Call it whatever you want to call it, but if you ask Nomura’s Charlie McElligott, one Fed chair and two of the world’s most influential people just capitulated in the face of unrelenting pressure from a force far greater than their collective power: the market.
“Powell, Trump and Xi collectively all ‘bend the knee’ to markets in less than one week’s time,” McElligott writes on Monday, before reminding everyone that this “coordinated capitulation” is happening “for the wrong reasons.”
Those reasons: tightening financial conditions, a decelerating global economy, a pervasive end-of-cycle trade and signs that the reflation narrative is dead.
The read-through for McElligott is that ultimately, this will be a fade-able rally. But a rally it is nonetheless and that’s bad news for the buyside. We’ve been over this on any number of occasions over the past week including on Monday morning.
“This Equities gap higher is the trade which would hurt the buyside the most and now after this latest can-kicking tri-party ‘blink,’ insult is further added to injury”, Charlie writes, driving the point home as follows:
There simply is not enough “net (long) exposure” on for HFs to realize any of this Equities rally, while MF’s instead used last week’s rally to further “de-beta” portfolios (which is “the right thing to do” at this point in the cycle!), as our measure of US Mutual Fund “Beta to SPX” shows an absolute nuking down to 17th %ile last week (from 57th %ile the week prior).
So, basically, the buyside is effectively getting “shorter” with every gap higher and the quandary then becomes whether to suffer in silence or try to grab for exposure despite abysmal performance.
“Due to performance struggles and the psyche damage, many funds had battened down the hatches into year-end, with very few willing to pay away already negative performance despite the risks of an upside move into year-end thus not ‘capturing’ this gap”, McElligott goes on to write, summarizing this rather unfortunate dilemma.
This recalls Goldman’s commentary from a Friday note. “Our Sentiment Indicator, which measures net equity futures positions of institutional and leveraged investors relative to the past 12 months, stands at just 12”, the bank wrote, adding that “the most recent move lower in net equity futures exposure has been primarily driven by a decline in long positions.”
Now one more time, from McElligott:
Last week’s futures positioning update (note: only through last Tuesday) showed the beginnings of a “dynamic hedging” spasm: Leveraged Funds added +$3.4B in SPX, NDX +$1.3B, +$700mm in RTY, while Asset Managers bot +$1.5B in SPX, +$600mm in EM Equities…and it goes without saying that those number REALLY jumped later in the week.
Panning back out to the 30,000 foot view, the bottom line – for McElligott anyway – is that the “coordinated capitulation” rally catalyzed by Powell, Trump and Xi all bowing to the market will be “a rental into year-end”.
The only question is whether you want to “pay” some of your own (probably terrible) personal P/L to participate or whether you’re content to let somebody else “rent” this farce and wait around for tightening financial conditions and the deteriorating macro backdrop to finally reassert itself late in Q1.