Volatility Spikes on Macro Risk Off

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


MACRO RISK OFF

It was a mixed bag for markets last week in what was clearly a risk off episode for equities particularly tech stocks. With more and more rhetoric that the FED is behind the curve and might raise rates 50bps in March, people really started getting spooked.

HAWKISH EXPECTATIONS FOR FOMC

Once the market has fully discounted the hawkish FED pivot and discretionary positioning is flush-out, the price insensitive buyer will be there to take stocks back up at least in the short term until higher rates in the futures may lead to smaller buyback programs. Estimates are more than $4Bn per day to be bought.

FOMC


DEALER SHORT GAMMA NIGHTMARE

Spotgamma models showing that that both SPX and NDX remain firmly in short gamma territory.

VIX SPIKES HUGE AS INDICES CRUMBLE

The recent weakness has got many people wondering if the bear market has begun, and the top is in for this cycle. Small caps drawdown breached 20% and NDX got close. We did however see sign of capitulation finally from vol markets with VIX inverting to levels not seen since COVID sell-off in Mar2020.

RETAIL PARTICIPATION FADES

There are parallels of the 2000 tech bubble collapse as retail darlings have been destroyed, vindicating Warren Buffets more defensive stance. Retail participation in stocks has declined as meme stocks get crushed and options usage falls.

RELATIVE STRENGTH IN COMMODITIES

The outperformance of commodities vs equities has been impressive and is indicative that this recent bout of risk off is the market trying to reprice relative valuations as we head into a post pandemic world with some lingering supply constraints on key commodities. It is not an immediate deterioration in economic fundamentals.

The chart below shows…


Filmed on on Tuesday 25th January 2022.


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