Earlier this week, Nomura’s Charlie McElligott described the G20 meeting as a “binary nightmare” for traders who are being bombarded by an incessant barrage of conflicting headlines, some of which have turned out to be entirely bogus.
Now, the moment has arrived. Trump is in Argentina and he’s got Peter Navarro in tow, which means every ostensibly positive headline needs to be taken with at least a grain of salt, and probably a whole shaker.
On Friday, McElligott is out with a characteristically colorful blast and he kicks things off by reminding everyone that systematic re-risking/de-risking triggers are tightly clustered. On top of that, the greeks are land mines. “[The] tactical trade outlook continues to look binary for SPX, where a dangerous overlapping of both systematic BUY- and SELL- triggers and large SPX & SPY deltas- and gammas- at big strikes”, Charlie warns, before explaining exactly what that means for anyone who is confused (all caps in the original):
IT’S GONNA BE MENTAL around these G20 outcomes.
He goes on to remind you that playing out in the background (and thereby adding to the manic nature of the price action) is what he’s variously characterized as a “synthetic short gamma” setup that finds fundamental/discretionary investors being forced to grab for exposure on gap moves higher after last month’s purge.
“As I’ve been messaging relentlessly over the past few weeks, the Equities pain-trade remains higher due to the wholesale de-risking / de-grossing / de-netting / de-beta’ing of both MF and HF books over the past two months on the fundamental active side”, McElligott writes.
Despite the sustained uptick in realized vol. prompting de-leveraging from the vol-targeting community, Charlie notes that “this past week has seen the Fed’s ‘dovish pivot’ confirmed, which threw gasoline on the relief rally fire already being stoked by optimistic G20 language [and] as such, first-mover and ‘unemotional’/rules-based CTAs have been re-leveraging US and Global Equities with significant notional buying [and] covering week-to-date.”
The takeaway: It’s going to be choppy, by God.
“The YTD ‘chop’ has created a dynamic where both further re-leveraging levels (to ‘Max Long’) and de-leveraging levels (again flipping to ‘Max Short’) sit within a DANGEROUSLY tight band”, McElligott cautions, in a reiteration of what he’s been saying for at least two weeks. Here’s a visual:
And then there’s the greeks. “This also comes as there remains large SPX & SPY consolidated delta- and gamma- within reach at the 2650 / 2700 / 2750 strikes as the buyside has held their options”, Charlie says, before concluding that this means there’s “the potential for options hedging flows to interplay / exacerbate these systematic trigger levels.”
This is the same dynamic over and over again across assets. Momentum chasers and trend followers pushing critical assets into key strikes triggering gamma effects. Now it’s colliding with a massive geopolitical powder keg.
To make it all the more interesting, the big headlines will likely come over the weekend.
Good luck, folks.