Broad based selling pushed the SPX 1.1 percent lower on Wednesday with all sectors ex energy (+0.2%) closing in the red.
Traders had to digest several issues today and we don’t claim the following list is complete:
In order to simplify things we recommend focussing on Federal Fund Futures (see chart for December contract below). A break lower triggered by a new wave of inflation angst could very well spell trouble for the markets and bring lower strikes in play again.
https://www.tradingview.com/x/Cb2i8Ek1/
Explainer for chart above: Fed Fund futures are traded in IMM index terms, that is, as a price rather than a rate. The price is simply the implied rate subtracted from 100. For example, if the average monthly Fed Funds rate for September is 1.20% the futures price would be 100 – 1.20 = 98.800.
Gamma Discussion
Implied dealer gamma decreased again by 202MM to -435MM, while the gamma flip level got pulled slightly lower to 4210 index points.
Put volume was highest at 3500 and 3400, so we expect to see some increase in open interest there tomorrow, which will likely result in implied dealer books getting even shorter gamma, which in turn will increase the probability for higher volatility ahead.
A short note regarding iV: The VIX declined today by 0.1 points even though our models suggest that volatility should be up 1.7 percent.
Overall the VIX is 1.8 percentage points “too cheap” currently, which is remarkable given the rising uncertainty, but not uncommon (recall mid May iV was trading almost 8 points below fair value).
Looking ahead, market participants will receive the ECB’s policy statement, the Weekly Initial and Continuing Jobless Claims Report and the EIA’s Natural Gas Inventories Report.
Also there will be another bond auction (30 years), which could potentially bring additional stress.
Traders had to digest several issues today and we don’t claim the following list is complete:
- Intel said on a conference that the macro environment has been weaker and that circumstances at this point are much worse than it had anticipated coming into the quarter.
- IMF’s chief economist Gopinath warned about a much steeper as expected US rate path, disruptions to the economy, and the risk of inflation expectations unanchoring.
- A warning from the White House Spokeswoman that the inflation numbers which will get released at the end of the week could be “elevated”.
- A report from Bloomberg that the SEC is targeting payment-for-orderflow schemes, which could bring negative consequences for the already damaged liquidity environment.
- A soft 10-year Treasury Note auction.
- And last but not least an EIA inventory report, that showed no signs of demand destruction (gas inventories down 812K barrels). In the early afternoon natural gas crashed by over 12 percent due to a fire at a LNG exporting terminal in Texas, but that didn’t help to alleviate the price pressure on oil, which is a rather concerning signal in itself.
In order to simplify things we recommend focussing on Federal Fund Futures (see chart for December contract below). A break lower triggered by a new wave of inflation angst could very well spell trouble for the markets and bring lower strikes in play again.
https://www.tradingview.com/x/Cb2i8Ek1/
Explainer for chart above: Fed Fund futures are traded in IMM index terms, that is, as a price rather than a rate. The price is simply the implied rate subtracted from 100. For example, if the average monthly Fed Funds rate for September is 1.20% the futures price would be 100 – 1.20 = 98.800.
Gamma Discussion
Implied dealer gamma decreased again by 202MM to -435MM, while the gamma flip level got pulled slightly lower to 4210 index points.
Put volume was highest at 3500 and 3400, so we expect to see some increase in open interest there tomorrow, which will likely result in implied dealer books getting even shorter gamma, which in turn will increase the probability for higher volatility ahead.
A short note regarding iV: The VIX declined today by 0.1 points even though our models suggest that volatility should be up 1.7 percent.
Overall the VIX is 1.8 percentage points “too cheap” currently, which is remarkable given the rising uncertainty, but not uncommon (recall mid May iV was trading almost 8 points below fair value).
Looking ahead, market participants will receive the ECB’s policy statement, the Weekly Initial and Continuing Jobless Claims Report and the EIA’s Natural Gas Inventories Report.
Also there will be another bond auction (30 years), which could potentially bring additional stress.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.