The View from 5th Avenue – 16 June 2022

Well, Powell did warn investors back in May that it would be painful. And as the Fed continues to ween more than a decade worth of stimulus/ low rates out of the system, it has been exactly that. T+1 from the FOMC’s 75bp hike, traders reacted to the news by accelerating their de-positioning as expectations of a pending recession grows. The surprise hike by the SNB today, along with the expected BOE, left participants on edge, and the final tally across the board was deeply red, with the best performing sector, Staples, closing down 76bps. The S&P finished down 3.25% and now is back to the December 2020 level. And for Nasdaq, down 4.08% today, back to September 2020. Everyone is either now bearish, or very bearish, and the CNN Fear and Greed Index is now at 14 (yes, it has gone to zero). Excluding Staples, the average sector move was down 3.3%  Homebuilders fell 7% as the 30yr mortgage rate rose to 5.78%, and Housing Starts data fell 14.4% m/m. Semis dropped 6.2%, Energy 5.6%, Retail -5.1%... you get the point. Treasuries rose today, with the 10yr yield closing at 3.18% (versus 3.29% yesterday). High Yield on the other hand, is near their March pandemic lows, as the Fed is no longer supporting the space, and investors are concerned about potential bankruptcies during a recession. Stress is definitely building. What will mend the current sentiment is still unknown, but tomorrow happens to be a Triple Witch expiry with over $3trln expiring. Perhaps the most important part for those staring at the end of day volatility is that some gamma will also be expiring, alleviating some of the dealer hedging that is also moving indexes recently. Unfortunately, any respite from the option market feels like it will be short-lived, but maybe, just maybe end of month/ quarter will provide some support. But that is still 1.5 weeks away, a lifetime in this current environment.