Heading into Tuesday’s plunge, there was a veritable cornucopia of excuses (which traders had generously ignored) to resume last week’s deleveraging as investors were already anchored to more tangible market headwinds:
- Lack of progress on CARES 2.0 (consensus still sees $1.5-$2T getting passed although even Goldman is becoming more skeptical)
- Gamma reset in megacap Tech due to the SoftBank doxxing (massive upside vol structures should begin to roll off, however)
- Record equity issuance upcoming ($308BN so far YTD in the US or the 100th %-tile back to 2008)
- September trading seasonality (see MSZZMOMO SEAG on Bloomberg)
- Diminishing systematic bid (Morgan Stanley now sees only a few $B of global equities to buy vs prior growth estimates)
- Diminishing bid from retail (next round of stimulus checks may matter)
- Elevated HF exposure (nets and gross at the 66th and 89th %-tile per MS PB Content)
- Mutual fund year-end (will we finally see outflows/profit taking if tax loss selling was pulled forward in August?)
- Election permutations (Senate races should remain in focus for those in fear of new tax proposals)
- US-China re-escalation (hence focus on SMIC over the weekend)
- Setbacks in the reopening (second wave?)
Yet despite Tuesday’s violent sell-off, with vols already massively elevated in the market largely due to the now notorious SoftBank gamma gamble and “riding down the skew” as the market sold off, we saw “enormous pressure on vols” which finished significantly lower across the term structure and across products (incidentally, had SoftBank not been in the market, it is certain that the VIX would have closed far higher). And while flows were generally quiet, Morgan Stanley’s trading desk “did see some accounts coming in to fade the weakness by selling puts, notably in the tech space” suggesting that gamma is close to neutralizing if not there already.
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