The Nomura robot whisperers on the persistence of equity refuse to capitulate as macro conditions deteriorate. For me, this is not very different from any bear market. Things get overstretched and snap back then sink again. Rinse and repeat.
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Macro Vol—particularly in FX—on CB policy diverges vs hawkish Fed (dovish BoJ, PBoC), “behind the ball” hawkish laggards (ECB) and hawkish surprises (Riksbank)—yet Equities(particularly bellwether “Growth” Nasdaq, +3.0% off the Tuesday low) continue to SOMEHOW hold the line—what gives?
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With the caveat that we still have some MAJOR profile Corp Earnings risks remaining, the last two days have evidenced a pretty notable dynamic, where we have seen (for the first in a long while) some Stocks now going-UP on weak #’s and / or ugly guides…a.k.a. they’ve stopped going down on “bad news” (low bars from rock-bottom expectations in FB and PINS, or horrible guidance from PYPL and TXN being viewed as “kitchen sinking”…plus some actual “good” earnings from MCD and QCOM).
With other idiosyncratic signs of relief in other recent “dogs” like Chinese Equities, the “Fed tightening tantrum” calm during their media blackout ahead of next week, and the gradual clearing of risk-events in single-name earnings (where we are starting to see some names actually now “under-realize” vs their implied vol moves going into EPS), Vol is backto softening / underperforming incrementally as well, and could begin to mean-revert, struggling to support / “realize” its own high “implieds” after VIX / VVIX had leapt higher this past week and outperformed (“over-VIXed”) vs the Spot Equities move.
So in the meantime, these quick “Vol-melts” create “unemotional” second-order flows that might confound the fundamental world—where “if” Vol can now begin to sustain underperformance after its recent outperformance (*admittedly not fully unshackled until AFTER Fed next week*), it kicks-off these intermittent blasts of “mechanical” buying, either via Dealer “short hedges” being covered in options (as Puts bleed / are unwound and the associated BIBLICALLY “Negative $Delta” gets bot back), while also seeing gradually softerVol mean nearing reallocation / buying from Systematics, which remain signficantly under allocated vs recent history.
I continue to believe that once Fed risk-event is “cleared” next wk, the Equities downside hedge “bleed” should pick-up pace (as at least for this meeting, markets and Fed seem locked-and-loaded on all expectations with low surprise risk)—which may finally allow for the “Vol-melt” to extend and put yet-another “floor” in for Equities….with the caveat, of course, of new inflation data “upside shocks,” which would then again drive Rate Vol higher on renewed “hawkish-ier” Fed path expectations and risk further disruptive FCItantrums.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
