COVID Fears Return

In this week's Macro Insight I discussed...

The break down in US 10Y bond yields below 1.20% signals that growth has likely peaked as COVID concerns re-emerge across the globe. Accordingly SPX sold off post July expiry on Friday. With markets now in the short gamma zone, we look for higher realised vol to persist this week.

The sell off sparked a large VIX spike up to intraday highs of 25. Recent retail put selling likely fuelled some of the panic in vol. VIX term structure flattened and once July rolls off this week, August front month contract will likely find a floor around 18 given it contains the Jackson Hole date.

With the tech sector being the last pocket of strength holding up markets, earnings next week will be key. The gap between stock prices and earnings momentum has been widening in the sector.

Using SXTP as a barometer for the COVID concerns gave us an excuse to short DAX last week.

The jury is still out on whether this dollar breakout has any real momentum. DXY has major resistance at 93.5, which equates to 1.17 support on EURUSD. Playing the break in dollar using EUR puts will be cheap given low levels of FX vol.

Oil prices had their steepest one day drop of the year as COVID travel restrictions into the US were announced and lockdowns extended in some countries as the Delta variant cases have increased. Gold has been lagging the move in Real yields and we like selling Copper to buy Gold a tactical trade to play the phase transition away from Reflation and into the next macro regime of with Deflation or Stagflation.

Filmed on on Tuesday 20th July 2021.

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