Market Wrap
The SPX (-0.1%) traded sideways in a very choppy fashion and closed only marginally lower, just above the main support level at 3800 points.
Without the support of mega-cap growth stocks (MGK +0.3%) the situation would look different though, as an equal weighted basket of S&P 500 stocks traded 0.6 percent lower, which would imply a sub 3800 SPX level.
The sentiment was pressured by a weaker than expected GDP print, and Powell, who said that the risk of overshooting with rate hikes is worth taking in order to avoid the greater danger of de-anchoring of inflation expectations.
After the close RH cut its revenue guidance for FY22 to approximately 3.6-3.7B (current consensus 3.8B) and CEO Friedman offered some valuable insights (as usual):
"The deteriorating macro-economic environment has resulted in lower than expected demand since our prior forecast, and we are updating our outlook, particularly for the second half of the year... With mortgage rates double last year's levels, luxury home sales down 18% in the first quarter, and the Federal Reserve's forecast for another 175 basis point increase to the Fed Funds Rate by year end, our expectation is that demand will continue to slow throughout the year."
While our focus is more on the US in general, it is advisable to keep an eye on Europe, where the Fortum subsidiary Uniper is having liquidity issues and tumbled over 10 percent in the after market. Deutsche Bank (-3.3%) and Commerzbank (-2.3%) also continue to be deeply underwater, while Euro high yield spreads have almost reached euro crisis levels again.
Put activity was high at 3800 (duh), 3600 and 3200, but overall put volume continued to remain below trend (see chart below).
https://bucket.mlcdn.com/a/3517/3517811/images/8baf9bd54309fd23e39222dfca72e3b8f9140cb9.png
Since the post-OPEX rally got kicked off June 17, investors in general have had surprisingly little interest in reaching out for protection, despite the increasingly gloomy macro environment, as underscored by the open interest chart below.
https://bucket.mlcdn.com/a/3517/3517811/images/e93daa1fdf2641b4e9cf723f40e28ef0c4357336.png
This lack of protection is a potential market risk, as it means that there could emerge a sudden reach for puts in the case VIX is spiking higher.
If investors load on puts, market makers have to see futures to hedge their directional risk, which could amplify a self-reinforcing spiral lower.
Zerohedge meanwhile circulated some thoughts from Wall Street banks regarding the unusually low VIX and the surprisingly low interest in black swan protection (we covered the strange Skew behavior in a recent newsletter).
One of the theories put forth was that implied volatility is currently still fairly priced in relation to credit risk (chart below depicts spread of HY bond yields vs Treasuries).
https://bucket.mlcdn.com/a/3517/3517811/images/20706f85f72b54d348bff1ce002090a38645b252.png
Two thoughts on that: a) Spreads seem still contained, but their volatility is (ex 2020) higher than at any time since 2012 and b) Credit risk can jump as all it takes is a one systemic risk event to bring hidden liquidity issues to the attention of the markets.
Please consult the chart below for a current picture about the gamma situation.
https://bucket.mlcdn.com/a/3517/3517811/images/853be8343fe0821b97deb66d678f0b4b2eda3dca.png
Without the support of mega-cap growth stocks (MGK +0.3%) the situation would look different though, as an equal weighted basket of S&P 500 stocks traded 0.6 percent lower, which would imply a sub 3800 SPX level.
The sentiment was pressured by a weaker than expected GDP print, and Powell, who said that the risk of overshooting with rate hikes is worth taking in order to avoid the greater danger of de-anchoring of inflation expectations.
After the close RH cut its revenue guidance for FY22 to approximately 3.6-3.7B (current consensus 3.8B) and CEO Friedman offered some valuable insights (as usual):
"The deteriorating macro-economic environment has resulted in lower than expected demand since our prior forecast, and we are updating our outlook, particularly for the second half of the year... With mortgage rates double last year's levels, luxury home sales down 18% in the first quarter, and the Federal Reserve's forecast for another 175 basis point increase to the Fed Funds Rate by year end, our expectation is that demand will continue to slow throughout the year."
While our focus is more on the US in general, it is advisable to keep an eye on Europe, where the Fortum subsidiary Uniper is having liquidity issues and tumbled over 10 percent in the after market. Deutsche Bank (-3.3%) and Commerzbank (-2.3%) also continue to be deeply underwater, while Euro high yield spreads have almost reached euro crisis levels again.
Put activity was high at 3800 (duh), 3600 and 3200, but overall put volume continued to remain below trend (see chart below).
https://bucket.mlcdn.com/a/3517/3517811/images/8baf9bd54309fd23e39222dfca72e3b8f9140cb9.png
Since the post-OPEX rally got kicked off June 17, investors in general have had surprisingly little interest in reaching out for protection, despite the increasingly gloomy macro environment, as underscored by the open interest chart below.
https://bucket.mlcdn.com/a/3517/3517811/images/e93daa1fdf2641b4e9cf723f40e28ef0c4357336.png
This lack of protection is a potential market risk, as it means that there could emerge a sudden reach for puts in the case VIX is spiking higher.
If investors load on puts, market makers have to see futures to hedge their directional risk, which could amplify a self-reinforcing spiral lower.
Zerohedge meanwhile circulated some thoughts from Wall Street banks regarding the unusually low VIX and the surprisingly low interest in black swan protection (we covered the strange Skew behavior in a recent newsletter).
One of the theories put forth was that implied volatility is currently still fairly priced in relation to credit risk (chart below depicts spread of HY bond yields vs Treasuries).
https://bucket.mlcdn.com/a/3517/3517811/images/20706f85f72b54d348bff1ce002090a38645b252.png
Two thoughts on that: a) Spreads seem still contained, but their volatility is (ex 2020) higher than at any time since 2012 and b) Credit risk can jump as all it takes is a one systemic risk event to bring hidden liquidity issues to the attention of the markets.
Please consult the chart below for a current picture about the gamma situation.
https://bucket.mlcdn.com/a/3517/3517811/images/853be8343fe0821b97deb66d678f0b4b2eda3dca.png
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