Good Morning! Last week we saw some relentless buying thanks to an in-line CPI print last Tuesday. We are now bumping up against the 4000 $SPX mark. Now the market must make a decision. 4000 is negative gamma, so we will likely see a break one way or another, not a wall. #volland
And it will be determined by IV. 4100 is solidly positive vanna, negative charm going into opex, which portends a rise as long as IV is declining. But we just experienced a vol crunch with 4300 keeping price muted. VIX expansion has occurred when it dropped below 20 recently,
So the question is, have we entered a new vol regime? Is VIX now lower or will we expand again? With the BoJ decision tomorrow morning, a very underrated catalyst with no event vol, I think there is a good chance IV will expand. The BoJ has yield curve control on the block.
Last month, a 25bps increase in yields on the 10y JGB caused a 1% drop. The yields are already exceeding the new curve, and CB watchers are increasingly expecting the BoJ to abandon YCC. This could cause a massive revaluation.
I have seen estimates that yields can raise 50bps if this happens. All this on volex as well... so while we could be entering a new vol regime, there is a large landmine we have to step over before I feel confident in that.
Otherwise the rest of the quarter's dealer positioning is somewhat bullish if we have entered a vol contraction regime. I think VIX under 16 would need to be seen before we consider that. But one thing is for sure, domestic catalysts are muted, particularly NFP, FOMC, and CPI.
Their predictive models have gotten a lot better, so I think the only large negative catalysts will be earnings-specific and foreign CB decisions. Not to say I think the economy is out of the woods, but we are in a tense moment where there is a large wall of worry...
that we will climb before some of the macroeconomic fallout from rising wages, excessive debt, and demographics will take hold. Meanwhile, there is a bump possible tomorrow... but it would be a bump to buy.
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