FED Hawkish Pivot Spooks Markets


Very choppy week last week as predicted and apart from just Omicron dominating the tape, we saw the FED (rather than reassure markets) pivot to an even more hawkish tone and drop the term “transitory” from their inflation language. This triggered a large flattening in the yield curve with short end rates higher, now pricing in more than 1 full hike by Jun22 and long end yields breaking lower. The market is now expecting an acceleration of tapering to announced at the 15Dec FOMC meeting.


Despite this double whammy of the growth uncertainty from Omicron and the FED liquidity taps being turned off, the market could still have a rally into year-end for no other reason than all the longs are out! The seasonality narrative had people leaning long and we have seen a major capitulation on several fronts. Whilst retail may have bought the dip many professional money managers will have gone into Pnl protection mode. This could mean that the real rally where people get forced back in might be in January.


After breaking down below the vol trigger last week and testing 4500 support area, SPX managed to hold the second test and has staged an impressive comeback. The gamma positioning looked bleak had 4500 been taken out to the downside but it seems to have held for now, rewarding those brave enough to buy the dip. I have highlighted key zones for the SPX looking forward for the next couple of weeks. Above 4650, the dealers short gamma positioning goes away and if anything they will decay longer into OPEX which has the potential to crush vol (VIX back into 16-20 range) we may even squeeze out a new ATH around 4800 in that scenario as Vanna impacts create more delta to buy. Below 4500, markets could find themselves caught in a bit of a short vol cascade and we could see further VIX explosions stretching even into the 40s.


OPEC+ stuck with the plan to increase production in Jan, not giving oil prices the support they were looking for. Positioning in spec oil futures is at 1 year lows. The whole commodity sector was dumped but particularly the energy space, US Natgas has also been hit hard on the prospect of warmer weather coming in the US. Prices have rebounded strongly this week as Omicron fears are subsiding, but still work to do before you can call this anything other than a retracement

Filmed on on Tuesday 7th December 2021.

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