CSI 300 back to 2015 levels and "speculation" looking healthy...
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Bernstein points out:
" If you are thinking about a holiday note that recent studies suggest that being outside, in warm weather, and maintaining social distancing can significantly reduce the risk of infection and it will make you feel good too … and It’s what rosé was invented for"
...but is Beyond showing signs of life?
Mother of catch up trades in the making?
...not getting excited on the downside until we start trading below those levels.
Will it take out late May levels?
Authors write:
"For the first time in 40 years, we believe we may now have to face up to the corrosive power of inflation."
Ft article worth a read,
https://ftalphaville.ft.com/2020/07/02/1
TME touched upon this scenario earlier this week, in case you missed it, "Are we hedging the wrong tail"
Must read,
Europe (SXXP) +2.0%
Winners:
Travel & Leisure +4.5%
Chemicals +4.2%
Banks +4.0%
Losers:
Healthcare +0.5%
Oil & Gas +0.7%
Food & Bev +0.8%
Refinitiv
The U.S. financial system could be on the cusp of calamity. This time, we might not be able to save it.
Atlantic article worth a read,
https://www.theatlantic.com/magazine/arc
XLF/SPY chart not looking "healthy".
US L/S weighted gross leverage dropped ~3% DoD to 182% (51st %-tile since 2010, 11th %-tile over last 12 months). Net leverage increased 50bps to 49%, which is the 34th %-tile since 2010 and 80th %-tile over last 12 months
MS PB
"The EPS cycle is moving swiftly past the trough as industrial activity picks up. It took sellside just ~4 weeks during March/April to cut 2020E EPS by ~25% for the European Capital Goods sector. For the sector's industrial short-cycle names, the cut was ~35%. But with industrial activity picking up from the April lows, and corporates initiating or accelerating cost-out action, the earnings cycle looks set for a sharp reversal in H2. We believe that can form the basis for continued sector outperformance..."
Barclays Equity research
How will fatalities curve develop during the coming two weeks?
As Nordea points out:
"Will all this money suddenly reach the system via aid packages and/or infrastructure projects? Or will Mnuchin and the US Treasury ultimately decrease issuance markedly during H2 2020? We bet on the latter, which is by the way (almost) a global phenomenon"
Nothing to trade on a short term basis, but as Citi notes:
"The disparity between credit spreads and rating migration can obviously be closed
two ways – spreads widen or rating migration improves. "
As we all know, rating agencies are not quick and the recent bounce in PMIs is probably in the "pipe" to be reviewed.
On the question will they close the gap entirely Citi writes:
" In this era of abundant liquidity, credit will
likely tend to be expensive to fundamental momentum and very expensive to levels. "
European credit.
Chart: retail participation in Korea
As Matt O'Brien notes,
"With a population of 21 million, Florida announced 10,109 new covid cases today.
With a combined population of 2.6 billion, China, Japan, Korea, Vietnam, Thailand, Malaysia, Indonesia, the Philippines, Australia, and the European Union are averaging 6,760 new cases."
CSI 300 looks like Robin Hooders found the green button. Impressive...
One of them is the RUB, breaking away further.
...not getting excited on the downside until we start trading below those levels.
How will fatalities curve develop during the coming two weeks?
Fed balance sheet and VIX.
Watch this space should we get a bigger gap. iTraxx main vs V2X.
EPS...
Below is a chart showing how SPY vol structure has shifted from the "bloody" Thursday sell off June 11, few days later June 16 and finally today.
Market has gone from pricing approx 2% daily moves for SPY to 1.4% daily moves.
As we have been outlining for past weeks, equity volatility has been trading too rich to current "narratives".
We still believe in the "summer box" trading, but given the recent fall in vols, the relative "edge" of the logic is less attractive at these vol levels.
GS out with a new report of using flow and liquidity top model SPX. They basically incorporate an analysis of ETFs, in house flow data and liquidity.
Conclusion, there is more upside...
"Our analysis suggests the S&P 500 has underperformed liquidity-adjusted
investment flows"
FX and equity vols continue moving lower. We have had the "sell premium logic for the past 10 days" and remain comfortable with this view for now. We will reconsider that logic when more people start pushing this idea, the first ones just started...
From the top:
Obesity index, SLIMD,
Internet ETF, FDN,
NASDAQ.
Go figure
The suicide of Alex Kearns — who thought he had lost heavily — has triggered calls for reform of online brokerages
Via FT - Free to read
https://www.ft.com/content/45d0a047-360f
The chart below shows the extreme development in short term trading in options.
"sell the 3250 rip" and "buy the 2950 dip" in S&P500
...until the market is ready fr the next narrative which is not now...
Frequent readers of TME know we consider Chris Cole of Artemis one of the better guys when it comes to thinking "beyond" volatility.
This piece written years ago is somewhat technical, but provides some great insights into hedging and mispricing risks under a "hyperinflation" scenario. We are probably not there, but CBs have been very active and one should consider a small if at least...
As Cole writes:
"Print too little money and we cascade off the waterfall like the Great Depression
of the 1930s... print too much and we burn like the Weimar Republic Germany in the 1920s... fail to harness the trade winds
and we sink like Japan in the 1990s"
Full must read note in case you missed it a few years ago, before Robin Hood existed....
The economy, or inflation kicking in, or both_ Who knows, but this time the Spuz is lagging....
EEM has done little over past weeks, small down from recent highs and EM "VIX", VXEEM, has moved lower as we are realizing very low volatility.
Let's see if Spuz and VIX get inspired....
The bounce perfection continues...until it does not...
The p/c ratio vs Spuz chart below needs little commenting. Note people have been buying puts on a relative basis lately...
1, investor's light positioning that could increase if lower volatility feeds through the "system"
2, policy support
3, higher Covid 19 is mainly impacting younger population, which have drastically lower fatalities and likely reflect higher testing rates
See below the recent low risk exposure by vol targeting funds as well as CTAs.
TME's most recent logic is to use elevated volatility to enhance yield, as the above and summer trading continue to lack the big negative catalyst.
One of the ideas below. As he writes himself;
"It seems crazy to be offering a bullish trade idea in what is at best the third
inning of a pandemic; but the FED has gripped the financial markets with its
Mighty Hand and has “promised” not to release it anytime soon.
If the economy realizes a U-Shape recovery, stocks will jump to new highs. If
the economy founders, the FED will support financial assets via zero rates and
QE~ until congress can load the MMT fiscal cannon. Indeed, this will not end
well in the long-term, that’s a problem for another day."
S&P 500 = 3000 ~SPY = 300 Forward = 286.25
Buy December 16, 2022 call; K = 340 @ $21.0; Vol = 21.25%; Delta = 37%
Sell December 16, 2022 put; K = 230 @ $21.5; Vol = 27.50%; Delta = 23%
1) This is a “better beta” idea; substitute this for your current SPX exposure;
2) Steep volatility skew initially creates long Convexity and short Theta;
3) Call strike is the old high, put strike is a 16.6 P/E with E = $138.50;
4) Monetizes the rate differential to depress the forward to cheapen the call;
5) The longest listed expiry available; it allows one to ride out the pandemic.
Full note,
People are still giving month/quarter end flow a lot of focus, but the big supply is most probably over as we have one day left.
MS quantitative derivatives team expects "~$5bn of global equity to buy from asset owners....On top of the pension flows, QDS estimates that dealers will have over $5bn of delta to buy as customer short / dealer long ITM calls expire on Tuesday"
Also, do consider the TVIX delisting on Thursday, which should put an offer on vols and a possible small bid on deltas (TME has outlined the TVIX delisiting effect on various occasions over the past week).
Consensus seems to be there is a still a lot of supply about to hit the market, so watch this tape carefully since we could be witnessing a "violent" move higher should all this expected supply already be over...
It was only 8 hours ago we suggested:
"Time for Russell over NASDAQ".
The ratio is moving big...
There are risks in tech as well...
