Why such a violent equity squeeze on such ‘meh’ Ukraine / Russia headlines?
Nomura’s Charlie McElligott summarizes the long and the short of it succinctly below (Spoiler alert – Same shit, different day!)
As we’ve repeated numerous times, stocks are so deeply-immersed in Negative Gamma and critically, EXTREME “Short Delta” location for Options Dealers from all that downside hedging (after yesterday’s session, $Delta for SPX / SPY 0.2%ile, 0.0%ile for QQQ, 0.4%ile for HYG, 4.1%ile for IWM) that this means violent rallies which have to be “bot into” as Dealers cover shorts in futures.
Accordingly, McElligott has noted that any rally would have potent kindling for a short-squeeze from said “negative Delta,” as all those downside Puts are torched as we rally away from lower strikes, and the coupled “short hedges” from Dealers in futures will be bot back / covered.
Further, there too will be a SUBSTANTIAL “Vanna” support coming from rapidly softening iVol (with UX1 -5 vols from yesterday’s high), as negative Delta (shorts in futures) is too then bot back on this Dealer hedging sensitivity.
But, there is some good news in all this chaos…
Lower implied Vol will also act to see Dealer Gamma get “longer” – or said another way and critically in this case, “LESS SHORT Gamma” – which can help to further insulate us from the big intraday swings like those seen yesterday – where we had TWELVE intraday moves of at least 90bps or more!!!
Nonetheless, the Nomura strategist’s medium-term view remains that as we have not yet even begun the hiking lifting nor balance-sheet runoff, rallies over the next 2-3 months (before more clarity from inflation data on the Fed path) will likely be sold into from the long-term lazy accumulators of Duration-proxy Equities (Mega-Cap Tech / Nasdaq “Growth” types, which any global Equities fund needed to overweight to outperform benchmark and take-in assets for the past 5+ years), particularly as financial conditions remains far too “easy” and Real Yields far too negative for the Fed.
As stock rallies and Dollar pullbacks act to EASE FCI—which is counterproductive for the FOMC and global CBs right now—the Fed will accordingly need to “lean into” these opportunities and use them to increase hawkish rhetoric, in order to try and get a hold of rapidly strengthening forward inflation expectations from becoming “embedded” in the minds of consumers and businesses.