Well, the bottom fell out for U.S. equities at lunchtime on Tuesday.
If you’re looking to assign blame, you can probably point to 1) the 2s10s flattening inside of 10bps and 2) some negative headlines out of the U.K. which threw sterling for a loop, in turn turbocharging the dollar’s rebound.
The 2s10s tightened into single-digit territory (top pane) around the same time S&P futures plunged, completely erasing the G20 gap (bottom pane).
The move in ES came on high volume and pushed the S&P below its 200-DMA.
Although market participants were already skeptical about Theresa May’s chances of cramming her Brexit deal (which, you’re reminded, Brussels has assured her is the only deal she’s going to get) through Parliament, the outcome of a government contempt vote cast further doubt on an already indeterminate situation and as noted above, that hit sterling which in turn gave the dollar an extra boost. All of that played out around the same time as the U.S. equity swoon.
Meanwhile, it looks like the trend followers are piling on. In a quick client blast, Nomura’s Charlie McElligott says CTA deleveraging is now “live.”
Charlie has variously warned over the past several days that CTA de-risking/re-risking levels were tightly clustered, which is obviously bullish assuming stocks go higher, but bearish in the opposite scenario. On Tuesday, we’re getting the bearish side of it.
“Our CTA Trend model is again deleveraging massive notional in ‘long US Equities’ expressions across SPX, RTY and NDX”, he writes, adding that the bank’s “SPX model was triggered to sell down at 2763 with $32.8B notional for sale, reducing from “+100% Max Long” down to “+65% Long”.”
He goes on to warn that there’s an “additional sell point under 2711” which entails another $32.4B additional notional for sale.
Blame whatever you want here, but we’d be inclined to suggest that all of the factors mentioned above contributed.
More to come.