Takeaway: Investors are increasingly against any coming market impact from reflation’s rollover.

Below we draw notable conclusions from our daily monitoring of derivatives-market sentiment factors. We publish key conclusions ~monthly in cohesion with shifting conditions. Because many of these factors shift in the short-term, this note is intended to be a summary of process.

We’ve been high touch this week with regard to contextualizing currency and rate views. For our thoughts into GDP this morning, we would direct you to two quick-hit notes we circulated yesterday to frame up the conclusions below:

Dollar Exhaustion Addendum

Real-Time Macro: Our Forecasts Ahead of Friday's GDP Report

In this month’s update we’ll focus on highlighting a rates-rising, reflationary bias embedded across equities and FICC. The series of charts at the bottom correspond to the quick-hit bullets in order.

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  • CFTC Positioning: The conclusion here is that a re-rating of near-term inflation expectations has led to a set-up where speculative open interest is 1) Short 2yr and 5yr contracts; 2) Long Euros (longest ever) & Pounds; 3) Long Crude Oil (longest ever).
  • Weak Dollar Tilts: We show a series of skew and risk reversal charts below from our G-20 Currency Monitor. Volatility surfaces have more U.S. dollar weakness embedded in their shapes (consensus expectation). In GBP, AUD, EUR, we’re looking at the most bullish tilts in 10 years. However currency momentum trends are often long and stubborn, so we wouldn’t put a large weighting on a levels-based sentiment indicator without leaning on other parts of the process. 
  • Yield Sensitivity: Also referring to measures of skew, which compares the price of different strikes at the same contract expiry, protecting or betting against downside vs. upside in yield-sensitive vehicles is much more expensive on the margin (Treasuries, Credit, REITs).
  • Yield Sector Implied Dispersion (XLF vs. XLU): Implied sector dispersion rhymes with the general theme. We compare sector dispersion across the term structure. The widest downside dispersion (relative to SPY) can be observed in financials (XLF). The widest upside dispersion is in Utilities (XLU). Financials volatility hasn’t traded this tight to Utilities since September 2016, two months after the 10-yr put in its low. Volatility expectations are currently at parity in the front-month which is far from the norm.
  • VIX: "VIX is Up.” It got to 12 and at an 11-handle, yes a little. Implied volatility has some life in some equity pockets, but the surface tilts are important. In some markets, much of the increase has possibly come from forced ATM or upside call buying as evidenced in flatter surface shapes. We show this visually with SPY. Consensus “fear” at all-time SPY highs with VIX increasing to 11 isn’t a conclusion we’d make currently.  
  • Updated Short-Interest: Short-Interest as a % Float declined in every S&P 500 sector m/m except Utilities where it increased +20 bps.      

   

Ripple Effects of Rate Narratives (FX, Yield-Sensitivity) - CFTC TTM

Ripple Effects of Rate Narratives (FX, Yield-Sensitivity) - CFTC 3Yr

Ripple Effects of Rate Narratives (FX, Yield-Sensitivity) - AUDUSD Risk Reversal

Ripple Effects of Rate Narratives (FX, Yield-Sensitivity) - EURUSD Risk Reversal

Ripple Effects of Rate Narratives (FX, Yield-Sensitivity) - 25 Delta Skew TTM

Ripple Effects of Rate Narratives (FX, Yield-Sensitivity) - 40 Delta Skew TTM

Ripple Effects of Rate Narratives (FX, Yield-Sensitivity) - XLF vs. XLU IVOL

Ripple Effects of Rate Narratives (FX, Yield-Sensitivity) - SPY Skew

Ripple Effects of Rate Narratives (FX, Yield-Sensitivity) - Short Interest

Ben Ryan

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