Trader thoughts - a liquidation in risk with traders looking for a low

With China slowing markedly, demand destruction now visible in energy (diesel demand was -17% last week) – equity is gaming the Fed to pivot (to be less hawkish) but they have made it their mission to get inflation back to 2-3% target – if that means a shallow recession then so be it.

Powell doesn't want to be remembered as the guy who lost the inflation battle after 40 years of low price pressures - without the backing of the Fed and with global growth in question growth equities have been smashed – energy -8.3% as a sector (in the S&P 500) – companies with poor earnings have been carted out (Peloton -21%, ARKK innovation -10%) – Crypto has been savaged and it’s all eyes on Bitcoin into 30k – the market ‘Generals’ (Amazon, Apple, Microsoft, Google) are not helping either and given the huge ownership and saturated position (much of it on leverage) these big names are being unwound.

On equity, we have to add in poor top of book liquidity (you can get out of $6m notional in S&P futures at touch – the 4th percentile), further liquidations as S&P 500 realised volatility pushes higher (20-day S&P realised vol is now 32% - the highest since May 2020) and forced selling (margin calls) and hedging flow from options market makers to hedge their delta (they short S&P 500 and NAS100 futures) and it’s a hodgepodge of different type of investment flow all going off at one time….

The good news? Something changed overnight - While we heard from Fed member Bostic (who pulled back from his 75bp hike call), we’ve seen the market start to price out rate hikes through this year and for 2023. We’ve seen inflation expectations turning lower and again, this would not have gone unnoticed at the Fed. It makes me think we’re closer to a trading low in Gold.

The question retail is asking, is when do we see a bottom in risk? 

Personally, I wanted to wait until we go into options expiration (next Friday) as there could be a tradeable low on this as dealers who have amassed a sizeable short equity futures buy back an unwanted inventory – shorter-term, a 7 as the big figure in tomorrow’s US CPI could set some relief. Conversely, a number closer to 8.5% may keep the negative flow going in earnest.