Macro and Flows Update: February 2022 - e02

Summary

The 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

• 📉 The market bottomed out after the January Opex, reaching 4220 in the S&Ps.
• 🚀 The Fed's tapering accelerated faster than expected, impacting market dynamics.
• 🌍 Geopolitical tensions, particularly the Russian troop buildup near the Ukrainian border, have surprised many.
• 📈 Despite macro and geopolitical issues, the market has performed well, increasing by about 67% from its lows.
• 🔄 The speaker expects geopolitical and monetary policy issues to gradually resolve, with the market continuing to build off recent lows.
• 💰 Inflation has become the primary concern alongside populism, influencing fiscal measures and government responses.
• 🏠 Potential government responses may include tax holidays for energy and credits for first-time home ownership to control inflation and housing affordability.
• 📊 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.
• 🔧 Positioning at record short levels may contribute to market support and potential growth as short positions are covered.
• 🌟 The expectation is for new market highs by May, with positive momentum building from February through April.
• 🔮 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

00:00

📉 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.

05:02

📈 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.

10:02

⚖️ 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.

Keywords

💡Opex

Opex, short for operating expenses, typically refers to the ongoing costs of running a business. In the context of the video, it seems to be used as a title or label for a monthly update on market conditions, possibly related to operational metrics or expenses in financial markets.

💡Market Bottom

A market bottom refers to a point in time when a financial market reaches its lowest point before starting to recover or rise. It is often seen as an opportunity for investors to buy assets at lower prices before they increase in value.

💡Fed's Taper

The Fed's taper refers to the Federal Reserve's gradual reduction in the pace of its asset purchases, which are part of its monetary policy. Tapering is a signal that the central bank is beginning to normalize monetary policy in response to improving economic conditions.

💡Geopolitical

Geopolitical refers to the influence of politics on international relations, particularly in terms of conflicts, alliances, and other strategic interactions between countries. Geopolitical events can have significant impacts on global markets and investment decisions.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, leading to a decrease in purchasing power over time. Central banks attempt to limit inflation and avoid deflation to keep the economy running smoothly.

💡Populism

Populism is a political approach that strives to appeal to ordinary people who feel that their concerns are disregarded by established elite groups. It often emphasizes a perceived conflict between the interests of the 'common people' and those of the 'elite'.

💡Fiscal Policy

Fiscal policy refers to the use of government revenue collection (taxation) and expenditure (spending) to influence a country's economy. It is a key tool used by governments to manage economic growth, income distribution, and price stability.

💡Buybacks

Share buybacks, also known as repurchase programs, occur when a company buys back its own stock from the open market. This can be done for various reasons, such as to improve financial ratios, return capital to shareholders, or support the company's stock price.

💡Positioning

In the context of financial markets, positioning refers to the way investors have allocated their portfolios based on their expectations of market conditions. It can indicate whether the market is bearish (expecting a decline) or bullish (expecting growth).

💡Gamma and Vega

Gamma and Vega are terms used in options trading to describe the sensitivity of an option's delta to changes in the underlying asset's price (gamma) and the sensitivity of an option's price to changes in implied volatility (vega). These are important concepts for understanding the dynamics of options pricing and market expectations.

💡Event Risk

Event risk refers to the potential for losses that arises from unexpected events or news announcements that can have a significant impact on financial markets. This can include geopolitical events, economic data releases, or company-specific news.

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

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