HomeTop Stories“Extreme Gamma” – Nomura Exposes The Driver Behind This Week’s Market Melt-Up (& What Happens Next)
March 14, 2019
“Extreme Gamma” – Nomura Exposes The Driver Behind This Week’s Market Melt-Up (& What Happens Next)
The US equity markets – despite slumping earnings expectations, disappointing macro data, US-China trade deal uncertainty, and Brexit chaos – has surged this week (in the face of total denial by the bond market).
Every dip has been bought and every ‘worry’ excused – except bonds ain’t buying it.
So what is going on?
Nomura’s Charlie McElligott, managing director of cross-asset strategy, has the answer. First things first, the catalysts are:
Buybacks (Healthcare, Tech, Industrials and Fins are the top 4 S&P sectors today and are 4 of the top 5 Buyback desk ‘executed’ sectors, with Mutual Fund Overweights / Megacaps +1.4% vs S&P +1.0% and RTY +0.8%, respectively)
Overwriters continue to systematically roll-out into Friday’s Quad Witch OpEx, driving a dealer “delta-grab” and further spurring mkt gains
Finally, VIX term-structure continues to compress and steepen further into contango, with systematic roll-down strats in “high cotton” again shorting volatility (VIX back to Oct 3rd / pre-Powell “a long way” from neutral on interest rates comment the following day)
But the big driver is more simple – its March Quad Witch Week!
The “March Surprise” window-for-stock-pullback scenario has of course anticipated this type of “melt-up” into Friday’s options expiration, as that’s the seasonality of“up into OpEx, down out of OpEx.”
There is ‘extreme’ gamma and delta – sum of QQQ (Nasdaq) $ Gamma within 1% of spot currently 98th %ile, while the sum of QQQ $ Delta across strikes is 96th %ile), especially as the forced dealer delta grab via overwriter roll-outs CEASE and aligns with the buyback blackout commencement…
…On top of our systematic trend “sell trigger” levels being mechanically “pulled-higher” looking-out the next ~9-16 days which means only a modest move lower could risk of a repeat of last week’s “flip sellers” behavior from CTAs
In the interest of being ‘fair and balanced’ however, McElligott lays out the current consensus “Goldilocks narrative”
In Rates, the US yield curve is again attempting to steepen post the slightly tailing 30Y auction earlier…but still struggling to break meaningfully higher without either 1) a ‘bad data’ acceleration which would see the mkt “pull-forward” / grow Fed easing expectations (bull-steepener)…or from the opposite side of the spectrum, 2) a further ‘reflationary’ impulse (bear-steepener), whether driven from an actual inflation data upside surprise, an escalation of Chinese easing / stimulus or a “hard shift” in the Fed inflation framework
This then again speaks to the current ‘goldilocks’ stasis (today’s CapEx (+) US Durable Goods “Orders” and “Shipments for Non-Defense,” versus misses again in PPI after yday’s CPI whiff as well) of “slowing-but-still-expansive US econ with decelerating inflation,” but still with the ongoing support of the strong consumer and labor mkts—which then reiterates the rationale behind the multi-year legacy US Equities portfolio positioning “long Growth, short Value” which remains a “Seculars over Cyclicals” bet into an increasingly “end-of-cycle”- looking economy
These “Growth Longs” are known / high-conviction names which are “comfort blankets” for Equities PM’s due to their past performance and thanks to their ability to grow profits without a “hot” economy and their “quality-like” high cash levels (which come via a funding-advantage vs Cyclicals—thus Growth’s positive correlation to a flattening yield curve)…and thus are de facto “long-duration” assets as they benefit from lower-yields, which justify their valuations
This “low rates supporting current market valuations” then has become a common refrain from the Equities buy-side, which realizes that thus far in 2019, US stock markets are up because of multiples, not earnings
So what happens next week is clear – and returning to the first chart above, what will The Fed’s reaction be if stocks catch down to bonds’ pessimistic perspective?