Summary

‍

The first important week of 2023 begins, full of sensitive data for the market and with a speech by Powell in between. The market is still in the bad news is good news regime, dreaming of a Fed pivot as the only bullish argument in a complex and totally uncertain macroeconomic environment. Last Friday, despite strong US employment data, the market found the "bad news" (well below expected non-manufacturing PMI and slightly lower average hourly earnings of workers) it needed to embark on a rally that in our view is going nowhere. The Fed's message was clear in December and this data will not alter its discourse and action one iota. The market is still dominated by the flow derived options: ODTE options and squeezes, it is more of a casino than a market reflecting future economic expectations, nothing has changed from the last few months of 2022.

‍

Macro and news

‍

Relevant data for this week:

‍

Tuesday: Powell's Speech

Thursday: Inflation and unemployment USA

Friday: GDP Uk and Germany Consumer Confidence Michigan

‍

At the December Fed meeting, Powell emphasized the need for higher unemployment to control inflation and change monetary policies. Friday's data showed that US employment remains at full speed, with this data the FED is not going to pivot as the market is demanding. The unemployment rate even dropped to 3.5%.

‍

US DEC. PAYROLLS INCREASE 223,000; EST. 203,000

US DEC. UNEMPLOYMENT RATE FALLS TO 3.5% VS. 3.7%.

US DEC. AVERAGE HOURLY EARNINGS RISE 0.3% M/M; EST. +0.4%

US DEC. AVERAGE HOURLY EARNINGS RISE 4.6% Y/Y; EST. +5.0%

‍

‍

‍

The bad news the market needed was found in a much lower than expected non-manufacturing PMI and slightly lower than expected average hourly earnings of workers. All this was enough to initiate a short squeeze of the excessive bearish positioning seen in the options market after the Fed meeting.

‍

These are the relevant macroeconomic data for the past week:

‍

Massive drop in ISM services PMI for December, coming in at 49.6 vs. 55.0 est. First contractionary print since May 2020 (50 = neutral), with slowdowns in almost all underlying components.

‍

‍

‍

Accelerated drop in average weekly hours in recent months

‍

US unemployment at a 50-year low of 3.5%, although JP Morgan estimates it will reach 5% by the end of the year.

‍

‍

JP Morgan also estimates that the consumer will run out of available savings starting in Q2 of this year.

‍

‍

Analysts expect SP500 companies to report their first year-over-year decline in quarterly earnings since the height of the Covid pandemic in 2020: data from FactSet. Earnings are forecast to have fallen 4.1% in the fourth quarter versus a 31% gain reported a year earlier.

‍

‍

‍

It seems that the "HOPE" cycle is being fulfilled to the letter and its achievement would inevitably mean entering recession. The market, drunk after so many years of ultra-expansionary monetary policies and with central banks acting as a shield, is addicted to Powell's words, to such an extent that it seems to want to ignore the possible entry of recession, ignoring important structural problems that are far from being correctly discounted by the market. In our view, the real pain will come as earnings start to deteriorate severely this year and unemployment starts to rise. There is clearly an appetite for bullish narratives after a truly difficult 2022. Markets are trapped in a cycle dominated by the Fed and the shadow of recession. In the short term any negative data feeds the hope that the Fed will change its tune, but at the same time such deterioration is inexorably bearish. The key in our opinion will be in earnings and unemployment to determine whether we will see a "soft landing" or a severe crisis scenario. A priori it seems that we are entering a macro environment that has all the characteristics of the 4 previous relevant crises.

‍

‍

‍

‍

At the same time, it is important to understand what kind of dynamics are dominating the markets today in order to know in which market context we are moving. The volume of 0DTE (zero days to expiration) calls reached unprecedented levels on Friday. More than one million calls were traded and almost 60% of these were for the same expiration of the day. Faced with such an avalanche of calls, the market makers selling the options must buy the underlying to cover their delta, driving the price up. This is known as "weaponized gamma". Certainly this intraday betting game is distorting market behavior at all levels. The SPY and SPX are the benchmark for all risk assets and the SP500 future is one of the most traded futures in the world. Playing on data and betting on whether the market on the day will go up or down does not seem to be a healthy market dynamic, but a dangerous sign of what the markets have become.

‍

‍

Cryptos: spot, derivatives and on Chain metrics

‍

The crypto ecosystem has caught the joy of risk assets, after a tremendously bullish Friday for SPY and QQQ. The big question is: is this a genuine sign of buying strength or the umpteenth short squeeze driven by the flow derived from options market activity and bearish over-positioning after the last Fed meeting? For our part, we will be cautious until we know the inflation data this Thursday, which will move the entire market as a whole.

At the same time, all eyes are on the DCG - Gemini soap opera. DCG's Silbert Ceo, in a letter to investors last December, addressed the problems and "noise" that the FTX bankruptcy has caused for his business. Fears of a contagion effect have spread rapidly through the industry, affecting large and small firms alike: lenders have stopped lending, withdrawals have become more difficult and cryptos as we already know have suffered heavily. In this context, some of the hardest hit businesses have been those of DCG, such as Genesis and the asset manager Grayscale, whose strong interconnectedness has sunk the value of the Grayscale Bitcoin Trust (GBTC), the world's largest bitcoin fund. The Gemini-DCG fiasco may become a major market event, we will be closely watching everything related to this issue.

‍

02/01/23

‍

‍

09/01/23

‍

‍

Bitcoin after shaking the previous relevant highs of $18200, experienced a very abrupt return to the value, however the break and test inside the vpoc of $16800 has left a failure of bearish continuation. Complex situation as can be seen in the chart, they do not let it develop upwards but they do not let it develop downwards either. This week we will find out with all the macro events of high sensitivity for the market that we have ahead (Powell and CPI USA). If the blue minor structure manages to unbalance and consolidate the $16800 vpoc, the bulls will have another chance again. We are not particularly comfortable to pose solid bullish scenarios with a market driven by the "risk on" mode initiated by the SPY last Friday after data feeding the Fed's precipitous Pivot narrative.

‍

The skew, which measures the difference between the IV (implied volatility) of OTM puts and the IV of OTM calls, is again significantly sloping, indicating that fear is returning to the market and OTM puts are once again in demand.

‍

skew 02/01/23

‍

‍

skew 09/01/23

‍

‍

The skew shows us the excessive complacency in which the market dances to the tune of the rest of the risk assets without finding its own way.

‍

The behavior of implied volatility of options at the money is absolutely stunning, Quoted volatility seems to be dead.

‍

‍

The time structure of the volatility curve at the money in a normal contango situation, continues to experience a tightening in the short part belonging to the closest maturities. The market is discounting volatility in this week marked by relevant data.

‍

ATM IV 02/01/23

‍

‍

ATM IV 09/01/23

‍

‍

In our opinion, the main driver to keep an eye on is the performance of the SPY and the Nasdaq. Risk assets are in a chaotic situation in terms of price dynamics, squeeze after squeeze and violent moves by data. The BTC and SPY correlation is still at its peak, more details in the exchanges section.

‍

‍

This cycle differs from the rest, this time the previous highs have been pierced.

‍

‍

Classic markets

‍

SP500 Futures 02/01/23

‍

‍

SP500 Futures 09/01/23

‍

‍

The 3800 level was defended tooth and nail and finally the market found the "bad news" it needed on Friday to reignite the Pivot narrative and begin an explosive rally.

‍

‍

As we said last week, any bullish scenario would necessarily require the recovery of the vpoc of 3960 points. This is clearly the area to be conquered by buyers and will mark the future of all risk assets in the coming weeks.

‍

‍

We certainly believe that it is difficult for this scenario to be confirmed, the movement initiated on Friday seems unsustainable if Powell keeps his speech and the inflation data does not show a considerable improvement.

‍

Gamma profile 02/01/23

‍

‍

The gamma profile of the market last week showed a great bearish positioning, with a lot of interest in the 3800, 3750 and 3700 puts, which were increasing their gamma notional in a remarkable way after the last Opex. A short squeeze like the one on Friday, causes these puts to burn and market makers have to unwind their short hedges, buying back the underlying, further boosting the asset. A change of bias and an overpositioning of options to one side are always the main ingredients of such explosive moves.  

‍

Gamma profile 09/01/23

‍

‍

‍