Stocks Rally on Falling Rates and Options Squeeze, But Headwinds Remain
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Stocks rallied this week due to declining rates and fewer Treasury auctions, triggering a gamma squeeze in options.
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Rates fell due to absence of central bank bond buying and declining global liquidity levels. Massive short position in Treasuries exacerbated the drop.
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Negative gamma in S&P 500 options market caused dealers to buy futures aggressively as stocks rose, fueling the rally.
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Options market has now flipped to positive gamma, which may limit further gains unless call wall moves higher.
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Macro backdrop of slowing growth and sticky inflation still a headwind; stagflation could keep rates rising on long end.