Australian dollar sags as robots buy robot stocks

See the latest Australian dollar analysis here:

Macro Afternoon

DXY was strong last night:

The Australian dollar sagged:

In fact, the entire EM and commosities complex sagged:

Treasuries rallied hard:

Stocks only go up:

Not much in data but US core inflation remains very weak:

And the virus very strong:

Two vaccines are now offline with Johnson&Johnson and Ely Lily in pauses as mysterious illness strike patients.  Vaccine efficacy is waning anyway:

The economic recovery is fading:

And the election is approaching:

Followed by:

So, still plenty of risk in the chamber for forex to calculate and weigh on the Australian dollar.

The major offset is stocks where robots keep buying robots but even that has its limits, from Nomura’s Charlie McElligott:

…the market “gets” the Dealer “short Gamma” dynamic in mega-cap single-names with very large open interest outstanding (remember, the large Oct expiries from the Aug Calls / Call Spreads were in AMZN, ADBE, GOOG and NFLX) and are in the process of self-fulfilling near or even through the strikes which the Dealer(s) is short and thus forced to aggressively Delta hedge…

…just like the Aug / Sep “pivot” from extreme grab to extreme vomit, if we were to continue rallying into Friday’s expiration, there will continue being a ton of stock to buy for the Dealers to remain delta hedged and extend the melt-up (i.e. late Aug)—but if we roll over and the individual stocks trade well below the strikes and the options again look “worthless” (back to last week’s levels, LOLOL), there then would be a massive puking of all that Dealer delta hedge, just like the Aug turn into Sep expiry (Note: the same thing would occur if the client were to unwind the position).

In my eyes, we are not quite at that same “vol up, spot up” red-flag level just yet as said Aug / Sep swing, particularly bc the delta hedging is still far too “real” here as judging by NQA +103bps early today vs ESA -6bps and RTYA -92bps – there is just too much convexity out there and it is forcing the standard “short Gamma” into a rally perversion of “buying more to stay hedged the higher it goes”

As I said yesterday however, next week – post Op-Ex – could see spot markets get very “binary,” with the latest index-level options analysis showing that 32% of the Gamma in SPX / SPY is set to come off, and an incredible 60% of the Gamma in QQQ set to roll-off after this expiry – and all with $Delta back at historical super-extremes (SPX at $452.2B – 97.5%ile, QQQ at $20.8B – 100%ile).

Robots also sell robots, when robots sell robots.

David Llewellyn-Smith

Comments

    • The main issue in this market versus the GFC is the sheer volume of ‘dumb money’ i.e. passive investment. Non-discriminatory flows into cap-weighted ETFs, which mean that all the largest stocks in these funds benefit from the flows in an outsized fashion.

      Active fund managers who care about things like PE ratios, earnings, growth prospects etc are either being run over – or following the herd.

      • Mike Green of Logica makes that point on passive impressively.

        Blackrock is eating the world. In 2008 they had $1.5T under (passive) management…today is $7.8T, up 12% YOY. Stimulus sure has been great for the rich.

        But consider this for insanity: of the 261 companies in the US with a market cap over US$1B who lost money in 2019…but their stock price is up an average of 65%!!!

        • This is why I seriously ponder whether fundamentals will ever matter again — of course, they will have to one day — but this could go on for years.

          And, while many on here denigrate Austrian economics, what if we are in the early stages of a crack-up boom? You won’t want to be in cash or ‘short’ the market. Many risks to consider …

          • The US legislature are debating, but have not yet passed the ‘Banking for All’ Act. They wanted it to come into force by Jan 1, 2021. It allows for:

            – All Federal reserve banks shall, not later than January 1, 2021, make digital wallets available to all residents and citizens
            – The Fed to monitor every transaction you make
            – Can force negative “digital” rates
            – Can create a decay function on the money so you have to ‘use it or lose it’
            – The Fed to monetize bank reserves

            As Lacy Hunt says, if the last point comes to pass then the Bond market implodes, inflation takes off and hefty financial repression of cash. Property prices and equities to the moon as they chase the PM miners, physical gold and silver, and bitcoin rocketships.

            With Europe and Japan and the Swiss all right now trying to drive down their currencies, the Chinese actively doing it to the Yuan, what happens to the USD and AUD in the interim?

            Then there’ll have to be a major currency system reset sooner rather than later. Most likely a partial debt jubilee where sovereign debt evaporates and the banksters get even richer

        • “All Federal reserve banks shall, not later than January 1, 2021, make digital wallets available to all residents and citizens”

          Yep. I’m not following this closely enough but it appears that almost all major central banks are now looking at this (digital currencies, cashless society etc). It all seems pretty logical if you accept that the current system is on its last legs and that the authorities would prefer an orderly transition to a new system and doesn’t ‘spook the horses’ so to speak.

          But as you say, there will be a rush to PMs and crypto and other assets — so, they’d need to either shut that down, or, actually let that play out naturally and let those ‘alternative assets’ find their true level. It would be a Jubilee of sorts as bondholders would get smoked — either way the the debt mountain suffocating us needs to be addressed. Agree with Lacy Hunt on this.

  1. pro-scienceMEMBER

    I have had all my vaccines in the past, but there is no way I will take a rushed, experimental vaccine that has skipped most of the safety trials from a company with indemnity from prosecution.

  2. Charlie had me engaged briefly with the “extreme grab to extreme vomit” and “massive puking” but then he had to go and tie it in with “Dealer delta hedge” …. whatever the heck that is.

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