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Granted, the S&P 500 had risen for eight straight days, so a 0.4% fall doesn’t seem that out of place – there's been no real panic, but the demand for downside equity index hedges from funds has picked up and we see the VIX index +0.56 vols into 17.8%, with traders buying S&P 500 1-month put volatility more aggressively.
We’ve seen the S&P 500 discretionary sector -1.4% - largely as a result of Tesla getting slammed 12% - the biggest one-day fall since Sept 2020. Our flow on Tesla has been significant, with a mix of shorts (to open) and dip buyers. As mentioned on Monday, we’re seeing better two-way opportunities in Tesla now and it's not just a one-way gamma squeeze. Interestingly, we’re not seeing any negative flow in Crypto on the Tesla drawdown – and if anything we’ve seen some switching into DASH which has exploded to the upside.
(Source: TradingView - Past performance is not indicative of future performance.)
US Financials have been sold adding to the equity index downside and we can explain that through flatter yield curves – the 2s v 10s US Treasury spread is testing 100bp but yields between 5- through 30-year maturities are lower by 5bp. Some are talking about positioning for a Lael Brainard-led Fed, whereas we know she was recently interviewed by President Biden for the top job – the talk is we’re to hear the fact ahead of Thanksgiving (25 November). I personally wouldn’t be buying treasuries or selling USDs on a Brainard appointment, but then I think the strong odds are Jay Powell stays on as Fed chair – I might be wrong, but I think the market would be very comfortable with a Brainard appointment anyhow.
Others are saying the move is pre-position ahead of US CPI, as well as systematic buyers through 1.55% (in 10s).
Being long rates and bonds on a hot CPI print will hurt, notably if we see headline CPI above 0.7% MoM, taking the YoY pace above 6% - The USD will be sensitive to moves in the 2-5yr part of the US Treasury curve, and I think we’ll need to see a print of 0.8% MoM to see the USD index break out of the top of the range of 94.50. Gold has been well traded here and needs a hot CPI print to see it push through $1833 – US real rates are the driving force again, and we’ve seen US 5 and 10yr real rates -7bp a pop. We’re seeing record low real rates in the 30yr maturity and not far off in 5 and 10yr rates – if this keeps trending deeper negative then Gold should push towards $1900 and keep the USD suppressed.
USDJPY is one of the best expressions of lower rates, flatter curves – It's trending lower but again if US CPI comes in hot then this poses a risk to USDJPY shorts.
(Source: TradingView - Past performance is not indicative of future performance.)
Watching AUDUSD too with Iron ore futures savaged again. Staying in the commodity mix, Crude is well bid here and we see the path of commodities being quite messy here, with nat gas starting to trend lower. Put US Crude on the radar, where a break of $84.80 and we could be ready to trend higher again and of course that question of $100 will be asked more liberally. Maybe a crude proxy could work – short AUDCAD anyone?
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