The price moves in equities are bewildering. Massive moves, on no news. Even more interesting is that bonds barely moved today. High yield also sold off, but in a fairly modest fashion. In other words, it seems like equities are moving massively in a vacuum. People are de-risking by reducing equity leverage and going to cash only. That may sound like the market is full of goldbugs, but as we know, gold has gotten killed.
It has been popular to ascribe equity weakness to growth concerns, but bond yields do not support that hypothesis.
The only explanation I can think of is that someone is short a ton of gamma around the 1950 mark. There was similar volatility around that figure on 7/31 and mid August.
I’m grasping at straws though – I don’t really have anything other than price action to support that hypothesis. If true, another question is when the options mature. The October options expire next week, so there is a chance that this volatility around the 1950 figure goes away after next week. Open interest in SPX cash and futures options exhibit a strong tilt towards puts (and has been for some time) for strikes below 1960. Perhaps most of those puts are held by long only investors who are not actively delta hedging, which suggests dealer hedging has been a large driver.
The CBOE skew index has been elevated since late June, which suggests that market participants have been willing to pay a high premium for out of the money puts (relative to calls) since then, when SPX was trading around the 1970 level. The sharp drop on 7/31 corresponded with some normalization of that skew:
Not clear really – just another unverifiable hypothesis.
Another possibility is that with the end of QE looming, there is a sudden uncertainty regarding the appropriate clearing levels for markets.
I saw a few reports this afternoon noting that this price action was seen 3 days before the 1987 crash. How’s that for putting fear back into the markets? Note a major difference: back then, the Fed had started tightening about a year before. Reducing QE is not a tightening event, and also unlike then, bond yields are falling rather than rising.
- BoE kept policy unchanged as exp
- UK RICS House Price Balance declined to 30 vs 36 exp and 40 prev
- German Current Account declined to 10.3Bn vs 13.8Bn exp and 21.7Bn prev
- US Jobless Claims were stable at 287k vs 295k exp
- Australia’s September employment change saw -29.7k lost jobs versus +30k expected. This was the largest decline since April 2011. If the Australian Bureau of Statistics not changed the method applied in September, the loss would have been 172k jobs. The unemployment rate declined to 6.1% from 6.2% since the participation rate declined to 64.5% from 65%. JPM: This is despite growth in the working age population of 1.8% annualized. A resumption of the weak trend in participation (not just on revisions), which is now back at the lows for the cycle, is therefore flattering the unemployment rate.
- Fri: Canada Employment, USDA report
- Mon: US Holiday, China Trade Balance, Australia Business Confidence
- Tue: France CPI, UK CPI, German ZEW, US NFIB Survey,
- Wed: Draghi Speaks, UK Employment, US Retail Sales, PPI, New Zealand PMI, Consumer Confidence, RBA FX Transactions
- Thu: EU CPI, US Jobless Claims, US Philly Fed, NAHB Survey