While stocks soar back towards record highs, Nomura’s Charlie McElligott warns that macro data continues to show that “stuff is breaking” off the back of the perception shift around the Fed’s ever-accelerating tightening path, with Street-wide revisions to Fed “terminal” rate forecasts screaming higher (e.g. Nomura @ 3.75-4.00%) in what will imply a shock tightening of FCI in the coming months (now pricing > 8.5 25bps equiv hikes through YE..while we have yet to even experience balance-sheet unwind impact in USTs and spread product).
A random smattering of said macro breakage:
1) $Yen seeing a 10 big-figure range this month, while the BoJ embarks on MORE stimulus paired-with YCC, incoherently versus a R.O.W. sprinting face-first into impulse policy tightening and QT as inflation “un-anchors”;
2) more major UST cash curves inverting this week (5s30s now and 2s10s just 8bps away), joining the majority of the swaps curve already, as the front-end goes further unglued and “front-loaded” Spring / Summer hiking now pushes into 2H22 as well (UST 2Y yields the largest monthly increase since 1984);
3) outrageous absolute levels in the upper left side of the USD Rate Vol surface, with obvious signs of Dealer “short Gamma” problems (particularly as we break to new multi-year levels in Rates, with Dealer pain via high strike Payers which they’re short to clients in size and causing a hedging “acceleration flow”…but also too on the esoteric / opaque structured side, via legacy “non-inversion” notes, where hedging is now adding to further flattening impulse) and with little offsetting Gamma “supply” in-sight, as Systematic Vol Shorts pull-back after being repeatedly burned; or
4) how about Euribors, where the ~1m aggregate move in ERU5 is > -5.3 z-score move (10 year rel), as the European STIRs market also goes haywire with the “rate hike + war de-escalation” impulse;
and finally, how about 5) sustained bouts of massive Volatility being seen across the Commodities complex, particularly within Energy (i.e. yesterday being Brent Crude’s 3rd largest 1d fall EVER in absolute $ terms, or May WTI Crude contract 25delta Puts at a 74 Vol).
So what is behind the manic-buying-frenzy in stocks in the face of this ‘breakage’ and inevitable and dramatic tightening of financial conditions that is imminent?
Simple, warns McElligott, we are seeing the re-weaponization of the Options complex via Retail, with resumption of the “Gamma Squeeze” behavior from the YOLO crowd, buying short-dated, highly convex OTM upside in “meme stocks” at a magnitude back near prior “speculative frenzy” highs seen during previous bouts of “Vol Up, Spot Up” behavior in said Retail favorites (TSLA, GME, AMC, AMD, NIO, BB, NOK, NVDA, SNDL, TLRY amongst others).
Emboldened by passive Systematic bid to spot markets and feedback loop into Vol compression: The WSB-crowd is back in a major way on this Equities bounce, where for the past 2 weeks, we see the collective “upside grabbing” activity at levels only previously witnessed during prior speculative frenzy periods in the COVID / WSB / “stimmy” era (our basket of 10 of the most prominent “meme stocks” has seen their aggregated daily Call option volumes jump to over +2 z-scores as of last Friday vs the 2 year lookback)
Just how ridiculous has it gotten (again)? Well looking at the big “meme” favorites, it’s a return to “Vol up, Spot up,” with some true “foaming at the mouth” behavior evident in the options space, as buyers grab into short-dated weekly (or less) OTM upside, looking to create “Gamma Squeezes”:
TSLA options breakdown yesterday: Call prem $2.7B vs Put prem $823mm, in more of the same retail “Gamma Squeeze” speculative comedy, reminscent of the “worst” behaviors during the WSB manias of 2020 and 2021
TSLA call buyers (orange line) going at it again pic.twitter.com/izLyG09T0o
— SpotGamma (@spotgamma) March 28, 2022
Yday we saw total premium spent on TSLA options ($4.8B, again predominately Calls)–more than AMZN ($1.3B), SPY ($1.2B), QQQ ($877mm), NVDA ($387mm), AAPL ($373mm) and GME ($353mm) combined on the day
AMC 01Apr22 40 Calls (so ~100% OTM vs opening level in spot, expiring Friday) traded 99k volume, single most active options line today (stock opened at 20.53, closed at 29.31, +44.8% on the session)
GME 01Apr22 315 Calls (so > +100% OTM vs opening, expiring Friday) traded 15k volume, 2nd most active options line on the day…or 14Apr 500Calls which traded 6.2k times (stock opened at 151.98, closed at 189.35, +24.6% on the session)
Look at the yesterday’s most active US Eq Options, where vast majority were “meme” stocks…and check the “Call volumes vs avg” and their “Call : Put” ratios, again indicating more speculative FOMO:
But, don’t expect this to continue forever as positioning has now returned to ‘long gamma, positive delta’ in both S&P and Nasdaq…
Finally, McElligott warns that perversely, there will be comeuppance with risk-assets off the back of this ‘gamma squeeze’-driven rally…
Expect the resumption of Commodities inflation (Russia sanctions not going away even with a cease-fire), inflation data upside surprises and +++ risk-sentiment to force a further escalation of “hawkish” central bank pricing to yet-again cause tremors, as the FCI shock of 125bps of Fed hiking by July becomes reality…but critically, even before QT kicks-off, which will begin to bleed USTs and MBS with real “price discovery” again.