Week of May 28 2023

Market Wrap

EOW 21 - Benchmarks

SPX (D) - Trailing 12mo and +/- 1σ Expected Weekly Range (+/- 2.3% 4108.7 → 4302.2)

VX Surface - RVOL Spreads - VVIX / VIX Ratio - Trailing 12mo

Narratives

The “left-tail” of the distribution being that ~150bps-250bps emergency cut-type of calamity scenario is seeing its market implied probability crater, all while “higher for longer” (even holding terminal through year-end) picks up delta, with the debt-deal compromise being expected in the next few days, allowing the Fed to get back to the economic task at hand. Then stepping back, as all of that forced US equities index “crash-y downside” and over-hedging around triple-whammy “debt ceiling / regional banks / recession” goes increasingly OTM for this local risk-event which will seemingly fail to materialize, there will be lumpy dealer “short futures hedges” to unemotionally unwind in Spooz, which may take us to a local “relief top” in the days that follow an official deal announcement — Charlie McElligott, Nomura

Developed market-focused equity mutual funds and ETFs shed $3.21 billion over the latest weekly reporting period, while their emerging market counterparts snapped a streak of consecutive inflows with a $728 million exodus. Global equity flows are now flat YTD, in contrast to big inflows of $175 billion in 2022, $949 billion in 2021 and $182 billion in 2020 - Bank of America

Equal-weighted M7 remains well off post-pandemic extremes, but June Fed hike expectations are up from nothing to 12bps; the Nasdaq is taking 10-year Treasury yields back to 4%; the dollar is surging; and financial conditions are tightening. Once spreads in global HY bonds are back above >550bps, we expect another bout of risk-off to return in late June - Bank of America

Once the debt ceiling negotiations are concluded, liquidity will be front and center again. The rebuilding of the TGA balance toward its medium-term level of around $600 billion to $700 billion will likely proceed relatively quickly. The net effect of the TGA rebuild and QT on broad liquidity is clearly negative, and thus a likely headwind for risk - JPMorgan

Week Ahead

The negotiations over the US debt ceiling continue to dominate the news, with the Treasury Department's June 1st deadline fast approaching. On Friday, the White House and congressional negotiators made progress towards a compromise agreement to raise the debt ceiling for a two-year period, with the two sides only $70 billion apart on a total discretionary spending figure of over $1 trillion. In the coming week, market participants will eagerly await the US labor market report, which will provide insights into the health of the jobs market ahead of the Federal Reserve's June meeting. The US economy is expected to add 193,000 jobs in May, indicating a slowdown from the 253,000 jobs reported in April, while the jobless rate is set to rise slightly to 3.5%. Moreover, several important indicators, including April's job openings and the ADP employment change for May, are due to be published. Additionally, the ISM Manufacturing PMI, S&P/Case-Shiller home prices, and regional activity indexes such as the Chicago PMI and the Dallas Fed Manufacturing Index will provide further clues about the state of the economy. The final S&P Global Manufacturing PMI and first-quarter labor productivity readings will also be of interest - TradingEconomics

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Calendar (UTC-4)

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Major Economies

Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 12-mo Estimate	🔵	224.71	224.38	228.39	January 1, 2023
Forward 12-mo PE	⚪️	18.7	18.7	17.2	January 1, 2023
Nominal Earnings Yield	🔴	5.34	5.35	5.86	January 1, 2023

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔵	13.83	13.6	0.23	1.69%
SPX GEX Flip	🔵	4,157.5	4,147.5	10	0.24%
SPX Skew Adjusted GEX	🔴	13,985,819,230	14,846,030,036	-860,210,806	-5.79%
Equity Put/Call Ratio (CBOE)	🔴	0.53	0.56	-0.03	-5.36%
VIX Put/Call Ratio (CBOE)	🔴	0.36	0.47	-0.11	-23.4%
SPX/W Put/Call Ratio (CBOE)	⚪️	1.38	1.38	0	0%
OEX Put/Call Ratio (CBOE)	🔴	3.83	3.91	-0.08	-2.05%

Net Skew-Adjusted Gamma by Strike - @tradevolatility

Skew-Adjusted GEX Trend - @tradevolatility

Implied Volatility Trend - @tradevolatility

Put/Call OI Trend - @tradevolatility

Futures

June E-mini S&P 500 futures ended the session at a one month high of 4213.25 Friday, up 53.50 (1.29%). Across all maturities, volume was 1,754,037, with June seeing 1,744,425 traded. Total open interest finished the day at a one month high of 2,463,778, adding 44,932, or 1.86%. June open interest rose 41,155 (1.74%), to 2,411,230.

Option volumes were highest for the June EW1 4700 call (11,000) and the May E5B 3425 put (48,063). For June options, the 4400 calls were the most actively traded with 3,676 done, and the high volume put was the 3300 strike with 5,713 contracts changing hands. Options with the most open interest are the June EW3 100 call with 40,756, and the May E5B 3425 put with 55,169.

As measured by the 30-day at-the-money, implied volatility ended sharply down, lower by 9.87% to close the session at 11.11%. The 30-day historical volatility closed the day higher by 0.51% to a one month high of 13.62%.

Longer TF (W → D) NEUTRAL - W20 → W21 continued rotational action with a matching 107 handle range, but with consecutive closes above the 4208.50 Q1 HI, thereby confirming Q2 1TFU extension at the margin. The uptrend remains counter relative to the larger timeframe (bearish) Q322 HI 4327.50 → 2022 LO 3502 structure, but with odds now favoring a retest of 4300 within +1σ expected weekly range. Breakout failure risk < 2022 AWVAP 4068.50 (-3.44%) is within -2σ (W).

Shorter TF (3H → M30) BULLISH - V-shaped reversals are occurring more frequently of late as traders are turning weekly options into 0DTE resulting in surging call volumes on Fridays. This in turn triggers a surge of one-way hedging flows in futures, with observable shortening of the thrust (SOT) as positions, and thus gamma exposure, expire. That said, the strong position of close increases the odds of taking out both the WHI and WHI.1 in the coming week.

Bull v Bear

This Week (30d ATM IV 11.11% v RVOL 13.62% p)
Bulls will seek to break WHI.1 4227.25 on a closing basis and continue to build price acceptance above. Upside: > Q421 LO BOS 4260 (+1.11%) is within +1σ (W) 4303.50 (+2.14%).
Bears will seek to break PLO < 4146 and ideally recapture the 6M VPOC 4138.25 (-1.8%) on a closing basis. Downside: < WLO 4120 is beyond -1σ (W) expected 4126.50 (-2.06%).

Last Week (4213.25 JUN23 +0.2%)
Bulls will seek to break WHI 4227.25 on a closing basis and continue to build price acceptance above. Upside: > Q421 LO BOS 4260 (+1.31%) is within +1σ (W) 4289 (+2.00%).
Bears will seek to break PLO < 4191.50 and ideally the 4172.50 swing low on a closing basis. Downside: < WLO 4120 (-2.02%); WLO.1 4111.75 (-2.21%) are beyond -1σ (W) 4123.50 (-1.93%).

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