Options speculation creating a market melt-up

The Daily Shot: 03-Sep-20
Equities
Credit
Energy
Commodities
Rates
Emerging Markets
China
Asia – Pacific
The Eurozone
The United Kingdom
Canada
The United States
Global Developments
Food for Thought



 

Equities

1. Let’s begin with the options market where the speculative fervor is on full display.
 
Speculative demand for call options (mostly deep out-of-the-money contracts) has been staggering (3 charts).
 
Source: @sentimentrader  
Source: @jessefelder, @Convertbond   Read full article  
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Short-term call options are notoriously difficult to hedge, and dealers who sold them rapidly become short the market as shares rise (and the probability that these options will get exercised increases). Dealers are forced to buy stocks to cover their exposure (delta-hedging), pushing the market higher. That, in turn, makes the dealers short again, creating a melt-up.
 
Source: @markets   Read full article  
 
Some dealers (and other participants) are also hedging by buying volatility. That’s why implied volatility and stocks have been rising together – a highly unusual trend.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
Implied volatility is now well above realized volatility.
 
h/t Nancy Moran  
 
Here are the top 20 VIX readings for days when the S&P 500 hit an all-time high.
 
Source: @Convertbond   Read full article  

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2. This rally looks increasingly stretched.
 
The Nasdaq 100 deviation from its 200-day moving average:
 
Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital   Further reading  
 
Nasdaq gains with negative breadth:
 
Source: @sentimentrader  
 
The S&P 500 RSI:
 
Source: @markets   Read full article  
 
Fear/greed indicators:
 
Source: @markets   Read full article  
Source: @markets   Read full article  
 
By the way, here is a drawing from 1928 …
 
Source: @StockCats  

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3. Fund flows show that investors are increasingly in favor of non-US exposure.
 
Source: SPDR Americas Research, @mattbartolini  
 
4. Growth ETFs are seeing some outflows (2 charts):
 
Source: @markets   Read full article  
Source: @ISABELNET_SA, @BofAML   Read full article  

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5. Only 30% of S&P 500 stocks are above January/February highs.
 
Source: @MarkNewtonCMT  
 
6. Dark pool activity has been unusually muted.
 
Source: @Callum_Thomas, @CapitalComped  


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Credit

1. Here is the relative performance of high-yield bonds by rating (2/1/2020 = 100).
 

 
2. Banks’ credit outperformance doesn’t match their weakness in the equity markets.
 
Source: @ISABELNET_SA, @GoldmanSachs  
 
And the economic recovery isn’t helping.
 
Source: @ISABELNET_SA, @MorganStanley   Read full article  
 
Here is why.
 
Source: @WSJ   Read full article  

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3. Small banks have been driving PPP lending.
 
Source: S&P Global Market Intelligence  
 
4. The CMBX-9 credit index shows continuing stress in the hotel sector.
 
Source: @markets   Read full article  
Source: @axios   Read full article  


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Energy

1. US crude oil production declined sharply last week, driven in part by Hurricane Laura shutdowns.
 

 
Net crude oil imports also declined.
 
Source: Princeton Energy Advisors  

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2. US jet fuel demand has been weak, but it’s outperforming some other economies.
 
Source: EIA   Read full article  
Source: EIA   Read full article  

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3. Refined product demand is back under the 5-year lows.
 

 
4. Gasoline inventories continue to shrink, but crude oil stockpiles are still elevated (measured in days of supply).
 

 
5. Brent crude oil has been stuck in a trading range since July.
 


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Commodities

1. Iron ore prices are hitting multi-year highs.
 

 
Other industrial commodities, such as copper, continue to rally.
 
Source: @WSJ   Read full article  

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2. Gold is at support.
 

 
3. The US lumber rally is fading.
 


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Rates

1. Let’s start with the Fed’s MBS purchases.
 
Source: @markets   Read full article  
 
2. Foreigners bought US liquid assets this year.
 
Source: Natixis  
 
3. Globally, high unemployment and low inflation could justify low-to-negative interest rates.
 
Source: BCA Research  


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Emerging Markets

1. LatAm vehicle sales recovery has been uneven.
 

 
2. The Colombian peso has been rallying on speculation that the nation’s debt will be included in the Bloomberg Barclays bond indices.
 

 
3. Nigeria’s trade deficit hit a record, as exports (especially of crude oil) slowed.
 

 
Separately, Nigeria will be more populous than China by 2100.
 
Source: Statista  

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4. According to IIF, the Belarusian economy had been struggling even before the pandemic and recent political unrest.
 
Source: IIF  
 
5. This chart shows the stock market divergence between wealthier and poor economies in Asia.
 
Source: @markets   Read full article  
 
6. Here are the F/X reserves in Russia, Saudi Arabia, and Brazil.
 
Source: Pavilion Global Markets  


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China

1. The bond selloff continues.
 

 
2. Stocks are testing resistance.
 
Source: @TheTerminal, Bloomberg Finance L.P.  
 
3. Investment should strengthen with profits.
 
Source: @PkZweifel  
 
4. Here is an overview of China’s policy rates.
 
Source: Danske Bank  
 
5. Hong Kong’s business activity continues to shrink.
 


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Asia – Pacific

1. Singapore’s PMI shows persistent weakness in business activity.
 

 
2. Australia’s service sector is contracting again.
 

 
And construction activity remains soft.
 

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3. Japan has been a significant source of global investment.
 
Source: Alan Brazil; SOM Macro Strategies  


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The Eurozone

1. Germany’s retail sales declined again in July.
 

 
However, the trend remains steady.
 
Source: Pantheon Macroeconomics  

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2. Dutch retail sales have been remarkably strong.
 

 
3. Finland’s home prices rebounded.
 

 
4. Next, we have some updates on Ireland.
 
Manufacturing continues to grow.
 

 
The population has been recovering, driven by immigration. That’s giving Ireland an advantage over other Eurozone nations.
 
Source: CSO  
Source: CSO  


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The United Kingdom

1. Home price appreciation has rebounded.
 

 
2. Next, we have some data on UK tax revenues.
 
Source: @financialtimes   Read full article  
 
3. How has the pandemic impacted crime in the UK?
 
Source: Statista  


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Canada

1. Labor productivity spiked in the second quarter as employee hours collapsed.
 

Source: Reuters   Read full article  

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2. The Oxford Economics recovery tracker is grinding higher.
 
Source: Oxford Economics  


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The United States

1. The ADP private payrolls report surprised to the downside. The number of jobs created in August was less than half of what economists were expecting.
 

Source: @jsblokland  
 
However, the ADP figures have been consistently below the official payrolls data.
 
Source: Pantheon Macroeconomics  
 
Morgan Stanley expects the nonfarm payrolls report to show 1.5 million new jobs, with the unemployment rate dipping below 10%.
 

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2. Next, we have some updates on the housing market.
 
Mortgage applications remain robust.
 

 
Housing momentum persists.
 
Source: Arbor Research & Trading  
 
The share of new listings sold in two weeks or less keeps climbing (amid tight inventories).
 
Source: Arbor Research & Trading  

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3. Consumer sentiment is improving.
 
Source: @HPS_CS, @HPSInsight, @CivicScience  
 
4. Growth in factory orders was solid in July.
 

 
5. The Fed’s Beige Book report showed pandemic-driven economic uncertainty.
 
Source: @GregDaco, @OxfordEconomics, @BostjancicKathy  
Source: Reuters   Read full article  
 
The Fed has been focused on employment and household spending instead of inflation …
 
Source: Arbor Research & Trading  
 
… and calling for more fiscal support.
 
Source: Arbor Research & Trading  

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6. What are the odds of a double-dip recession?
 
Source: @axios   Read full article  
 
7. The nation’s federal government debt is expected to exceed the size of the economy in 2020 (3 charts).
 
Source: @WSJ   Read full article  
Source: @GregDaco, @USCBO  


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Global Developments

1. The number of advanced economies with rising COVID cases is on the decline.
 
Source: Variant Perception  
 
2. Global manufacturing activity is expanding.
 
Source: IHS Markit  
 
Stronger orders growth bodes well for factory output in the months ahead.
 
Source: @acemaxx, @MorganStanley  
 
Fewer countries are reporting a decline in manufacturing PMI over the past month.
 
Source: Deutsche Bank Research  
 
Here is the breakdown.
 
Source: IHS Markit  


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Food for Thought

1. Challenging times for new MBAs:
 
Source: @WSJ   Read full article  
 
2. Hospital consolidation:
 
Source: @KFF   Read full article  
 
3. A lousy (and costly) forecast of US college-age population:
 
Source: Moody’s Analytics  
 
4. The share of consumer spending by Americans aged 55 and older:
 
Source: Variant Perception  
 
5. How long does it take to sell a house, by metro area:
 
Source: Black Knight  
 
6. Population growth in select cities:
 
Source: @Noahpinion, @bopinion   Read full article  
 
7. Video vs. voice:
 
Source: Waveform   Read full article  
 
8. The components of gasoline prices:
 
Source: EIA  
 
9. Jeans are a tough sell right now:
 
Source: @chartrdaily  

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