From “Dovish Rug-Pulls” To “Weaponized Gamma”, Nomura Explains Why ‘This Is Not Fine’

The Nasdaq looks set to rally once again this morning, the 10th straight day of gains and longest win-streak since Dec 2020, pushing it to the most overbought since August 2020…

Source: Bloomberg

Much of this most recent surge has been driven by what Nomura’s Charlie McElligott calls a “dovish rug-pull” by the world’s central banks:

…the RBA at the start of the week (no chance of ’22 hike, most likely a ’24 story), 

…the Fed (back to late ’22 at earliest on resumption of “transitory”!) and most incredibly,

…the BoE (7-2 “no change” vote, and Bailey didn’t even vote for a hike following weeks warning of imminent moves and confirming mkt pricing….are you kidding me?!)

…after what had been a month+ of coordinated “hawkish” messaging across global CBs.

So after a month of scrambling to price-in hikes across global STIRs (Short-Term Interest Rates) on account of the Energy Prices- and Supply-Chain- disaster, CBs from RBA, ECB, Fed, BoE to even the National Bank of Poland (who hiked by 75bps earlier this week, but is now saying further hikes are not required) are now saying that markets went too far in pricing-in aggressive hiking during the still (supposedly) fragile global economic recovery.

But, while stocks read the tea-leaves ultra-dovishly, we note STIRs barely budged on their expectations. Yes, rate-hike odds have fallen since The FOMC announced taper but they have also increased again this morning after the payrolls beat…

Source: Bloomberg

Furthermore, McElligott notes that suddenly, inflation is “transitory” again:

Jerome telling us that the bar to hike before year-end ’22 is incredibly high and that effectively, hiking the policy rate in the near-term would be an ineffective tool to try and manage inflation dynamics, which they continue to view as being driven by supply-chain disruptions…especially as they expect said bottlenecks to have eased by 2H22; hence, a multi-day rally in Whites, Bonds squeezing higher / Curves painfully bull-steepening in “pure reversal” pain of last week’s behavior.

But the Nomura strategist notes that the squeeze potential in bonds is almost exhausted:

Net Exposure across said G10 Bond futures positions in the CTA model, where the aggregate was as close to “max short” as we had seen over the past decade at just 0.4%ile on a 10 year historical lookback only a few weeks back…

…but is now back to barely “net short” in aggregate, showing Net Exposure having reversed from said 0%ile now back to a 19.2%ile (10 year) rank in mere days, after buying an astounding +$153.4B of G10 Bonds to cover or even flip “long” in some cases over the past two weeks.

On the equity side, the S&P index Vol story for weeks has been one of massive overwriting and options selling, which of course is then stuffing Dealer and the market on STABILIZING “long Gamma” and accordingly, has then helped yet-again in resetting Vols lower…

…in turn, spurring massive buying / re-allocation thereafter from systematic “vol target / risk control” types

However, McElligott warns that the insidious impact of the “weaponized Gamma” dynamics from the latent, persistent, perpetual Call buying in TSLA (and now too, spreading to other names like NVDA yday, lolmygoodness)…

…is again showing us what a dysfunctional mess that market-structure has become, perversely reiterating that spot Equities are left as a derivative of the Options market and its flows.

All of this said, the Global Equity Derivatives MD offers some more tactical thoughts that ‘this is not fine’ at all…

…looking back at TSLA’s Call options, the mega OI on the $1200 and $1300 lines are in-play today, due to of course how many of said Calls were for Friday’s expiration, so there is mechanically going to be Delta to unwind (long TSLA shares as hedge for short Calls) which should most likely pause the melt-up for at least today, in the absence of freshly motivated upside lotta ticket “Gamma Squeeze” attempts…

…and lord knows if we were to somehow see TSLA spot drop below $1200, we could then just as easily see dynamics reverse and contribute to an acceleration lower.

At the broad index level, 4700 stands out as a key pin for the S&P today…

…but as SpotGamma notes, we see little gamma expiring today: S&P <=10%, 20% in QQQ. This implies we should see little change for total gamma or key levels into Monday.