‘Epic’ Highs, FOMO And An October QT Hangover

Nomura’s Charlie McElligott is excited about the reinvigorated momentum factor rally which, as noted last week, he believes presages a “monster” September if seasonality is any guide.

The last several sessions have had a January-ish feel to them as U.S. stocks continue to melt-up on the back of a weaker dollar which has helped rescue an EM complex that was struggling mightily amid the greenback’s ascent which is itself predicated on the notion that thanks to U.S. fiscal and trade policy, the Fed is pigeonholed into hawkishness, at least in the near-term.

On Thursday, McElligott is back with a short note that finds him characterizing U.S. stocks’ recent “epic highs” as a “pretty-standard ‘FOMO’ after two months of ugly underperformance from active HF- and MF- complex.”

That latter reference is to the breakdown in the “consensus” long Growth/short Value trade that accelerated post-Facebook’s plunge and in step with the late July correction in the FANG+ index. That breakdown has now reversed amid the most recent bout of U.S. equity euphoria.

“‘Value’ simply will not work until the UST curve begins to steepen with a ‘sticky’ move being a 2019 story at best,” McElligott writes.

(Nomura, Bloomberg)

He also notes that the buy-side will likely be forced to chase recent benchmark performance, something that multiple folks have suggested over the past several days.

(Nomura, Bloomberg)

But, if you’re going to chase this in an effort to ride the seasonality mentioned above, Charlie continues to warn that there could be another reversal (read: hangover) in October due to the resumption of QT dynamics and a concurrent spike in rates vol. When rates vol. spikes, you should be on cross-asset vol. spillover watch.

He lays that out nicely on Thursday and I’ll leave you with the relevant excerpts in that regard.

However, I continue to believe there is HIGH potential for Rate Vol come Oct / Nov, which could then drive reversals in crowded positions like the “flattener”.

The large central bank “Quantitative Tightening” impulse escalation in Oct, with Fed’s balance-sheet run-off “maxing” to -$50B /month; the ECB’s bond-buying program tapering in half; and the high-likelihood that the recent YCC range-adjustment for the BoJ will mean more “stealth tapering” of purchases in a “triple-whammy”.