Good Morning! VIX doing its usual Monday thing, slight overvixing, creating a VIX up/SPX up dynamic. The odd thing is, the normal undervixing wasn't done last Friday, suggesting further hedging for FOMC. It also suggests more liquidity injection, since we are still melting up.
Since these are ad hoc CMBs, there is no way of knowing how much are going to be issued, or how much there is left to be issued. So I maintain an slight positive delta, gamma negative trade that is hedged. Looking forward...
We recently had a debt ceiling scare. We are looking at almost the exact same scenario as 2 months ago wrt market action. So it is time to start planning accordingly.
I also need to add: While we have seen some hedging over the past week, we are underhedged compared to the past few FOMC decisions. This could be because there was less uncertainty around those decisions: The expectation is tapering announcement and schedule will be released Wed
But I would contend there is more uncertainty. Inflation/wages have shown to be more sustained, supply chain issues persist, and the debt ceiling threat again looms. Will these changes to the FOMC baseline forecast have an impact on their plans?
My base case is no, because there is a unreasonable fear of correction (unless your personal net worth is tied to it). Liquidity contraction will happen, the question is how much will they put it off by artificial injection, thus creating a sharper contraction in the future?
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