It’s a pivotal week, dammit.
And we tried desperately to document why all weekend long.
There are Fed speakers galore and then, of course, there’s the G20, where markets are hoping against hope that Donald Trump and Xi Jinping can strike some kind of temporary truce that will see the U.S. back down from publishing a list in conjunction with tariffs on an additional $267 billion in Chinese goods.
Ideally, the Trump-Xi meeting will also produce an understanding that would entail the U.S. delaying the imposition of a higher tariff rate on the $200 billion in Chinese products that were subject to 10% duties as of September 24. That rate more than doubles at the turn of the year and the market would love to see that postponed.
On Monday morning, Nomura’s Charlie McElligott is out with some quick thoughts on this in the context of the overnight action.
After flagging “bear market bounces” in the Hang Seng, the Kospi, the lira, the rand and and crude, Charlie notes that “the vapor-move in recently purged Equities overnight is especially notable as our CTA model shows meaningful re-leveraging levels either already triggered or in-play [as] SPX, Russell, Eurostoxx, DAX, FTSE, CAC and Kospi are all back in the buy zone.’
That, McElligott says, indicates “that much of the overnight move is likely via the Systematic universe and not the Fundamental space.”
He also rekindles his “synthetic short gamma” case (i.e., the idea that the Fundamentals universe will be forced to grab if the market moves) before suggesting that “US bond and stock performance overnight too resembles behavior in-line with pension rebalancing flows, with estimates of significant size in Equities to buy (Spooz +1.2% overnight vs SPX -2.9% MTD) against Bonds for sale (TY -0.1% overnight vs TLT +1.4% MTD) into the month-end.”
In the context of this week’s massive event risk (and “risk” can be taken to mean upside or downside there) around Powell and the G20, McElligott observes that “straddles are pricing-in big moves with the Dec 7th expiration to capture the full window.”
Charlie offers the following visual which shows that CTAs are currently at re-leveraging levels across a broad spectrum of global equities, but he also reiterates his warning from last week about how we’re also still precariously close to de-leveraging levels, which makes the G20 all the more perilous.
The bottom line from McElligott is this:
This risk then becomes that today’s CTA Equities “re-leveraging” sees another “de-leveraging” wave out of any potential G20 disappointment, as “sell levels” remain close-below the market.