Market Wrap
The SPX failed the second day in a row to climb above 3800 on Thursday, but managed to close one percent higher at 3796 points.
Macro was bad, with global PMIs disappointing, euro banks crashing (Deutsche -12%, Commerzbank -12%) across the board, copper imploding to the lowest level since February 2021 (-5.2%) and bond yields extending their declines (the yield on a 10-year UST note is now down over 40 basis points since June 15).
Well, seems we now officially have a new theme at hand: Recession (not that we were not talking about this over the last weeks).
What would such a scenario mean for stocks? On our Twitter we conducted a very representative poll (NOT!) , which resulted in 65 percent among 34 voters think this is good news for stocks.
While this is certainly a rational position given the history of the Fed and given that the rather technocratic Powell does not emanate much courage/confidence, we rather agree with Bill Ackman, who send out another rant today that pretty much reflect the GammaLab position (tweet not included).
On the gamma front there is not much to discuss really, so how about going a little bit off script?
The situation is puzzling: WW3 is (potentially) at hand, globalization is dead/getting rebalanced, a new world order is emerging in the west, the east is hiding behind a curtain again, record amount of balance sheet assets are about to get released back into the system, inflation is raging, rates go crazy, states are failing, etc..in short uncertainty has reached enormous levels, yet markets are pricing in no tail risk as expressed by option skew (we mentioned this a couple newsletters ago).
How is this not reminiscent of the pre-Black Monday era, when option were not smiling because the assumed black swan risk was 0 and models implied there is none?
And how about another similarity: PCE volatility (see chart below).
https://bucket.mlcdn.com/a/3517/3517811/images/6d86bbcf11b17c1325aa502d521a270f36e93bf8.png
1987 was the first year since world war two with a large increase in consumption vol, before the era of moderation sucked it out of the system again until the world came to a standstill in 2020 and went on a massive buying spree shortly after (chart below).
https://bucket.mlcdn.com/a/3517/3517811/images/4b00ec486dbf5f386f6d12507563ad083e9101a8.png
It is not a uncommon belief among economists that consumption volatility is directly tied to the strength of the financial system and that shocks to beliefs about the volatility state of consumption can cause sudden shifts in risk awareness.
Could we experience another Black Monday scenario that is not yet priced in by option skew?
Food for thought.
Macro was bad, with global PMIs disappointing, euro banks crashing (Deutsche -12%, Commerzbank -12%) across the board, copper imploding to the lowest level since February 2021 (-5.2%) and bond yields extending their declines (the yield on a 10-year UST note is now down over 40 basis points since June 15).
Well, seems we now officially have a new theme at hand: Recession (not that we were not talking about this over the last weeks).
What would such a scenario mean for stocks? On our Twitter we conducted a very representative poll (NOT!) , which resulted in 65 percent among 34 voters think this is good news for stocks.
While this is certainly a rational position given the history of the Fed and given that the rather technocratic Powell does not emanate much courage/confidence, we rather agree with Bill Ackman, who send out another rant today that pretty much reflect the GammaLab position (tweet not included).
On the gamma front there is not much to discuss really, so how about going a little bit off script?
The situation is puzzling: WW3 is (potentially) at hand, globalization is dead/getting rebalanced, a new world order is emerging in the west, the east is hiding behind a curtain again, record amount of balance sheet assets are about to get released back into the system, inflation is raging, rates go crazy, states are failing, etc..in short uncertainty has reached enormous levels, yet markets are pricing in no tail risk as expressed by option skew (we mentioned this a couple newsletters ago).
How is this not reminiscent of the pre-Black Monday era, when option were not smiling because the assumed black swan risk was 0 and models implied there is none?
And how about another similarity: PCE volatility (see chart below).
https://bucket.mlcdn.com/a/3517/3517811/images/6d86bbcf11b17c1325aa502d521a270f36e93bf8.png
1987 was the first year since world war two with a large increase in consumption vol, before the era of moderation sucked it out of the system again until the world came to a standstill in 2020 and went on a massive buying spree shortly after (chart below).
https://bucket.mlcdn.com/a/3517/3517811/images/4b00ec486dbf5f386f6d12507563ad083e9101a8.png
It is not a uncommon belief among economists that consumption volatility is directly tied to the strength of the financial system and that shocks to beliefs about the volatility state of consumption can cause sudden shifts in risk awareness.
Could we experience another Black Monday scenario that is not yet priced in by option skew?
Food for thought.
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