Having gone into the weekend with stocks squeezing to record highs and oil prices plunging on euphoric hope that goldilocks was right around the corner in the Middle East - following Trump's very enthusiastic statements all day - things have gone a 'little bit slightly turbo' again...
As last week's rally extended, the market’s sensitivity to negative developments diminished.
Investors brushed aside warnings from global institutions about the economic damage. Instead, flows remained supportive and leadership broadened, with technology catching up after a rough start to the year. By Thursday and Friday, the tone had shifted to express the view that the war is all but over and the growth cycle remains intact.
That left markets heading into a critical inflection point.
But the weekend did not offer any help...
First, shortly after the 'close' on Friday, Iran denied most of what Trump claimed as fact with regard 'nuclear dust' and peace-deals.
Then came the Iranians fired upon an Indian tanker attempting to cross the Strait.
And today we have seen the US military strike and seize an Iranian-flagged cargo ship in the Gulf of Oman
On the bright side? ...there are expected to be 'talks' on Tuesday or Wednesday (which Iran has claimed it will not attend).
Soaking all that in left markets back in 'Green Dot Sunday' mode with oil spiking, equity futures fading, and bitcoin sliding.
WTI spiked almost 9% - back up near $90...
Gas contracts are jumping in early Asian trading, setting up a nervous start for risk assets in the region
*EUROPEAN GAS RISES AS MUCH AS 9.8% AS IRAN CLOSES HORMUZ AGAIN
S&P futures are down around 1%...
Bitcoin has erased all of Friday's gains...
Treasury futures are down, implying around a 5bps jump in 10Y Yields...
AUD is leading losses for G-10 currencies as the US dollar strengthens in early action...
Gold is down around 1.5%...
As we noted on Friday, the OpEx was extremely call-heavy on a delta notional basis.
SpotGamma estimated the OpEx profile is about 80% weighted to calls, one of the most extreme readings in its data, after the SPX rallied 11% in two weeks.
The problem is that if traders monetize gains instead of rolling positions higher and out, negative dealer hedging flows will put pressures on spot.
Said another way, the rally increasingly looks driven by call buying, which leaves the gains more fragile if the positive narrative starts to wobble and traders rush for the exit.
The technical picture says much the same, with gamma unclenched, opening the door for more volatility (in either direction).
Equities went from oversold to overbought in only two weeks, a very fast reset that can often mark a real regime turn and precede a tactical consolidation that cools the momentum.
Based on recent "stock up, vol up" dynamics, and massive imbalances to call volumes vs puts, SpotGamma sees room for a modest equity correction this week.
They suggested expressing this via S&P500 put spreads.
This is not a statement on the longer term equity dynamics, but a short term overbought condition.
Over the past week, realized intraday SPX moves have consistently exceeded implied expectations.
This environment continues to favor long volatility structures (e.g., straddles/strangles) over short premium strategies, given the current risk/reward setup.
As Bloomberg's Brendan Fagan noted, the bar is no longer low: With equities at records and oil back down, the peace dividend has largely been pulled forward. If talks deliver tangible progress, either a framework or a memorandum to carve out a deal, the current rally can be validated. But if negotiations fall short, the asymmetry becomes more acute.
As a reminder, this is exactly the same picture we saw last Sunday - a major gap up in oil (down in stocks) at the open after the US blockade began... which then rapidly reversed into a monster week...
However, this time is different as after a week defined by markets trading on belief rather than verification, the time to deliver on what’s in the price has arrived.