Must Read - US EQUITIES - FOCUS ON GROSSpdf
Must Read - US EQUITIES - FOCUS ON GROSSpdf
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  1. US EQUITIES -FOCUS ON GROSSFICC and Equi�es | 25 January 2024 | 5:39PM UTCDisclaimer: The views or ideas expressed here are those of the desk and / or author only and are not an "official view" of Goldman Sachs; others at Goldman Sachs may have opinions or may express views that are contrary to those herein.In the near-term, the US equity market will pay attention to what happens between now and Feb 2nd... among other catalysts, we get:•More PCE data tomorrow•QRA•FOMC•Earnings -nearly 40% of the S&P’s market cap reports, the biggest week of earnings.The equity vol market is now pricing the biggest premium on this date –the S&P implied move from now thru next Friday’s close = > 1.50%If that sounds low, it’s because it is ... The options market is currently implying near record-low correlation amongst S&P constituents, as high gross leverage and index vol selling products have led to much more dispersion.
  2. Note: overall gross leverage has risen to new record high levels on the GS PB pad, while overall net leverage ratio is now in the 50thpercentile on a 3-year lookback (vs. 3rdpercentile at the start of November);
  3. Underscoring the micro volatility: both long and short exposures have risen sharply to their respective multi-year highs.The other prevalent trend of more options selling remains thematic at the S&P index level, which continues to provide dealers with more gamma (this has a braking effect on the SPX market moves, as dealer hedging flows lead to more buying on dips, and more selling on rallies).
  4. So where does the desk think we can move? We still like IWM upside despite the recent pullback. With short exposure at multi-year highs and looming catalysts, the case for owning calls here is attractive. If tomorrow’s PCE data again confirms a disinflationary trend, some investors will be hard-pressed to still be carrying high levels of short exposure into next week’s remaining events after the Russell move we saw in Nov/Dec.Similar to other short proxies (namely China equities), we are seeing positive spot/vol correlation in IWM as investors rush to hedge shorts on rallies. This phenomenon has never before occurred in small-caps.Reminder, Fed’s Waller in his recent speech highlighted how important PCE can be:“I like to look at the 3-and 6-month [core PCE] measures to have a better understanding of the current level of inflation... the 6-month change has been hovering close to a 2 percent annual rate, as has the 3-month measure.”Enter GS Economist David Mericle:On the timing of the first cut, Waller and Williams both seemed to raise the inflation threshold for the first cut relative to official FOMC communication, but even their higher thresholds are still met—after all, their 6-month annualized rate of core PCE inflation is below 2%.That’s why we’ve kept our March baseline—we are well ahead of schedule on bringing down inflation, so if Powell feels like they’re going to do it eventually and might as well do it sooner rather than later to minimize any downside risks, then the inflation data certainly support the case.Link.
  5. While today’s reading was a quarterly average for Q4 (and likely de-risks tomorrow a good amount), tomorrow we’ll specifically get the December data, where we can focus more on the sequential pace (h/t Spencer Hill).Where else could shorts be vulnerable? Managers have continued to sell and press shorts in Energy stocks –our PB data has shown consistent selling here to start the year as part of the re-grossing theme, and with China potentially turning a corner on the policy front (more on those recent flows here), we’re seeing some investors warming up to this space again.It’s also worth noting that commodities in general are starting to see some positive flow signals. Unlike our equity CTA model that shows a downside asymmetry, in the commodities space:
  6. Last point: the dichotomy between the first half of February and the second half from a seasonal perspective. For those worried about any froth in the US markets, the last two weeks in February are historically the worst 2 weeks of the year. Given how wellmarkets followed the historical analog last year, it’s something to have on the radar.Past performance is not indicative of future results / charts sourced from Goldman Sachs FICC and Equities, GS Research, and Bloomberg as of Jan 25th2024
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