On Tuesday, Nomura’s Charlie McElligott emphasized that when it comes to whether risk appetite can recover in earnest into year end, it all comes down to the Trump-Xi meeting at the G20.
Previously, McElligott was in the camp calling for a tactical rally in equities thanks to a confluence of factors including re-risking from systematic strats, macro funds getting long and hedge funds/asset managers being forced to chase the market higher after low-ticking their exposure on October 29 just before U.S. stocks staged a powerful rebound off last month’s lows.
On Tuesday, McElligott sounded a more cautious tone, saying he plans on abandoning his tactical S&P “‘outright long’” ahead of the G20, where he sees scope for disappointment.
Since then, the trade news has been largely ambiguous with a slight tilt towards positive, as the Trump administration is said to have decided to hold off on auto tariffs and China is apparently prepared to repackage the opening-up measures Beijing is already engaged in and try to present those efforts as something “new” to Trump.
On Thursday, the above-mentioned McElligott is out with his latest missive and he’s sticking with the notion that Trump will attempt to calm things down with the usual photo op, but ultimately, whatever risk-on sentiment that engenders should probably be faded. To wit:
My opinion remains this: there is pressure on both sides to relieve markets-based pressures into the upcoming Trump / Xi meeting, and they will likely pursue some sort of handshake / photo op at the G20 with a perceived “thawing-out” via a DELAY of the escalation from 10% tariffs moving to 25%, as this would almost certainly cause a widespread global risk rally.
HOWEVER I believe that will be a “fade-able” event, as right now there are no indications of any movement on the cumbersome structural IP theft / forced technology transfer or “level playing field” / subsidies issues that can be resolved in short-order; per the incredibly hawkish language of VP Pence of late, the message that this is a long-term structural shift which China must now address OR risk entering a new “Cold War”.
Clearly, McElligott views the G20 as a binary event, wherein both sides will either make an effort to “prove” to the market that relations have thawed or not, with the former leading at least to a short-term bounce and the latter being obviously negative.
Given that, Charlie says it’s no surprise that “the straddles around the event expiry (December 7) went ‘mental’ yesterday for US Equities with the SPX implied move going from 1.09 to 1.71.”
He goes on to note that in light of recent action (which has been anything but inspiring), macro funds are “more actively shorting the U.S.”.
As far as the all-important interaction of hedging dynamics and systematic flows, McElligott paints a decidedly disconcerting picture. “S&P options are showing VERY defensive posture change since last week, -$520.5B delta (1st %ile since 2013) and -$18B of gamma per 1% move + or – (also a 1st %ile outcome since 2013)”, he writes, before warning that that’s a setup for a whole lotta “chop”.
“Obviously this means potential for EVEN MORE INSANE price-action and VIOLENT up / down chop, with extreme short-gamma on both sides at a time where we sit near pivot-points for systematic de-leveraging and re-leveraging”, he cautions.
You have been warned.