Gamma warning
Sept 17. 2020
–Markets not overly enthused with the FOMC meeting yesterday. Tens closed slightly higher in yield at 68.5 bps. Eurodollar curve was more or less unch’d out to blues. Fed holding rates low until inflation exceeds 2% for some time. Eurodollar options believe it…most back straddles lost 1.5 to 2.5 bps, which doesn’t sound like much, but percentage declines at these levels are high. For example, on Tuesday EDH’22 9975^ settled 21.5, and yesterday 20.5. EDH’23 settled 43.0 on Tuesday and 40.5 yesterday. Without more commitment to QE than continuing at the current pace, some saw the meeting’s outcome as less dovish than expected. In any event, stocks slid into the end of the day and are lower this morning with quadruple witching tomorrow.
–In yesterday’s note I expressed some surprise at strength in near ED contracts. The reason was revealed in the morning as CS’s Zoltan Poszar reversed his stance and said that year-end funding pressure is likely to be muted, as capital constraints on GSIB’s were less than expected. FFF1 to EDZ0, which is a proxy for FRA/OIS fell 1.5 bps to 21.0 matching the low from Aug 6. The intervening high has only been 25. This change in sentiment opened the door to selling of EDZ premium, with at least 25k EDZ0 9975 straddle sold at 7.0 (settled there vs 9972.5 with 88 dte).
–Today and tomorrow may be more about positioning than anything else. Stock futures have traded lower this morning, but have held important lows from Sept 9 and Sept 11. In SPZ those lows are 3286 and 3298 and in NQZ it’s more of a double bottom, 10925 and 10924. AAPL was weak yesterday closing at 112.13; its critical low was 110 on Friday. If these levels break to the downside, then expect possible violent gamma-driven follow-thru. Press reports about Softbank have heightened awareness of this issue, at the same time that liquidity has become noticeably absent.
–News includes Jobless Claims expected 850k. Housing Starts. Philly Fed expected 15.0 from 17.2 last.
