It’s Friday, Brace For Bouts Of Volatility
On one hand, it was supposed to be a quiet end to the week: According to Spotgamma, about 15% of SPX gamma and about 7% of QQQ was set to roll off at todays expiration. As SpotGamma notes, “a lot of QQQ puts burned up this week, and with that dealer buyback fuel burned up. Through this lens both the “speed” of the recent rally, and the overnight consolidation makes sense.”
On the other hand, the blow out in yields which saw the 10Y burst above the YTD high of 1.625% has shattered any fragile stability, sending the Nasdaq sliding. As Bloomberg’s Laura Cooper writes, “the stimulus sugar-high is souring after U.S equities closed at records with Nasdaq futures now leading losses. The dollar is climbing, while the calmness across fixed income is getting a jolt from the U.S. 10-year bouncing above 1.60%. Signs of souring sentiment from bond volatility may be short-lived, much like the bond market’s reaction to the ECB’s flexibility pledge.”
A similar sugar high is also fizzling in Europe where bonds opened on the back-foot with details of that pledge less convincing:
The ECB will “significantly” increase PEPP purchases over the coming quarter, but they won’t be “micromanaging operations.” Bond buying changes will occur on a quarterly basis. As for financing conditions, there was no shortage of “holistic and multifaceted” thrown in. Except with its inflation mandate far from reach, no specificity on yield targets and no bounds to any PEPP number… so much for that clarity markets were craving.
As Cooper concludes, with U.S. stimulus checks to be sent as soon as the weekend and the pledge to have all Americans vaccinated by May, “it’s perhaps no wonder inflation expectations are building – asset price inflation hasn’t disappointed on that front.”
Finally, going back to the maelstrom of “Greeks” pushing and pulling the market, SpotGamma does not expect to see any material selling as long as markets hold the 3870 level, adding that one can see see in the vanna model comparison below that todays OPEX may bring a small tailwind/support to the S&P into Monday (right chart). “This is indicated by the Mondays estimated hedge requirement (blue) being beneath that of the todays (red).” As the Monday shows lower positive delta exposure dealers can reduce their offsetting short hedge position.
Fri, 03/12/2021 – 11:28