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Narrative Collision! ‘The Best Is Behind Us’ Meets ‘Tightening Ourselves Into A Slowdown’


Friday morning finds U.S. traders staring down yet another big selloff in Tech just a day on from a Thursday bounce which featured Growth outperformance that was even more epic than the underperformance which characterized Wednesday’s Nasdaq bloodbath.


The reversal of fortunes on Friday comes courtesy of disappointing results from Amazon and Alphabet. Just about the last thing the market needed right now was for those two mammoths to undermine confidence, but that’s just what happened after the bell on Thursday.

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Tautologies, Perpetual Motion, Amazon And Alphabet

Not helping matters in terms of risk sentiment is the dollar’s push to fresh local peaks, which only serves to exacerbate the tightening of financial conditions occasioned by the selloff in equities.



It’s against this backdrop that Nomura’s Charlie McElligott is out with some “#hottakes” – and that’s verbatim, including the hashtag. He’s “running into meetings” this morning according to his daily missive.

“It’s the next risk-off, down-trade as former Equities leadership and massively-crowded Growth Longs in Tech / E-comm crack on earnings disappointments, crunching both Equities investor performance and psyche further”, he writes, before turning to the dollar, noting that what you see in the chart above represents “a pure tightening of U.S. financial conditions”.

And listen, Charlie isn’t a guy who’s shy about admitting when he was only half-right.

“My structural shift call since mid-June that we were transitioning into [a] ‘Financial Conditions Tightening Tantrum’ phase has been a damn-good one if I do say so myself”, he muses, before conceding that his “tactically-bullish SPX 1m to 3m view in large-part based upon belief that Rates would resume their selloff has been hot-garbage, especially the part where I thought Cyclicals could rally over Defensives even if Growth Tech / Comms sold-off.”

“One out of two ain’t bad, amirite?!”, he adds/asks. You’ve got to love the style, God bless him.

McElligott goes on to deliver the usual update when it comes to the real-time appraisal and re-appraisal of Fed expectations. Markets are now only pricing 39bps of tightening next year, a sharp drop off from earlier this month. As for 2020, markets are now priced for no more hikes beyond mid-2019 (2020 Eurodollar calendar spread inverted).



The overarching narrative, McElligott writes, is that “the U.S. short-term Rates market over the course of the past two weeks has again suddenly priced in anywhere from a Fed pause or even an outright ‘End to the Hiking Cycle’ in 2019 / ‘Beginning of Easing Cycle’ in 2020, while U.S. Equities have even more jarringly pricing a Negative Growth Shock if not an explicit Recession.”

There’s a ton more great commentary on the break down of the two constructs that have driven the Long Growth/Short Value (and, by extension, Momentum) trade in the slow-flation environment, but the money line (figuratively and literally) comes when McElligott rolls up two of his most oft-used trademark phrases:

Using a few of my favorite taglines, this is where “the best is behind us” mentality meets the “we are tightening ourselves into a slowdown” worldview.

Any questions? If so, you can catch Charlie on Monday, when I am absolutely sure he’ll be back with more #hottakes”.



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