The recent market selloff has left many investors scratching their heads, particularly when it comes to the performance of the S&P 500 (SPX) and the impact on bonds and volatility. In this blog post, we’ll take a closer look at the factors driving the market movement and how they’re affecting different asset classes.

Reduction in Oil Supply and Limiting of Private Credit Withdrawals

One of the main drivers of the recent market selloff is the reduction in oil supply, which has led to a decrease in the price of crude oil. This decrease has had a ripple effect throughout the market, as it can impact the performance of various asset classes. Additionally, the limiting of private credit withdrawals has also contributed to the selloff, as it can limit the amount of capital available for investment.

Negative NFP Miss

Another factor contributing to the market selloff is the negative Non-Farm Payrolls (NFP) miss. The NFP report provides insight into the health of the US economy and can impact investor sentiment. A miss on the report can lead to a decrease in investor confidence, which can result in a sell-off.

Bonds Initially Provided Some Cushion, but Now Gone

Initially, bonds provided some cushion against the market selloff, as yields were relatively low. However, over the past five days, bond yields have increased, proving problematic for risk parity strategies. As a result, dealers are starting to get squeezed on their short vega positions, which is causing a squeeze in vol despite skew already being steep.

Customers Remain Well-Hedged in SPX Options

While the market is experiencing a selloff, customers remain well-hedged in SPX options. The short put delta balance is at all-time extremes, indicating that investors are taking steps to protect themselves against potential losses.

Dealers Are Starting to Get Squeezed on Their Short Vega Positions

As bond yields continue to increase, dealers are starting to get squeezed on their short vega positions. This is causing a squeeze in vol despite skew already being steep. The impact of this squeeze can be seen in the VIX index, which is up 3x as much as SPX is down.

Macro Systematic Strategies Will Have an Incremental $10bn for Sale

The recent market selloff has led to an increase in the supply of options, with macro systematic strategies having an incremental $10 billion for sale over the next week. This will grow in a down market, contributing to the already stretched HF nets. While HF nets aren’t stretched at 52%, they still aren’t down to the 49/50% area that markets have bounced from over the last year.