Data Dump and Dealer Gammas | Morning Express 9/15/2022
Posted: Sept. 15, 2022, 9:25 a.m.
E-mini S&P (December) / NQ (December)
S&P, yesterday’s close: Settled at 3965.50, up 15.25
NQ, yesterday’s close: Settled at 12,222.25, up 106.50
Fundamentals: U.S. equity benchmarks remain on their back foot, and the S&P is within range of two-month lows. Hotter than expected inflation, via the August CPI report on Tuesday, forced markets to quickly discount a more aggressive Federal Reserve. The odds for next week’s policy meeting still squarely point to a 75bp hike, however, 100bps has emerged with a 26% probability. Although it’s unlikely they move more aggressively than 75, the shift in odds now has the central bank moving 200bps through yearend with a 56.4% probability. As we have discussed in recent months, we find the cycle holistically more important, rather than only focusing on the next meeting.
Fed direction may be front and center, but the push and pull associated with Friday’s Quadruple Witching also warrants a major focus. Goldman Sachs said there is $3.2 trillion worth of options notionally set to expire on Friday. Options are purchases for either hedging or speculative purposes, by both institutions and retail investors. The vast majority of those options are sold by dealers who then hedge their own exposure (known as gamma risk) through the underlying futures or stocks. Ultimately, what this means is that once this $3.2 trillion worth of options expires on Friday, those dealers will need to sell less futures and stocks as the market goes lower. Check out this short video by Paul Wankmueller, our Director of Education, discussing Quadruple Witching.
Retail Sales for August, fresh NY Empire State and Philly Fed Manufacturing for September, as well as weekly Initial Jobless Claims are all due this morning at 7:30 am CT. Industrial and Manufacturing Production will follow at 8:15 am CT. Tonight, we get a slate of economic data from China at 9:00 pm CT.
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NQ (December)
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Crude Oil (October)
Yesterday’s close: Settled at 88.48, up 1.17
Fundamentals: Crude Oil has slipped from rare major four-star resistance, a wide range, at 89.43-90.39, with a high of 90.19. One catalyst for the rally into resistance was yesterday’s weekly inventory report. Although it was headline bearish given the +2.442 mb build of Crude when only +0.833 mb was expected and the massive build in Distillates at +4.219 (vs +0.60 expected), the White House released another 8.414 from the SPR. The composite build was +4.894 when factoring in Gasoline’s -1.767 mb (vs -0.85 mb exp). Considering the White House’s comments earlier this week, that they want to replenish the SPR, it makes for a very bullish dynamic over the intermediate and longer-term.
October Options are set to expire at 1:30 pm CT.
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Gold (December) / Silver (December)
Gold, yesterday’s close: Settled at 1709.2, down 8.3
Silver, yesterday’s close: Settled at 19.569, up 0.078
Fundamentals: Gold has decisively chewed through the $1700 mark. Will this be a blip like July 21st or a more defined breakdown? We tend to believe a flush in Gold is necessary to cleanse the market and rebalance it for the next major rally, therefore, we are welcoming continued weakness. We have also been holding a somewhat negative view, only Neutralized this week due to Silver’s spike and Gold’s inability to crack $1700. In other words, our Neutralized view was more technical, however, from a fundamental perspective rising rates and a strengthening U.S. Dollar as markets discount a more aggressive Federal Reserve provide the recipe to encourage a technical breakdown ahead of next week’s Fed policy meeting. This would be similar to July 21st in how that occurred ahead of the July 27th Fed meeting. However, Gold’s rally fizzled at $1800 and from a positioning standpoint a true flush would allow for a more sustainable rally over a longer period, right into a seasonally bullish time of year.
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Silver (December)
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