Macro and Flows Update: March 2022 - e03

Summary

The 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

• 📈 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.
• 💹 There were historic positive flows from both institutions and individual balance sheets, which were expected to provide support to the market after poor seasonality.
• 📉 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.
• 🌐 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.
• 🔄 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.
• 🔄 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.
• 📈 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.
• 🌪️ 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.
• 📊 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.
• 📈 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?

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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

00:00

📈 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.

05:02

🔄 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.

10:04

📊 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.

Keywords

💡BuyBacks

Buybacks refer to the practice of companies repurchasing their own outstanding shares from the market. In the context of the video, record buybacks indicate that companies are buying back a significant amount of their shares, which can be a signal of confidence in the company's future performance or a way to boost the stock price by reducing the supply of shares. This is mentioned in relation to the financial market activities and the positive flows that were being experienced last month.

💡dark pool

A dark pool is a type of private exchange where financial instruments such as stocks can be traded anonymously without the trades being reported to the public. These are used by institutional investors to avoid large price impacts that can occur when they buy or sell large volumes of shares in public markets. In the video, dark pools are discussed as part of the financial market dynamics, indicating the flow of capital in less transparent markets.

💡accommodative monetary policy

Accommodative monetary policy refers to the actions taken by a central bank to stimulate economic growth by maintaining low interest rates and adopting a lenient approach towards the money supply. In the video, this concept is related to the Federal Reserve's efforts to catch up with the economic curve and its impact on the financial markets. The policy's accommodative nature is seen as a factor that can influence market sentiment and investment decisions.

💡historic positive flows

Historic positive flows refer to an unusually high volume of capital moving into the financial markets in a positive manner, indicating strong investor confidence and a surge in buying activity. In the context of the video, this term is used to describe the significant influx of funds from both institutional investors and individual investors, which is seen as a driving force behind the market's performance.

💡short interest

Short interest refers to the total number of shares that have been sold short but have not yet been covered or closed out. It is an indicator of the market's sentiment towards a particular stock or the market as a whole. High short interest suggests that many investors are betting that the price will go down. In the video, 'lots of short interest' is used to describe a bearish market sentiment that was present during the period being discussed.

💡CFTC data

CFTC (Commodity Futures Trading Commission) data refers to the information collected and published by the U.S. regulatory agency responsible for overseeing the futures and options markets. This data includes Commitments of Traders (COT) reports, which provide a breakdown of each Tuesday's open interest for futures markets in various categories. In the context of the video, CFTC data is used as a metric to analyze market sentiment and the positioning of different types of traders in the market.

💡hedging flows

Hedging flows refer to the capital allocated towards strategies aimed at reducing or mitigating risk in an investment portfolio. This often involves taking positions in derivatives such as options or futures to protect against potential losses. In the video, the mention of 'record hedging flows on puts and downside' indicates a significant increase in investors seeking protection against market declines, particularly at the index level.

💡Vana and charm supports

Vana and charm supports likely refer to options strategies or positions that provide market support, possibly related to volatility indices like the CBOE Volatility Index (VIX). These strategies might involve purchasing put options or other instruments that are designed to benefit from or counteract market volatility. In the video, these supports are described as being at historic levels, suggesting a significant market presence and influence on market dynamics.

💡backwardation

Backwardation is a condition in futures markets where the price of a near-term futures contract is higher than the price of a more distant futures contract. This is the opposite of the usual contango situation, where normal market expectations would have distant contracts priced higher due to the time value of money and expected future growth. In the context of the video, backwardation of skew and high all levels suggests an unusual market scenario where short-term contracts are more expensive, indicating heightened demand for immediate market protection or expectations of an imminent market downturn.

💡Russia invasion of Ukraine

The Russia invasion of Ukraine refers to the military aggression by Russia into Ukrainian territory, which has caused widespread international concern and significant geopolitical tension. In the context of the video, this event is considered 'new information' that was not anticipated in previous market analyses and has had a dampening effect on the market's decline, altering the expected flow of financial activities.

💡FED call

The FED call likely refers to the market's expectation of actions by the Federal Reserve, such as interest rate changes or other monetary policy adjustments, that can influence the direction of financial markets. In the video, the 'FED call' is increasing in the market due to the Fed's slower response to inflationary pressures and geopolitical events, suggesting that the market anticipates more aggressive policy moves by the Fed in the future.

💡deglobalization

Deglobalization is the process of reducing global interdependence and integration, often characterized by the unwinding of international trade, investment, and cooperation. In the context of the video, the threat of deglobalization is mentioned as a potential long-term negative effect of geopolitical events, such as China's support of Russia and the possibility of an invasion of Taiwan. This could lead to a fragmentation of the global economy, with significant implications for inflation, trade, and economic growth.

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

you this does not constitute an offer to

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