Below the surface, bear market rally deteriorates

The Market Ear with more terrific charts.

JPM currency volatility index has moved sharply higher. VIX is so far “unimpressed” as equities are focused on the upcoming expiration and people are trying to figure out how much more the systematic players will buy…

Refinitiv

The trend in bond volatility

Volatility is a mean reverting asset, but sometimes it trends as well. The trend in bond volatility, MOVE index, continues, although it is down from early July highs. Rates remains the most stressed asset out there, so let’s see what the number one asset decides to do from here.

Refinitiv

Credit protection – signs of life?

CDX IG has bounced over past sessions. Nothing huge, but watch credit protection carefully for overall clues as this space remains one of the more stressed. The gap vs VIX remains very wide.

Refinitiv

Expect a volatile Q3

JPM quant strategy team isn’t as bullish as Kolanovic is. The quant team does a deep dive into various key macro drivers of the profit cycle and basically reach the conclusion that the conditions for a market bottom aren’t present. They ” believe Q3 is likely to be a very volatile period for equities, and believe EPS expectations need to trough for a substantial recovery in cyclical and high risk parts of the market.”

Who needs downside protection?

Don’t worry if you missed the move higher in SKEW, it is now back to “where it started”. We are not at lows, but the latest “squeeze” is gone. So the crowd decided paying up for downside, and have already given up. That was quick….

Refinitiv

SPX – looking to move more “freely” post expiration

Two charts showing the upcoming expiration. 4300 is the “pin” strike, so expect a lot of delta “reshuffling” around it. According to GS there is around $4bn “pinned” (per 1%, buy or sell around the strike). Second chart shows the gamma run off…which should make the market move more “freely”.

Spotgamma

Never forget – we move into short gamma on sell offs

Gamma is rolling off post the expiration tomorrow, but don’t forget that we also flip into short gamma should the market move lower. Absolute levels to the downside are not big, but worth having in the back of your head. McElligott writes:

SPX / SPY Gamma “flips Short” below 4190

QQQ Gamma “flips Short” below$326.19

Nomura

Even moderate energy shocks can have sizable GDP effects

“To compare the size of the three energy shocks, the left panel of the chart compares changes in natural gas prices in the affected region with prices elsewhere. On this measure, the current shock in Europe is very large as the gap with US prices has jumped to unprecedented levels. Nevertheless, the research literature and our Japan economics team have estimated that Fukushima subtracted ½% from Japanese GDP while the more gradual and positive US shale supply shock added 1% to US GDP (right panel of the chart). The European energy shock has had a much larger price effect than either of these events and is likely to have a larger economic effect as well”

Goldman

Europe – cheap vacations, but expensive heating

Europe’s not so pleasant winter problem is approaching quickly. Do we take out the big 1 level this time?

Refinitiv

Euro risk on the rise

EURUSD 1 month vols have risen sharply recently as the soggy currency continues trading well offered. Meanwhile, European equity stress remains “dormant”. Do you price European equity stress on the back of boring VIX or exciting currency etc stress? Given Europe’s exploding power problems, we see a “convexity situation” when it comes to European equity stress.

Refinitiv

The full text of this article is available to MacroBusiness subscribers

$1 for your first month, then:

$24.99 / month

$249 / year

Cancel at any time through our billing provider, Stripe

Share

About the author

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.