Sentiment is Improving, Dealer Flows Still Amplify Volatility

Iran deal hopes eased geopolitical tension on Monday, then faded after a US strike on Qeshm Island. Meanwhile, dealer hedging is amplifying S&P 500 moves until the index clears 7,635.

Geopolitical sentiment improved Monday afternoon, November 2, due to a series of news items about a possible US–Iran deal.

First, Qatari mediation was reported to have made a breakthrough, then Qatari mediators took a draft agreement to Tehran, and Trump said he will not strike Iran after the elections.

Since then, GammaLab's geopolitical sentiment index has stayed mostly flat (chart above), before last night's US strike on Iran's Qeshm Island and Iran's denial that a deal is close put it under slight pressure again.

Meanwhile, the S&P 500 (+0.4%) stays in a regime where dealer delta-hedging flows are amplifying the underlying trend. Between 7,500 and 7,600 (see chart below), market makers will suck liquidity out of the system by delta-hedging in the trend direction.

In a nutshell, this means dealers are selling futures into weakness and buying futures into strength.

Only above 7,635, the so-called "gamma flip" level, does the situation change materially from a mechanical flow standpoint. Then market makers would switch to a counter-cyclical hedging regime, where dips are bought and rallies are sold, which has the effect that liquidity is injected and the market stabilized.