Macro and Flows Update: March 2022 - e03
Summary
TLDRThe video script discusses the financial market's response to various events, including record buybacks, dark pool flows, and accommodative monetary policy. Despite the Federal Reserve's efforts to anticipate market trends, the historic positive flows from institutions and individuals were influenced by poor market sentiment and high short interest. The script highlights the impact of the Russia-Ukraine conflict on market dynamics, noting that while short-term effects have slowed the Fed's actions and provided some support, long-term structural issues such as increased inflation and the threat of deglobalization loom. The discussion emphasizes the power of market positioning and the importance of understanding the interplay between macroeconomic flows and geopolitical developments.
Takeaways
- đ Last month's discussion focused on record buybacks, dark pool flows, and accommodative monetary policy despite the Federal Reserve's attempts to get ahead of the curve.
- đč There were historic positive flows from both institutions and individual balance sheets, which were expected to provide support to the market after poor seasonality.
- đ Despite record poor sentiment and short interest in February, the market saw a 7% rally off the lows in the last few trading sessions, demonstrating the power of options positioning and the importance of these flows in the context of geopolitical and macroeconomic developments.
- đ The Russia-Ukraine invasion was an unforeseen event that led to a dampened decline and extended the market's decline, but the Van and charm flows remained immutable and important.
- đ The historic skew and high put call ratios eventually led to the release of supportive flows, even amidst poor news regarding the Fed's stance and geopolitical tensions.
- đ The short-term positive effects of geopolitical events include slowing the Fed's rate hikes and exacerbating poor positioning and sentiment, leading to more people recognizing the market's long-term potential.
- đ The mid to long term, however, will face structural negative effects such as the Fed being more behind the curve, increased inflation due to the Russia-Ukraine conflict, and the threat of bifurcation of the global economy.
- đȘïž The potential invasion of Taiwan by China adds to the long-term inflationary pressures and the risk of deglobalization, which could overhang the market and lead to an extended decline.
- đ Momentum strategies like trend following, options targeting, and risk parity tend to start after big events, and the March quarterly expiration could see these strategies kick off, building upon themselves and leading to steady flows that dampen the market's ability to pull back.
- đ The combination of underlying support, a structurally positive period, and call writing from the Fed is expected to lead to a slow, steady support in the market and volatility compression heading into the summer.
Q & A
What were the main topics discussed in the previous month's conversation?
-The main topics discussed included record buybacks, dark pool flows, accommodative monetary policy, and the Federal Reserve's efforts to stay ahead of the curve.
What factors contributed to the historic positive flows in the market?
-Historic positive flows were driven by both institutional investments and record balance sheets of individuals.
How did poor market sentiment and high short interest in February affect the market?
-The poor market sentiment and high short interest, along with record hedging flows on puts and downside, particularly at the index level, contributed to a market decline.
What was the expected outcome of the VanEck and Charman supports in early March?
-The VanEck and Charman supports were expected to kick off positive flows and be at a historic level, rivaling significant past events like the 2020 election or Brexit.
What unexpected event occurred that dampened the market rally?
-The unexpected event was the full-scale invasion of Ukraine by Russia, which extended the market decline.
How did the Russia-Ukraine conflict and China's support impact the market in the short term?
-null
What are the short-term positive effects of the geopolitical developments mentioned?
-The short-term positive effects include slowing down the Federal Reserve's rate hikes and exacerbating the poor positioning and sentiment in the market.
What are the long-term negative effects of the Russia-Ukraine conflict and China's support of Russia?
-Long-term negative effects include the Fed falling further behind the curve, more rate hikes in the midterm, increased inflation due to the invasion's impact on commodity prices, and the threat of bifurcation of the global economy and deglobalization.
How do momentum strategies and market seasonality influence market behavior after major events like the March quarterly expiration?
-Momentum strategies such as trend following, ball targeting, and risk parity can kick off after major events, leading to a continuation of market behavior that builds upon itself, potentially dampening the market's ability to pull back during this period.
What is the expected market behavior during the period of seasonality and low volatility?
-The expected market behavior is a slow, steady support with volatility compression heading into the summer, influenced by the continuation of monetary policy and the wall of worry from poor sentiment.
What could potentially lead to an extended market decline in the future?
-An extended market decline could be triggered by unresolved geopolitical tensions, the threat of deglobalization, and the increasing pressure from the Fed's call writing due to inflationary effects and rate hikes.
What advice is given to investors regarding the information presented in the script?
-Investors are advised to conduct their own research and consult with business, legal, or tax advisors to determine if any investment strategy, security, or transaction is appropriate for them based on their personal investment objectives, financial circumstances, and risk tolerance.
Outlines
đ Historic Market Flows and Sentiment
The first paragraph discusses the historic positive flows in the market, driven by both institutional investments and individual balance sheets. It highlights the poor seasonality being counteracted by these flows, leading to a positive market undercurrent. The paragraph also mentions the record poor sentiment in February, with high short interest and significant hedging flows on puts and downside, especially at the index level. The expectation was that these factors would trigger Vana and Charm flows, supporting the market in early March. However, the unexpected invasion of Ukraine by Russia dampened the market's recovery, leading to a continued decline despite the supportive flows.
đ Sideways Market and Geopolitical Impact
The second paragraph examines the market's sideways movement, sitting at 4450 in the S&P on Friday Opex, a level maintained for two months. It discusses the transition into a historically positive seasonality period with supportive V compressed conditions, indicating strong economic growth. The geopolitical developments, such as the Russia-Ukraine conflict and China's support of Russia, have short-term positive effects, like slowing the Fed's rate hikes, but pose significant long-term structural risks. The paragraph also notes the potential for increased Fed calls due to the invasion's inflationary effects on commodity prices and the threat of globalization's unwind. Despite these challenges, the paragraph suggests that the momentum strategies and seasonality could drive a steady market support, with short squeezes potentially dampening the market's ability to pull back during this period.
đ Market Outlook and Strategic Positioning
The final paragraph provides an outlook on the market, suggesting a slow and steady support building up amidst structurally positive periods and macro forces' overhang. It indicates that the historic skew and high all levels previously discussed have led to an inevitable release of supportive flows. The paragraph anticipates a continued V compression heading into the summer, but warns of an extended market decline starting around May-June due to persistently negative macro flows. It concludes by emphasizing the importance of being prepared for an ever-changing world, advising viewers to stay informed and adaptable in their investment strategies, and reminding them that the content does not constitute investment advice.
Mindmap
Keywords
đĄBuyBacks
đĄdark pool
đĄaccommodative monetary policy
đĄhistoric positive flows
đĄshort interest
đĄCFTC data
đĄhedging flows
đĄVana and charm supports
đĄbackwardation
đĄRussia invasion of Ukraine
đĄFED call
đĄdeglobalization
Highlights
Discussion on record BuyBacks and dark pool flows
Mention of accommodative monetary policy and the Fed's efforts to stay ahead
Historic positive flows from institutions and individual balance sheets
Poor seasonality leading to positive market flows
Record poor sentiment and short interest in February
Record hedging flows on puts and downside protection
Vana and charm flows expected to kick off around early March
Comparison of Vana and charm supports to significant past events like the 2020 election and Brexit
Unexpected Russia invasion of Ukraine impacting market
Immutability of Vana and charm flows despite geopolitical events
7% rally off lows in the last three to four trading sessions
Geopolitical developments and their short-term positive and long-term negative effects
Fed's decision not to back away from plans despite poor news
Slower Fed actions leading to more raises in the midterm
Inflationary effects of Russia's invasion and potential bifurcation of the global economy
Threat of deglobalization and its impact on the market
Seasonality and momentum strategies influencing market movements
Expectations for a slow steady support in the market heading into the summer
Transcripts
last month when we last spoke um we were
talking about record BuyBacks dark pool
flows accommodative monetary policy um
even though the Fed was starting to try
and catch up uh and get back ahead of
the curve um we had historic positive
flows this was both from uh
institutions as well as you know um
actual balance sheets of of individuals
being kind of in record situations so um
those historic flows uh were were likely
after the poor seasonality as we
mentioned to to get um you know some
positive flows underneath the market
that was paired with record poor
sentiment um in February uh lots of
short interest uh lots of poor cftc data
as we referenced um and record hedging
flows um on on puts and downside
particular at the index level these were
uh as we expected something that would
kick off Vana and charm flows as we
approached early March into March Opex
uh these van and charm supports uh would
would looked to be at a historic level
really rivaling uh the closest thing
we've seen prior event ball something in
line with um the election of
2020 um or uh brexit um or the election
of 2016 even all of these things were um
we're seeing backwardation backwardation
of skew um and the and high all levels
which likely um you know historically
has has kicked off these supportive um
flows um in the context of this um we
did not expect uh Russia uh invasion of
Ukraine even though we were we saw the
massing troops we did not expect a full-
flood invasion
that was new information and that
ultimately led to um a dampening an
extending um of of the decline whereas
we had after Feb Opex seen a low around
4210 um we actually were unable to Rally
that said those Vana and charm flows
that we spoke about were still immutable
still very important in the context of
the distribution of outcomes so instead
of causing a quick um you know the
beginning of of positive flows earlier
in early March we got a a dampened
decline stair steps with declining V
because that vau and charm supports
which we would see in the mornings most
mornings continued to
underpin um you know and support even
though we had these uh you know very
negative flows from from that
geopolitical
event um that extension of the decline
the slowing of V uh the he saw made us
see historic skew decline historic fix
strike ball declines into um that that
market decline that being said uh these
Von and charm flows this inversion in
the in the curve um was historic and
eventually uh you know the it the
release of all of them was inevitable um
and of course in the last uh four or
five days we finally um saw their
effects even in the context of a very
poor uh news uh you know the FED did not
back away at their
meeting um from from their plans uh
China and Russia have not uh you know
come out and and given us any positive
news quite the contrary actually um and
so despite all of those geopolitical
developments we still saw a 7% rally off
the lows here in the last three to four
trading sessions that is the power of
these ball of this ball positioning and
the importance um uh you know of them in
the context of the geopolitical and and
macro
flows so we have gotten something in
line with other event vs um we have
gotten that that flow that that we
ultimately expected yet in the context
of some new information some new macro
flows and and that
two-sided um pressure has led us to
essentially go sideways um here we sit
at 4450 in the S&P on Friday Opex um
that uh that is basically where we've
been for two months now um so now we
head into um a new period into a what is
historically a positive
seasonality um uh
in into a period of of generally um
supportive V compressed period where
there's strong economic
growth and ironically uh this new
information the the Russia invasion and
China's support of Russia into this
period um has two short-term positive
effects But ultimately much bigger
structural negative effects over the
midterm over the uh the course of the
year the short-term positive effects are
it slowed um the the FED down instead of
doing 50 basis points as might have been
expected in March they only did
25 um they uh you know it it's
exacerbated the poor positioning and the
poor sentiment that was already there at
the lows and has only made that worse
there are more and more people coming
out realizing that there's a quicker
structural positively bigger tail on
this Market long term now um those two
things in the short term are very
supportive in this period of
seasonality um that said in the mid to
long term meaning in over multi months
past May into the summer into the fall
um it has several big long-term negative
effects that are absolutely immutable um
unless we get other geopolitical news
that counteracts it one that means the
FED is more behind the curve now it
means uh the FED will have more um
raises to do in the
midterm as they H get later into the
summer and into the fall uh so they'll
essentially be writing more calls on
this Market we all hear about the fed
put but this is the Fed call and the FED
call is increasing in the market um
that's not just because they have been
slower on the front end but that's also
because of massive inflationary effects
of China's of of Russia's invasion of
Ukraine um which we've seen in commodity
prices
worldwide but also
importantly the threat of bifurcation of
the global economy and the massive
unwind of globalization that potentially
sits on the horizon with a potential
China not just support of Russia um in
Ukraine but with the threat of their
invasion of Taiwan potentially in the
year to
come uh this these geopolitical effects
are significantly inflationary in the
long term and are have the likelihood of
extending uh secularly and increasing
inflation going
forward these ultimate effects um will
um in the mid to long term overhang the
market um the in particular until we get
any type of resolution or walk back from
China the building threat of
deglobalization as I mentioned um is
something that will overhang this Market
paired with fed calls that we feel will
ultimately be too much for this Market
to bear that said here we are in
mid-march there's a reason seasonality
is so DS period especially after the
momentum of a big
quarterly uh
expiration um you start to see the
Turning of several big momentum
strategies one Trend following two ball
targeting three risk parity among others
all of these momentum strategies can
really start to get kicked off after a
big event fall particularly these March
corly aexes if we get some extended
continuation here which it already feels
like we are getting in a
stretch those build upon themselves um
and the squeeze in short positioning
which we've already talked about which
is historic can lead to an underpin of
steady flows to ultimately dampen um the
ability for the market to pull back in
this period this is what drives
seasonality now add to that the March
quarterly Opex Volve Supply that we see
the risk parody accelerates in that
period A and B uh JP Morgan uh has their
own put spread collar among other ball
selling strategies here at the end of
the quarter that ball compression should
continue to add some Bond and charm
flows underneath the
market all of this in our opinion is
leading to a bit of a wedge you have
underneath support and a structurally
positive
period building into a period of call
writing for from the fed and overhang
from macro forces particularly China and
the threat of bifurcation and the
increases in
inflation so whereas last month um our
distributions very much were setting up
for what we believe would be a likely
positive period this time but more
positive starting earlier and then
leading to more extension later into
main we now see it much more likely that
we see a slow steady uh support in this
market and ultimately V compression
during this period heading into the
summer um that VA
compression is likely uh to continue
into a period Until It ultimately leads
to what we believe will be an extended
decline uh coming into May June and even
into the fall year um as we move through
the year
ultimately the macro flows are negative
and the short-term supportive flows that
we talked about coming from the
extension of of the um Supply uh of of
of monetary
policy as well as the even poor
sentiment the wall of worry into this
period of seasonality will ultimately
give way to a much poorer um structural
Outlook as always much like last month
into this month our distributions are
weekly we are looking at an everchanging
world in the context of the positioning
and the flow um and so we always wish
upon you to be water until next month
thank
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