Macro and Flows Update: February 2022 - e02
Summary
TLDRThe February Opex update discusses the market's resilience despite geopolitical tensions and accelerated Fed tapering. It highlights the focus on inflation and potential fiscal measures, such as energy tax holidays and credits for first-time home buyers, to address affordability. The script suggests a positive market outlook with expectations of new highs by May, driven by record short positioning and strong balance sheets, despite concerns of a potential increase in inflation in the latter half of the year.
Takeaways
- ๐ The market bottomed out after the January Opex, reaching 4220 in the S&Ps.
- ๐ The Fed's tapering accelerated faster than expected, impacting market dynamics.
- ๐ Geopolitical tensions, particularly the Russian troop buildup near the Ukrainian border, have surprised many.
- ๐ Despite macro and geopolitical issues, the market has performed well, increasing by about 67% from its lows.
- ๐ The speaker expects geopolitical and monetary policy issues to gradually resolve, with the market continuing to build off recent lows.
- ๐ฐ Inflation has become the primary concern alongside populism, influencing fiscal measures and government responses.
- ๐ Potential government responses may include tax holidays for energy and credits for first-time home ownership to control inflation and housing affordability.
- ๐ The short-term cap on inflation may be perceived as good news, with a likely shift towards more fiscal measures supporting demand in the long term.
- ๐ง Positioning at record short levels may contribute to market support and potential growth as short positions are covered.
- ๐ The expectation is for new market highs by May, with positive momentum building from February through April.
- ๐ฎ The March quarterly expiration, with its significant event risk, may lead to considerable market flows due to positioning and hedge adjustments.
Q & A
What significant event occurred in the market after the last Opex update?
-The market bottomed on the Monday after the last Opex update, reaching 4220 in the S&Ps as expected.
What was unexpected about the Federal Reserve's actions?
-The acceleration of the Fed's taper was quicker than expected, which surprised the market participants.
How has the market reacted to the geopolitical situation involving Russia and Ukraine?
-Despite the geopolitical tensions, the market has performed well, showing resilience and recovering about 67% from its lows.
What is the current focus of populism in relation to economic factors?
-The current focus of populism is paired with inflation, which has become the primary concern alongside equality and other populist issues.
What government measures are anticipated to address inflation?
-The government is expected to implement more fiscal responses, such as perceived price controls, tax holidays for energy, and credits for first-time home ownership to control inflation and affordability.
What is the expected outcome for the market in the short term?
-In the short term, it is expected that the market will see a rally with increasing momentum leading up to May, with the potential to reach new highs.
What does the positioning in the market indicate about investor sentiment?
-The positioning in the market is very bearish, with record short levels, indicating that investors are prepared for the worst but also setting up the potential for a significant market recovery.
How might the March quarterly expiration impact market flows?
-The March quarterly expiration could lead to significant flows due to the combination of seasonality and the short positioning in the market, potentially resulting in positive outcomes.
What is the outlook for the second half of the year regarding inflation?
-The second half of the year is expected to see an increase in inflation, which may lead to a larger liquidation and a need for dynamic adjustments to predictions.
What advice is given regarding investment decisions based on the information in the script?
-The information provided should not be construed as investment advice. Investors should consult with their business, legal, or tax advisors to determine the appropriateness of any investment strategy based on their personal circumstances and risk tolerance.
Outlines
๐ Market Update and Unexpected Events
This paragraph discusses the recent market developments since the last update, highlighting the market bottoming on the Monday after Opex at 4220 in the S&P 500. It mentions the unexpected acceleration of the Fed's taper and the geopolitical surprise of the Russian troop buildup along the Ukrainian border. Despite these issues, the market has performed well, and the expectation is for continued growth as these issues slowly resolve. The focus is on the continuing trend of populism, now paired with inflation concerns, and the anticipation of more fiscal responses, such as potential price controls and credits for first-time home ownership to address affordability and inflation. The paragraph also suggests a likely shift from an imminent war threat to a more cold-war type scenario with ongoing small issues on the border.
๐ Economic Growth and Positioning for New Highs
The second paragraph delves into the expectations for economic growth and the potential for new market highs. It discusses the supportive measures for the economy, the current level of fiscal stimulus in the system, and the strong balance sheets of individuals and dark pool flows. The expectation is for a broad growth off the recent lows, with short-term inflation being capped by fiscal measures while long-term inflation may continue. The paragraph also highlights the record short positioning in the market, which is expected to support the market's rise off these lows. It predicts that by May, the market will reach new highs, with improving news and a shift in positioning to more positive territory. Additionally, the paragraph discusses the importance of the March quarterly expiration and the expected significant flows due to short positioning and event risk around the Fed meeting.
โ๏ธ Market Outlook and Dynamic Predictions
The final paragraph provides an outlook on the market, noting that while the models predict a positive outcome, the team remains watchful due to macro flows and potential increased inflation in the second half of the year. This could lead to a larger liquidation in the latter part of the year. The paragraph emphasizes the dynamic nature of their predictions, which are adjusted week by week based on new information and changing circumstances. It concludes with a reminder that the information provided does not constitute an offer to sell or buy any security or service, and it is not intended to provide tax, legal, or investment advice. Viewers are advised to consult with their business, legal, or tax advisors for their specific situations.
Mindmap
Keywords
๐กOpex
๐กMarket Bottom
๐กFed's Taper
๐กGeopolitical
๐กInflation
๐กPopulism
๐กFiscal Policy
๐กBuybacks
๐กPositioning
๐กGamma and Vega
๐กEvent Risk
Highlights
The market bottomed on the Monday after the last Opex as expected, hitting 4220 in the S&Ps.
The acceleration of the Fed's taper has been quicker than anticipated.
The Russian troop buildup along the Ukrainian border and the threat of war have been a significant geopolitical surprise.
Despite geopolitical and monetary policy issues, the market has performed well, increasing by about 67% from its lows.
Inflation has become the primary concern alongside broad populism, especially with upcoming midterm elections.
Governments are likely to implement more fiscal responses, such as perceived price controls and tax holidays for energy to combat core inflation.
There will likely be increased discussions about credits for first-time home ownership to control housing prices and affordability.
The market is expected to continue building off its recent low, with short-term inflation being capped but long-term inflation potentially increasing.
Record buybacks and strong balance sheets from individuals, along with dark pool flows, are driving demand and supporting market growth.
Positioning is at record short levels, which, with buybacks, could support the market as it builds off these lows.
The S&P is at the 26th percentile, small caps at the 10th percentile, and NASDAQ at the sixth percentile of all time, indicating very bearish positioning.
New highs are anticipated by May, with a positive change in positioning and the continuation of the cell in May phenomenon.
Gamma tail convexity is likely off the table due to short positioning in the markets, leading to significant vanna and charm flows.
March quarterly expiration is significant and can create both downside and upside convexity due to massive positioning.
Event volatility is priced into the March quarterly expiration, which represents an important Fed meeting period.
The combination of weak positioning, hedge positioning, and geopolitical tailwinds suggests a positive outcome for the market during this period.
The models predict a positive outcome during the window from February to May, but caution is advised due to potential inflation in the back half of the year.
The information provided does not constitute an offer to sell or a solicitation of an offer to buy any security or investment advice.
Transcripts
hi and Welcome to our February Opex
macro and flows
update needless to say it's been a
eventful month since our last update uh
since we last spoke uh the market has
bottomed uh on the Monday after Opex as
we expected um down at 4220 in the
snps uh but what we did not expect um
was uh a couple of things one the
acceleration uh and the the fed's taper
has been quicker than expected we did
expect expect um that to happen but in
the last month it's been a bit quicker
um than anyone expected really on top of
that obviously the Russian buildup of
troops along the Ukrainian border um and
the threat of War has has been a big
geopolitical um surprised to many um we
have seen and expected that coming but
but again uh you know those types of
conflicts those types of macro
geopolitical issues um seem to be
accelerating a bit faster than than
expected despite both of those major
geopolitical issues and monetary policy
issues um the market has fared actually
very well um like I mentioned it Market
bottoms the Monday after last January
Opex um and is actually up about
67% from those lows um it has taken the
amount of geopolitical news very very
well we believe
um those issues will continue to slowly
resolve um and uh as they do uh we
expect uh broadly that this Market will
continue to build off of its recent
low
um there are a couple reasons for that
one uh equality and populism continues
to be the
Zeitgeist um but now it is paed with
inflation being the primary Z guys so we
have broad populism still at work but it
is uh trending to a focus on
populism given the uh coming midterm
elections the amount of push and need to
address inflation will grow not just
with the FED but importantly with uh
political and uh government response
what does that mean that means we'll
likely continue to have more fiscal
response but not in the traditional way
that we've had it up until now more in
the way of uh per perceived price
controls so there's already talks
currently about a holiday on taxes for
energy to help uh control uh core
inflation uh we think something along
those lines is very likely a response
from government to help get to the core
um uh of of price issues uh we also
believe there'll be more and more
conversations about credits for
firsttime home ownership um or other
supportive measures to control price and
affordability for housing these types of
things will help put a cap on
short-term inflation But ultimately and
they'll uh you know these things will
help um create more demand at the end of
the day they are ultimately fiscal
measures which will help push demand
even more and create even more fiscal
response so short-term cap on inflation
with more ultimate legs to inflation
longer term I think that's important in
the short term um these things will be
perceived as good news um pair with that
the um at least somewhat resolution on
the Russia front we we believe we will
avoid the nuclear option if you will of
um of a shutdown of nordstream 2 uh we
believe there'll be concessions made to
at least prevent those those worst case
scenario now this does not mean that
Russia will completely back off the
borders does not mean that that this
will uh go away but it will go from a
hot phase of uh you know imminent
potential war and big potential problems
to a much more cold uh War type scenario
where we will have kind of rolling small
kind of issues on the
border um if you think about that broad
macro picture we really talking about um
supportive measures a growing economy um
capped inflation um but really a growth
kind of middle middling inflation uh
type environment given the amount of
fiscal in the system and the amount of
demand that we are seeing from record
BuyBacks from record strong um balance
sheets of
individuals um as well as dark pool
flows that are also at record levels we
expect there to be broad growth off the
bottom that we have recently experienced
here in February uh we also believe that
positioning which is at record short
Levels by many many me measures will
help create with the buyback of that
those short me measures support broadly
for this Market as it continues to build
off these lows and we get better and
improving news um we are currently uh
seeing C have to see asset manager
positioning at the smallest net long
position since the US election so it's
been quite some time um and five of the
last five weeks uh there's been net
selling in these contracts to give you a
sense of percentile ranks um the S&P is
at the 26th percentile and more
importantly small caps are at the 10th
percentile and the NASDAQ is at the
sixth percentile of all time so
positioning is very very bearish
prepared for the worst
um importantly we believe this will all
likely lead to new highs heading into
May so coming here starting in back half
of Feb into March April uh We Believe by
May we'll be at uh new highs um and
broadly positioning will be starting to
turn more positive um the cell in May
phenomenon we we believe will be a thing
again this year um so we expect from
these lows to um you know and again we
will see how this plays out between now
and then but between now and may we
likely see a rally um an increasing kind
of uh positioning in the market more
momentum uh followed by likely
increasing V into May um and eventually
some type of short-term
top importantly V markets are also uh
going to be supportive of this so let's
talk about those flows a bit here um
March quarterly uh the quarterly
expiration as we know going back to 2020
can be a very very important expiration
there's a lot of positioning that
happens into the first quarter of the
year in terms of mall and hedges
particularly in those quarterly
expirations that played a major role in
the February to March liquidation we saw
during Co um these quity expirations
broadly can uh not only create downside
convexity due to massive positioning on
the put wi um and broadly downside
positioning but they can also create the
opposite of that which is Vana and charm
flows given the Decay and V and broadly
time Decay um during that period if one
of those can be taken off the table and
this time given the short positioning in
markets uh we believe that the gamma
tail convexity part of that equation is
likely off the table leading to
significant vaa and charm flows We
Believe starting here in the next
several weeks as we enter end of the
month into the weeks prior to the March
expiration we believe that we will see
considerable flows
there this has been ACC accentuated this
March in particular because there is a
lot of event V priced into that March
Corley expiration because it represents
the very important fed meeting uh period
that will be coming immediately uh
before that March exper op ation that
event VA much like we saw during
elections in 2020 and other periods
where there is event VA will likely lead
upon resolution to a significant
accentuation of that bana flow that we
talk about so there is strong
seasonality uh broadly paired with very
weak positioning very bearish
positioning in the market paired with uh
very much a hedge positioning in the
market exporation and what is otherwise
a big um Opex um paired with a lot of
geopolitical um Tailwinds that are
likely uh for these markets broadly this
these our models uh point to a likely
positive outcome uh during this
window so hopefully uh this is all
helpful information uh we believe that
by next Opex we should see um some
support here uh not only a decline invol
broadly that will that will lead to
positive flows uh that will ultimately
um balance uh the market eventually up
to a higher high level but again we are
watchful though given the macro flows
and increasing uh what we feel like a
inflation on the back half of the year
for what could likely be a bigger
liquidation that ultimately comes in the
back half of the year um as always we
play these uh everything week by week uh
these are our Broad macro flows but uh
we are dynamically changing these
predictions based on the information in
front of us and how things change um and
we look forward to updating you on the
next month's uh market and flows update
thank you be
water this does not constitute an offer
to sell a solicitation of an offer to
buy or a recommendation of any security
or any other product or service by Kai
or any other third party regardless of
whether such security product or service
is referenced in this video furthermore
nothing in this video is intended to
provide tax legal or investment advice
and nothing in this video should be
construed as a recommendation to buy
sell or hold any investment or security
or to engage in any investment strategy
or transaction Kai does not represent
that the securi product or Services
discussed in this video are suitable for
any particular investor you are solely
responsible for determining whether any
investment investment strategy security
or related transaction is appropriate
for you based on your personal
investment objectives Financial
circumstances and risk tolerance you
should consult your business advisor
attorney or tax and accounting advisor
regarding your specific business legal
or tax
situation
5.0 / 5 (0 votes)