Let me tell you something: When it comes to daily coverage of the evolving macro narrative and the intersection of that narrative with modern market structure, Nomura’s Charlie McElligott is on it, dammit.
Now I know what some of you are thinking. You’re thinking “well yeah, that’s Charlie’s job“. But even so, his daily missives (with their trademark quirky formatting, random capitalization, wild punctuation and color-coded font scheme), certainly seem to suggest that McElligott is a guy who wakes up every morning with the enthusiasm knob already cranked to “11” and then turns that sucker up to about a “15” by the time he gets down to business.
Over the weekend, we brought you some excerpts from McElligott’s latest chat with Erik Townsend and Patrick Ceresna (via MacroVoices).
That discussion found McElligott discussing “psuedo-stability” and how a macro regime shift has the potential to expose the buildup of risk beneath what, in the final analysis, is but a veneer of stability.
Part of that discussion revolved around McElligott’s estimates for systematic selling pressure during last week’s Wednesday/Thursday rout and on Monday, he picks back up on that.
“Range-bound U.S. Rates provide modest macro calm, yet Spooz remain susceptible to the ‘gamma-gravity’ of the massive OI @ 2750 and 2800 strikes (Spooz 2767 last),” Charlie writes, documenting latent “strike risk” (if you will).
He goes on to deliver an update on the trend followers, noting that “after additional systematic selling Friday / overnight (another -$7.8B of notional SPX selling), CTA Trend positioning in SPX [is] now just +36% Long from Friday’s +45%.” Note that the following visual shows you the level at which the next bout of forced de-risking could kick in:
Ultimately, McElligott is sticking with his call that there’s “scope” for a rally into year-end. As noted here on Friday, that’s predicated on cleaner positioning, the return of buybacks, a low bar for earnings beats and seasonality.
That said, he’s pretty excited to note that after the market briefly pushed back the timing of an end to the Fed’s tightening cycle (thanks to ebullient economic data), folks appear to be reversing course (again).
“We are now again ‘only’ pricing-in 52bps of hikes for 2019 vs 60bps just two weeks ago—and all ‘short’ of the Fed’s 75bps projections, as the buy-side is consensually skeptical of the Fed being able to implement tighter policy without slowing the ‘real economy’,” McElligott writes, before adding the following (and this is verbatim, including all the fun punctuation and red font):
This is PRECISELY the qualitative “psyche-shift” I have spoken about for months: investor psychology is transitioning from a “we are growing faster than we are tightening” view (risk-POSITIVE environment experienced majority of 2018) to the dreaded “we are tightening ourselves into a slow-down” (the risk-NEGATIVE / “Fed Policy Error” outlook), where markets “pull-forward” their end-of-cycle timing expectations.