Russia/Ukraine Risk Dominates as Gold Breaks Out

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


MACRO DATA IMPROVES

Last week’s macro data was largely positive, with Global PPIs decelerating in US, China and UK, adding support to the idea that inflation could peak soon and require less aggressive tightening from the FED.

RUSSIAN MARKETS EXPERIENCE HUGE VOLATILITY

From imminent invasion to Biden-Putin summit to Russia killing Ukraine forces who tried to violate the border, the situation is highly volatile and hard to predict.


EUROPEAN SOVEREIGN CREDIT WIDENS

The ECB signalled a reduction in asset purchases from their bloated 8.6 trillion euro balance sheet citing sovereign credit spreads that were “not that large”.


SPX PRICE ACTION

A combination of OPEX short gamma dynamics, ongoing concerns around the need for the FED to create more volatility through a “Volker” moment ( see Zoltan Pozsar’s piece https://www.zerohedge.com/markets/fed-repo-oracle-zoltan-poszar- explains-why-powell-must-crash-market ) and seemingly escalating Russia/Ukraine conflict, was enough to see SPX continue lower last week.


OPTIONS DEALERS REMAIN SHORT GAMMA AT THESE LOWER SPOT LEVELS

With markets still firmly in negative dealer gamma positioning, despite 25% expiring on Friday, we expect high intraday volatility until markets can get above vol triggers (or in this case anti-vol triggers).


SYSTEMATICS FUNDS HAVE ROOM TO ADD EQUITY LENGTH SHOULD VOLATILITY FALL

If the vol bid we have seen on Ukraine/Russia tensions can dissipate, and that’s a big “IF”, the systematic space also has a lot of room to add equity length which could fuel a counter-trend rally.

MARKETS LOWER PROBABILITY OF 50 BPS HIKE IN MARCH

March probability of 50 bps rate hike also dessimated to only 16%, providing some optionality to those calling for more, as 25 bps surely is a done deal, isn’t it?

GOLD BREAKS HIGHER

Gold has finally found the catalyst it had been looking for in geopolitical risk. We started to like the price action a few weeks ago when it had decoupled from the latest real-yield move higher and a break on a long standing triangle consolidation pattern was looking more likely.


Filmed on on Tuesday 22nd February 2022.


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