FOMC Minutes Signal Bigger, Faster-Than-Expected QT, Multiple 50bps Hikes
…and there it goes…
SPX bounced at 4460.00 to retest the mid-Cycle resistance at 4503.96. There is a likelihood that dealers and hedge funds supporting the options market may attempt to keep SPX elevated above the short gamma zone at 4500.00 through closing. A close beneath that level may create a bloodbath in the options market. Be aware of the dynamic that may cause a panic decline.
ZeroHedge comments, “The recent rally in stocks is, macro-wise, incoherent with what has been happening in financial conditions. Specifically, the 1w change in TIPS 2s10s curve was just the largest impulse flattening since the US debt downgrade in Aug ’11 and Dec ’08, while the cumulative 3 wk move in 5Y TIPS yields is the largest since Aug ‘16…
…along with tighter FCI and higher Rate Vol…all while Equities iVol has collapsed…
But, as Nomura’s Charlie McElligott points out in a note this morning, this sudden “shock tightening” in Financial Conditions – as Real Yields are exploding higher (5Y TIPS Yields from -1.66 to current -0.59bps over the past 3 weeks!) – is allowing “macro truths” to finally override recent “bullish” mechanical flows in Equities.”
NDX has declined beneath Short-term support at 14530.00 and may threaten the 50-day Moving Average at 14343.00 soon. It is declining into short gamma which may make the decline self-reinforcing. Watch what happens at the 50-day.
ZeroHedge remarks, “The second half of March came to an end and so did the meltup. Building on yesterday’s losses – as we detailed here – this morning’s breakdown has snapped all the major US equity markets below critical technical support levels.
The S&P is back below its 200DMA. The Dow and Russell 2000 are back below their 50DMA, and Nasdaq is rapidly accelerating down towards it 50DMA…
This comes as former NYFed President Bill Dudley issues another post-service op-ed warning that “If Stocks Don’t Fall, the Fed Needs to Force Them”…
GKX is wavering between mid-Cycle resistance at 551.00 and Intermediate-term support at 541.90. However, the Cycles Model suggests a powerful breakout by the end of the week and extending through the end of April. As mentioned previously, the minimum target appears to be over 800.00 over the current Cycle and may exceed 1000.00 by the end of the year.
ZeroHedge explains, “The EU is expected to deliver another shock to its agricultural sector by capping Russian imports of potash, a crucial ingredient for growing food, according to Bloomberg, citing a Dow Jones report.
The European Commission is expected to imminently unveil broad new sanctions on Russia. Much of the fertilizer is purchased from Belarus; the landlocked country in Eastern Europe could also be slapped with new sanctions for its involvement in Russia’s invasion of Ukraine.
Potash is a key ingredient for agricultural fertilizers. Europe produces only a negligible amount of the fertilizer, and to potentially cap imports from Russia and or Belarus (top producers) seems idiotic for Europe as the spring planting season is only beginning.
Even if Europe were to rework its supply chains to import potash elsewhere, only a few other countries would export it. The impact of capping imports will send prices even higher and create fertilizer shortages for crops. This can dramatically affect crop harvests at the end of the growing season. ”
NDX futures are making new lows, having declined beneath the April 1 low at 14723.00. It may have broken its trading range and descended into short gamma territory and, should it not reverse course, may decline into a doom-loop panic Cycle ending after May options expiration.
ZeroHedge remarks, “Beware the negative earnings revision
Earnings revisions just about to turn negative (so far disguised by commodity upgrades). Credit Suisse shows that in 71% of the times when earnings revisions turn negative the equity market falls (this measured as over the following quarter). (Credit Suisse Equity strategy)
NASDAQ – what was gained is now lost
Our main take remains intact, this market needs to consolidate before anything new big can take place. NASDAQ futs remain trapped in the 15200-14600 range for now. We are not getting short term excited until we break that range. Longer term, the 100 crossing the 200 day moving average isn’t overly bullish, although last time it happened was close to lows in late 2018 (chart 2).”
SPX futures have broken beneath mid-Cycle support at 4503.33 and is now threatening to break the 200-day Moving Average at 4489.23. Today’s expiring put options may be exploding, since SPX is now in short gamma territory. The sell signal is confirmed.
ZeroHedge reports, “There is a scene in My Cousin Vinny where Joe Pesci’s puzzled wannabe-lawyer character asks the judge if he was really serious ’bout dat.
On Tuesday and overnight, incredulous algos and 15 year old hedge fund managers had a similar question to the Fed about its market-crushing, rate-hiking intentions, after yesterday the Fed’s in house permadove and Hillary Clinton donor, Lael Brainard, shocked markets when she not only made the case for accelerated rate hikes but also a faster balance sheet drawdown after she said that curbing inflation is “paramount” and the central bank may start trimming its balance sheet rapidly as soon as May.
As a result, investors once again feared out that a more restrictive U.S. central bank could end up tipping the world’s largest economy into a downturn, or even a recession, something which is now Deutsche Bank’s base case for 2024. The virus resurgence in Asia and the war in Ukraine are also clouding the outlook for prices and growth.”
VIX futures leaped above the mid-Cycle resistance at 21.14 to a morning high of 23.43, confirming its buy (SPX sell) signal. This may be the beginning of a nasty short squeeze in the VIX, especially should it rise above 25.00 where gamma turns seriously long. It’s ironic that the SEC has approved the re-opening of the short-VIX ETFs in the past couple of weeks.
ZeroHedge remarks, “Remember the “good” old VIX days?
Remember when VIX’s “natural floor” or as quant analysts would call it “longer term average” was around 13/14? The VIX has trended higher over the past 5 years, despite the Fed expanding the balance sheet. You get the point, VIX is “distorted”. Let’s see what happens when they start the “rapid pace” reduction…
The disturbing trend in VVIX
VVIX and VIX are long term mean reverting assets, but they undergo structural shifts as well. Ever since Fed restarted the presses in 2019, the VVIX has traded well bid, trending higher. VVIX is down from recent highs, but let’s see what happens when the BS starts shrinking and volatility is already distorted.”
TNX gapped above its current trend channel, suggesting it may be making a running (irregular) correction. This suggests a move that may be beyond “normal” expectations. That is why it is important to pay attention to predictive formations, such as the Cup with Handle, which advises the 10-year yield climbing above 3.00 in a very short period of time.
ZeroHedge observes, “The inversion of the two-year and ten-year yields creates more problems for the Fed and the financial markets than for the economy.
That’s because the yield curve inversion has occurred at a relatively low level of interest rates, far too low to slow final demand and squash inflation pressures.
History shows that yield curve inversions offer an accurate negative view of the economy’s future path only when accompanied by a level of interest rates that prove prohibitive. In the past, restrictive interest rates were when the federal funds rate and market rates equaled or exceeded the growth in nominal income.
Notably, that is not the case today. On the contrary, it’s the exact opposite. A record gap exists between Nominal GDP growth of 10% in the past year and the current fed funds of .5%. There is even a record spread between Nominal GDP and two and ten-year yields of around 2.5%.
Yield curve inversion at low-interest rate levels is a nightmare for the Fed.”
USD futures rose to a morning high of 99.74, breaking through the prior high at 99.43 before easing lower. The current Master Cycle still has a week to go, so the target of “above 100” remains valid until a reversal signals the end of the Master Cycle.
West Texas Intermediate Crude futures may be consolidating today, making neither a new high or new low. However, the Cycles Model suggest weakness over the next week as the current Master Cycle comes to a close. A lot may happen in a week’s time, especially when monthly options come due. The average decline in Wave C may equal the length of Wave A, putting WTI near the mid-Cycle support at 81.25. Should a panic ensue, crude may decline down to the Cycle bottom at 55.11.
ZeroHedge remarks, “Three weeks ago in mid-March, in the latest confirmation of Zoltan Pozsar’s prediction that commodity trading giants are caught in a “Margin Call Doom Loop” (see Pozsar: “We Could Be Looking At The Early Stages Of A Classic Liquidity Crisis“) Wall Street was stunned to learn that commodity trading houses had – in their view – become “too big to fail” and the European Federation of Energy Traders, a trade body that counts BP, Shell and commodity traders Vitol and the margin-call stricken Trafigura as its members, said the industry needed time-limited emergency liquidity support to ensure that wholesale gas and power markets continued to function.
Translation: the world’s largest commodity traders were calling on governments and central banks to provide a bailout in the form of “emergency” assistance to avert a cash crunch as sharp price moves triggered by the Ukraine crisis strained commodity markets and sparked massive margin calls across the industry.
However, as we noted at the time, it wasn’t immediately clear if central banks would come running to the commodity giants’ rescue. As the FT notes, “some may be reluctant to help trading firms that often make large profits from shifts in commodity prices.” However, senior ECB officials are keeping a close eye on global commodity markets, and as ECB vice-president Luis de Guindos said last week, derivatives, including commodity derivatives, were a very specific market that we are looking at very carefully.
Ultimately, central banks made a decision last Friday afternoon, when a Bloomberg headline briefly flashed only to be buried in the usual firehose of Ukraine news and fake news:
- *ECB TURNS DOWN ENERGY TRADERS PLEA FOR FUNDING SUPPORT”