiring VIX options.
Above 3975 market makers will be forced to trade counter-cyclically again (buying when the markets is dropping and selling when the market is rising), which would inject much needed liquidity and put the S&P 500 on a much more stable footing.
A possible upside target would be the gamma strike at 3950, but there the "big 3" risk events (ECB/NS1 and FOMC) still need to get out of the way, before more (maybe substantially more) upside opens up in our view.
As Nomura's McElligott pointed out today, CTAs and other systematic traders like the vol-control complex are heavily underweight equities and are just waiting for their trigger (4100-4285) levels to get activated.
If there was anything unusual about the behaviour of iV, then that the VIX was unusually "expensive" relative to historical correlations with the SPX (see chart below).
https://bucket.mlcdn.com/a/3517/3517811/images/951f629b4f88d55ac6ce0550b217912195d93d52.png
Fundamental data was mixed with Housing Starts below, and Building Permits above the Wall Street consensus, but the sentiment was boosted by BofA's Fund Manager Survey, which showed the lowest equity allocation since Lehman, and the highest cash levels since 2001.
A second boost was provided by reports, that Russia will restart (limited) gas deliveries via Nord Stream 1, which were confirmed by Putin in the afternoon - we will see.
Another interesting observation from BofA's FMS (in our view) was, that only 10 percent of all surveyed fund managers perceive a systemic event as a tail risk and only 7 percent think the same of the war in the Ukraine.
The chart below depicts the spread between VIX and VOLI, which allows us to extract the priced in "semi tail risk" (as opposed to SKEW for instance), as unlike it's more famous counterpart, the VOLI only captures ATM options aka "immediate risk".
https://www.tradingview.com/x/ZWytajhT/
How come the markets are so "complacent"? Don't possible credit events down the road and a proxy war between two nuclear superpowers deserve a little bit more attention?
Or is the risk just being masked by other factors, like the popularity of yield enhancing products that force dealers to sell short-term vol?
More obvious explanations would be of course the record high cash levels, other hedging vehicles like commodities, and the bet on a pivoting Fed, but still we keep wondering..
Gamma Discussion
The overall gamma situation gets a little bit more interesting again, as the infamous "gamma flip" is finally within reach after months of sometimes extreme short gamma imbalances.
A supportive factor tomorrow to achieve that goal could be the normalization of the relatively "expensive" VIX, especially in the wake of the expiring VIX options.
Above 3975 market makers will be forced to trade counter-cyclically again (buying when the markets is dropping and selling when the market is rising), which would inject much needed liquidity and put the S&P 500 on a much more stable footing.
A possible upside target would be the gamma strike at 3950, but there the "big 3" risk events (ECB/NS1 and FOMC) still need to get out of the way, before more (maybe substantially more) upside opens up in our view.
As Nomura's McElligott pointed out today, CTAs and other systematic traders like the vol-control complex are heavily underweight equities and are just waiting for their trigger (4100-4285) levels to get activated.
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