Connect with us

Economics

“This Is Not A Taper Tantrum” – Nomura Warns Of “Lurking Delta One” Collapse As Gamma ‘Unclenches’

"This Is Not A Taper Tantrum" – Nomura Warns Of "Lurking Delta One" Collapse As Gamma ‘Unclenches’

In the new normal world of ‘Correlation…

Share this article:

Published

on

This article was originally published by Zero Hedge

This article was originally published by ZeroHedge.

"This Is Not A Taper Tantrum" - Nomura Warns Of "Lurking Delta One" Collapse As Gamma 'Unclenches'

In the new normal world of 'Correlation 1' risk-on, risk-off trading, the only thing that matters is the rise and fall of the Equity vol flows.

This is why, as Nomura's Charlie McElligott explains, with all the pre-warning warnings and expectations management, the current sudden slide in stocks is "not a taper tantrum", adding that "yesterday’s minutes were a non-event, where the market has already price Q4 official announcement anyhow."

Instead, the Nomura MD notes that US Equities Realized Vol is finally trueing-up to the incessant CRASH -signals from Implied Vol / Skew / Term-Structure / “Vol of Vol” signal extremes we’ve been hammering-on the past few weeks... and it’s causing a risk management / “crash” slide / stress issue around the Street now which is being traded around, ahead of the ever-critical monhtly options expiration cycle as an “accelerant” risk.

And offers some more ominous warnings for the unprepared:

Finally, I would expect that second-order “delta-one” issues are lurking somewhere behind in coming-days, even if any last remaining semblance of “long Gamma” tries to hold the line into tomorrow’s a.m. Op-Ex before “unclenching” thereafter.

This is what the cross-asset-class strategist believes is happening now:

  • My thoughts are that as a few on the sellside vol universe began more clearly speaking to the explicitly “CRASH” vol market signals of the past few months which has gone into absolute *red flag* overdrive mode this past week (and thus, the risk that it could then knock-into second-order “accelerant flows” like options dealer desk gamma hedging and systematic “vol sensitive” strategy de-allocation / deleveraging in standard lagging-fashion thereafter)—that some on the buyside began cutting their risk ahead of the expiration events this wk as this story was increasingly socialized, especially coming-off all-time SPX highs made just Monday

  • The thought was that the extraordinary “pinning” of the market from recently extreme “long Gamma” accumulation in recent weeks, largely via the “strangle seller” and various overwrite programs, could hold us tight and steady into the monthly Op-Ex turns this week (VIXpiration yday, Index / ETF / Singles tomorrow)…and that it was after expiration where you get the gamma “unclench” for tomorrow’s a.m. expiration where we could then finally see the fireworks (recall July expiration, Spooz trading down 1.2% from the highs made into Friday a.m. expiration through the close)

  • But here is the “feedback loop” issue: the Street has been “long Gamma” against their “short Vega” and “short Skew” positions—but the “short Vega” position began to squeeze as Dealers began to try and adjust their “crash” slides yesterdaybut as Vol moved higher, that meant losing your Gamma (especially as spot blew through the largest “long Gamma” strikes yday)

  • And part of this is that aforementioned “buyside cutting risk ahead of the Op-Ex turn” catalyst, where the prior extreme “long Gamma” then “coming off” after Op-Ex could allow prices to finally unclench from this tight corridor we’ve been trading-in (again largely thanks to the strangle-selling “Gamma Hammer” flows of the past few months)—which means that now you don’t really have no choice, you cannot “wait around” to see if we stabilize “down here”

  • If you’re a buysider with high grosses and nets (markets at all-time highs) and you cannot cut your underlying “long Equities” exposure fast enough, as Dealers are straining and liquidity worsens (underlying liquidity is ALWAYS the error in the stress backtest, because it simply doesn’t remain constant)…and all ahead of *imminent* delta-one flows about to release from vol-control types….you have to go hit-out ES / buy UX or “crash” options

  • And if shorting S&P futures is the dynamic hedging option, this too is then coming with options Delta now getting PURGED now here too as we blow through the big S&P strikes at 4450 and 4400 on the way down (hell, we traded through 4350 earlier!)which has put the Street in a worse position, bc their “long Gamma” was obviously so spot sensitive due to the strangle strikes which were pinning us, methinks

  • Well, that prior “long Gamma” is CRATERING now; with volatility jacking + spot blowing-through strikes, that explicitly means “less Gamma” which has kept us stuck in that extremely narrow trading band which has come in conjunction with the “Gamma Hammer à sell strangles” strikes

  • This is kicking-off stress VaR—the Street has too much notional to insure, but not enough balance-sheet available to insure it (as per my consistent messaging about regulatory risk mgmt realities and a supply / demand mismatch which cannot be accomodated)so they have to  “daisy-chain” the vol complex further, with dealers and market makers rolling-out their VIX futures weekly upside into more “term” stuff…or just buying UXA…or selling-out Delta in Spooz

  • Now, the VIX futs curve is reflecting the stress, with front inversion / proper “roll-up”—which means the market is gonna have to keep pricing-in a worst-case scenario, bc you’re going to have to move prices to cover your “short Vega” in the front-stuff /3m-and-in (assuming Dealers have at least some “long Vega” in that 6m-12m area to cover some of their risk-slides—let us pray)

  • And guess what: discretionary investors with “good-enough” years as I said are having to make some calls here as to what makes the most sense: either 1) reduce risk here and sell underlying; 2) short futures if you cant sell underlying singles (which is a risk); or 3) painfully hold their noses and pay Theta / buy Crash (which has been a brutal trade all year for obvious reasons that many have been avoiding, bc crash Theta is so jacked-up expensive and un-economical)—which then means if Theta likely gets only more expensive from here…so it might just make more sense to simply begin cutting your underlying book size / de-gross

So now, here we are in “phase two,” adding fresh “acceleration flows” to the mix: 

Dealers are suddenly now in deep “SHORT Gamma vs spot” territory in SPX (below 4435, ref 4355 last yikes) and Delta would flip “short” below 4343 - while mind you, the ES 50dma aligns at 4340 too, which should matter for short-term “momentum / trend” reversal

What happens next?

Simple: price-insensitive de-allocation flow from systematic Vol Control / Target Vol community:

Vol Control was only small yday (sold just -$3.2B on the -1.1% move) which we have anticipated, because there is an inherent “lag” in the both the “averaging up” of the trailing realized vol windows following this lastest spike…but also too bc of intentionally-designed “execution lag” (as well as volume constraints) utilized by funds to best try and avoid mechanical exposure reduction feeding into the aforementioned negative feedback loop.

That said, there will almost inevitably be very significant supply coming from Vol Control next week, where if we hold constant current triggers (3m rVol is currently our deciding input), there is almost “no” likelihood we can “add”...and instead, coming off recent 1.5 year $exposure highs, de-allocating is effectively assured unless we somehow “kick save”.

Also keep in mind that this option for buyside: either

1) cut your exposure,

2) dynamically short Spooz into the downtrade, or

3) pay crash Theta

It all becomes more complicated next week, where there is an actual “event-risk” into Jackson Hole which is already forcing decisions on book sizing risk.

In conclusion, McElligott warns that it is unlikely that this dynamic can simply “clear” in a day or two... we have a structural imbalance which has to get washed-out, yet again.

All this long gamma is a) fickle (i.e. the sellers of gamma step away on big drawdowns) and b) flips to short below 4250.  That is where Morgan Stanley fears we could hit an air pocket...

To put come numbers on this imminent chaos, Morgan Stanley warns that market makers likely need to buy over $150mm of vega (in one-year equivalent terms) in a down 5% move in SPX, which is ~20% of the average daily vega traded in S&P 500 options market. 

This is not a typo. It is huge. History shows VIX has been more reactive to the S&P 500 in the ensuing months when dealers have more vol to buy in down markets, and a 2x change in VIX for every 1% move in SPX suggests VIX would go to 40 or more in a 10% selloff.

Tyler Durden Thu, 08/19/2021 - 09:05

Economics

UK Gas Crisis Stuns Poultry Slaughterhouses, May Trigger Higher Chicken Prices

UK Gas Crisis Stuns Poultry Slaughterhouses, May Trigger Higher Chicken Prices

Soaring natural gas prices across the UK have disrupted companies…

Share this article:

UK Gas Crisis Stuns Poultry Slaughterhouses, May Trigger Higher Chicken Prices

Soaring natural gas prices across the UK have disrupted companies from operating. The latest is slaughterhouses that use carbon dioxide, a byproduct of fertilizer derived from natural gas. 

Richard Griffiths, chief executive officer of the British Poultry Council, told Bloomberg surging natural gas prices is a massive blow for poultry companies, which frequently use a byproduct of fertilizer production -- carbon dioxide -- to incapacitate birds at slaughterhouses.

CO2 supplies are incredibly tight, Griffiths said, adding that any further shortages could create massive headwinds for the industry and hinder chicken production. Already, weekly chicken output has dropped 5-10%, and Christmas turkey production could drop by a fifth. 

The unintended consequences of natural gas shortages are the effects on the food industry and how it may result in rising meat prices if slaughterhouse output continues to decline. 

On Thursday, we outlined how CF Industries Holdings' fertilizer plants, one in Billingham and another in Ince, suspended operations "due to high natural gas prices." 

"I would expect it to be having impacts very quickly," Griffiths said by phone. "At the moment, we've got all the Brexit effects, including labor shortages, all the Covid add-ons. And now, we're seeing these supply-chain problems emerge at a time when we really don't need it." 

Energy inflation could be a company's worse nightmare in the UK -- prices for the fuel have already doubled this year, while power costs are on a record-breaking run thanks to the lack of renewable energy output

More companies could be impacted by soaring natural gas prices and elevated electricity prices. This problem isn't likely to fade anytime soon as gas inventories remain low ahead of the winter season. 

All of this is feeding into inflation across the continent. European Central Bank President Christine Lagarde recently said energy markets are a significant driver in higher inflation. To solve this, Germany has to certify Russia's Nord Stream 2 to begin receiving shipments - but as we recently noted, that could take months and may suggest European inventories won't be resupplied in time for winter. 

    Tyler Durden Sat, 09/18/2021 - 07:35
    Continue Reading

    Economics

    US stocks close in a sea of red as tax hike fears grow

    US stocks closed the week in a sea of red on Friday September 17 after technology shares led the broad losses across segments and tax hike fears dragged…

    Share this article:

    US stocks closed the week in a sea of red on Friday, September 17, after technology shares led the broad losses across segments and tax hike fears dragged the benchmark indices down.

    The S&P 500 fell 0.91% to 4,432.99. The Dow Jones fell 0.48% to 34,584.88. The NASDAQ Composite Index declined 0.91% to 15,043.97, and the small-cap Russell 2000 was up 0.18% to 2,236.87.

    Markets have been volatile this week amid mixed global cues. Loses in the Asian markets over worries of slow economic recovery and recent geopolitical developments weighed on investors’ minds. The tech-savvy Nasdaq declined the most.

    In addition, the recent retail sales and unemployment data offered mixed signals about the US economy. While retails sales were up in August, jobless benefits claims rose noticeably last week.

    Meanwhile, lawmakers were considering a proposal to hike corporate tax. The news could be worrisome for some investors as a tax hike may eat into the companies’ profits. Democrats are seeking to increase the corporate tax from the current 21% to 26.5%.

    Investors will now eagerly wait for the Fed’s monthly meeting next week. The central bank officials are expected to discuss the latest economic data as they continue with the stimulus tapering talks.

    All the S&P 500 stock segments stayed in the negative territory. Technology and communications services stocks were the biggest losers, pushing the index down. Stocks of vaccine manufacturers Moderna, Inc. (MRNA) and Pfizer Inc. (PFE) plunged 3.57% and 1.34%, respectively.

    Invesco Ltd. (IVZ) stock rose 5.71% after reports that it is in talks to merge with the asset management unit of State Street Corporation (STT). STT stock declined 2.47% in intraday trading.

    SmileDirectClub, Inc. (SDC) shares surged 12.92% after the stock was discussed on social media.

    AbCellera Biologics Inc. (ABCL) stock rose 2.53%, a day after the US Food and Drug Administration extended the emergency use authorization for its covid drug Bamlanivimab.

    In technology stocks, Apple Inc. (AAPL) fell 1.94%, Microsoft Corporation (MSFT) fell 1.65%, and ASML Holdings N.V. (ASML) declined 3.18%. Adobe Inc. (ADBE) and Cisco Systems, Inc. (CSCO) fell 1.75% and 1.19%, respectively.

    In communication stocks, Alphabet Inc. (GOOG) fell 2.08%, Facebook, Inc. (FB) declined 2.96%, and T-Mobile US, Inc. (TMUS) declined 1.19%. In addition, Sea Limited (SE) dropped 1.23%, and Snap Inc. (SNAP) advanced 3.08%.

    In the material sector, BHP Group (BHP) fell 4.46%, Rio Tinto Group (RIO) fell 3.02%, and Vale S.A. (VALE) fell 2.21%. Ecolab Inc. (ECL) and Freeport-McMoRan Inc. declined 2.01% and 4.10%.

    Also Read: Check these 5 oil and gas stocks with high price-to-earnings ratio

     

    Copyright ©Kalkine Media 2021

    Also Read: ASAN, FORG, & DATS stocks shine on higher demand hopes

    Top Gainers

    Top performers on S&P 500 included Thermo Fisher Scientific Inc (6.49%), Invesco Ltd (5.46%), Centene Corp (4.95%), Diamondback Energy Inc (3.18%). On NASDAQ, top performers were Corvus Pharmaceuticals Inc (135.40%), Helbiz Inc (96.56%), Priority Technology Holdings Inc (47.23%), Innate Pharma SA (40.87%). On Dow Jones, Amgen Inc (0.93%), UnitedHealth Group Inc (0.80%), American Express Co (0.79%), Procter & Gamble Co (0.16%) were the leaders.

    Top Losers

    Top laggards on S&P 500 included Unum Group (-6.04%), International Flavors & Fragrances Inc (-5.53%), Copart Inc (-5.46%), Nucor Corp (-4.49%). On NASDAQ, Protagonist Therapeutics Inc (-62.00%), TCR2 Therapeutics Inc (-36.45%), Eliem Therapeutics Inc (-21.92%), Janux Therapeutics Inc (-20.26%). On Dow Jones, Dow Inc (-2.89%), Caterpillar Inc (-1.89%), Apple Inc (-1.83%), Microsoft Corp (-1.75%) were the laggards.

    Volume Movers

    Top volume movers were Bank of America Corp (43.29M), Nov Inc (41.49M), Apple Inc (40.72M), AT&T Inc (38.62M), Oracle Corp (37.24M), Lucid Group Inc (39.05M), Match Group Inc (36.06M), SoFi Technologies Inc (33.81M), Tellurian Inc (28.37M), Corvus Pharmaceuticals Inc (26.47M).

    Also Read: Top five mid-cap retail stocks with more than 100% YTD gain

    Futures & Commodities

    Gold futures were down 0.22% to US$1,752.85 per ounce. Silver decreased by 1.87% to US$22.367 per ounce, while copper fell 1.15% to US$4.2322.

    Brent oil futures decreased by 0.45% to US$75.33 per barrel and WTI crude was down 0.81% to US$71.97.

    Bond Market

    The 30-year Treasury bond yields was up 1.13% to 1.902, while the 10-year bond yields rose 2.43% to 1.363.

    US Dollar Futures Index increased by 0.33% to US$93.227.

    Continue Reading

    Economics

    Victor Davis Hanson: The Death Of Science

    Victor Davis Hanson: The Death Of Science

    Authored by Victor Davis Hanson,

    The scientific method used to govern much of popular American…

    Share this article:

    Victor Davis Hanson: The Death Of Science

    Authored by Victor Davis Hanson,

    The scientific method used to govern much of popular American thinking.

    In empirical fashion, scientists advised us to examine evidence and data, and then by induction come to rational hypotheses. The enemies of "science" were politics, superstition, bias and deduction.

    Yet we are now returning to our version of medieval alchemy and astrology in rejecting a millennium of the scientific method.

    Take the superstitions that now surround COVID-19.

    We now know from data that a prior case of COVID-19 offers immunity as robust as vaccination. Why, then, are Joe Biden's proposed vaccination mandates ignoring that scientific fact? Dr. Anthony Fauci, when asked, seemed at a loss for words.

    Is this yet another of the scientific community's Platonic "noble lies," as when Fauci assured the public last year that there was no need for masks?

    He later claimed he had lied so that medical professionals would not run out of needed supplies.

    Fauci also threw out mythical percentages needed for herd immunity, apparently in an attempt to convince the public that it will never be safe until every American is protected from COVID-19 by vaccination only.

    And why was it that hard for the scientific community to postulate a likely origin of COVID-19 Some of the very scientists engaged in gain-of-function research oversaw an investigation with Chinese authorities. They confirmed the predetermined conclusion that the virus likely had little to do with gain-of-function engineering. And they saw little proof it was birthed in a Wuhan virology lab. Yet scientific opinion, emerging evidence and basic logic have suggested the opposite.

    How can the government hector citizens that they have a moral duty -- and soon a legal obligation -- to be vaccinated when it does not mandate vaccinations for unvetted refugees flying in from Afghanistan?

    How can the government medical community remain largely silent when an anticipated 2 million foreign nationals will cross into the United States in the current fiscal year -- almost none of whom are vaccinated or tested for COVID-19?

    Why do the media and government blame particular races for the delta variant outbreak on grounds that they were insufficiently vaccinated?

    Why wouldn't officials simply urge the Latino and Black communities to be vaccinated as quickly as possible?

    Data shows that both groups have lower vaccination rates than white and Asian populations.

    Are woke political agendas discrediting science and losing public health?

    We saw just that in June 2020, when more than 1,200 "health care professionals" signed a petition demanding exemptions from lockdowns and quarantines for Black Lives Matter protesters marching en masse. And they concocted medical excuses such as "vital to the national public health" to insist that violating quarantines was less unhealthy than not pouring into the streets.

    Why did presidential candidate Joe Biden and his running mate, Kamala Harris, warn the American people on the eve of vaccination rollouts that an inoculation under the Trump administration could be unsafe, thereby undermining confidence in vaccines?

    Why was the medical community largely silent about such dangerous sabotaging of new vaccines, but months later became vociferous in warning the public that any doubts about the safety of these Operation Warp Speed vaccinations were scientifically misplaced? Was there a medical breakthrough on Jan. 20, 2020, to alter their consensus?

    From rewarding wokeness in medical school admissions to the peer reviewing of scientific papers, the anti-scientific mania has polluted scientific endeavors.

    "Critical race theory" would preposterously tell us that we need racism to fight racism.

    "Critical legal theory" ludicrously claims that laws have no rational basis but simply reflect power inequities.

    "Modern monetary theory" defies millennia of evidence and basic logic in stating that governments can simply print money without worrying about balancing expenditures with revenues or inflating the currency to ruination.

    Corporations are now asked to substitute a new woke agenda theory -- "Environmental, Social and Corporate Governance (ESG)" -- in lieu of market realities, rules of investment and economic data.

    Science is dying; superstition disguised as morality is returning. And we'll all soon become poorer, angrier and more divided.

    Tyler Durden Fri, 09/17/2021 - 22:20
    Continue Reading

    Trending