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Post-Mortem.

It's autopsy time.

Suffice to say Tuesday turned into an outright bloodbath on Wall Street – and that is not hyperbole.

It was readily apparent from the word go in Asia that equities were prepared to fade Monday’s trade truce euphoria so this likely wouldn’t have been a banner day for U.S. equities anyway, but things really started to go off the rails around lunchtime.

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On Wall Street: Midday Massacre

Long story short, it looks like U.S. investors are taking an “out of the trade war frying pan and into the economic slowdown fire” approach this week.

The curve inversion story has folks on tenterhooks, and as we’ll never tire of reminding you, due to the length of this expansion/bull market, it is entirely likely that a non-negligible percentage of the people with their fingers on the proverbial buttons on Wall Street have literally never seen a curve inversion in their professional careers.

Anyway, something started tipping dominos around lunchtime and while we can all debate the sequencing, what’s not debatable is that the massive rally in the long end had a part to play. This is extraordinary:

30YHR

(Bloomberg)

That was actually even more extreme at the lows – 30Y yields were down by more than 12bps at one point. Needless to say, shorts in the long end and all the unfortunate souls who were inexplicably still sticking around in steepeners (which they’ll describe in retrospect as “tactical” in order to save themselves some embarrassment) said “to hell with this” and threw in the towel.

Meanwhile, as documented in the linked post above, negative political headlines out of the U.K. came calling (again) and appear to have conspired with the risk-off signal from bond land to trigger a rout. In a flash, the G20 gap higher in S&P futs was erased.

Adios

(Bloomberg)

Now obviously, something went awry there beyond just sentiment suddenly souring. Who knows how the dramatic moves from bonds played into this, but the bottom line is that the bottom abruptly fell out which, again, seems to suggest that modern market structure was at play.

Earlier on Tuesday, when things started to fall apart, we brought you some quick quotes from Nomura’s Charlie McElligott who warned that CTA deleveraging is now “live.”

Not everyone agrees that the trend followers exacerbated the move. For instance, Wells Fargo’s Pravit Chintawongvanich noted that on the bank’s estimates, CTAs are “moderately short in global equities and close to flat in S&P 500.”

CTAs1

(Wells Fargo)

“CTAs had a significant amount of de-risking to do in February, and flipped to net short during the selloff in October”, Chintawongvanich said on Tuesday afternoon, adding that “they are also trading in reduced size due to the high volatility experienced across assets in recent months.”

Here’s a quick visual that shows the SG CTA index’s rolling beta to the S&P:

CTABetaHR

(Bloomberg)

Chintawongvanich goes on to remind you that “CTAs in aggregate do not operate on a single ‘trigger point’ [as] individual CTAs have different rules for entries and exits and operate on different time frames.”

That said, the S&P did blow through its 200-DMA average on Tuesday and at least one other analyst we spoke to this afternoon suggested that a modest amount of CTA deleveraging probably played a role. Whatever the case, this was among the worst days for U.S. equities of the year.

SPXMA

(Bloomberg) 

It is probably a safe bet to assume that lackluster liquidity during the sudden drawdown was a contributing factor.

This has been an issue in nearly every single one of these “flash crash”/”mini-flash crash”/pseudo-“flash crash” events. There is no telling what happened to market depth around lunchtime on Tuesday as volatility spiked, but you’d be forgiven for asking whether market making algos might have pulled back or otherwise adjusted quotes to the detriment of liquidity.

We’re almost sure the following chart from Goldman has been trotted out by someone, somewhere today, but just in case you haven’t seen it, it’s worth pondering in light of today’s price action.

GSLiquidity

(Goldman)

As far as the VIX and VXN go, here’s a snapshot (note the bottom pane which shows you the relative size of today’s spikes):

Vol

(Bloomberg)

Other highlights from Tuesday’s massacre include an egregious selloff in financials (which are whatever the polar opposite of “pleased” is with regard to what’s going on in bond land).

Financials

(Bloomberg)

The regional banks ETF had its worst day since 2016.

RegionalBanks

(Bloomberg)

The FANG+ index was of course routed along with everything else, but really, Tuesday wasn’t as bad as some of this year’s other Tech bloodbaths.

FANG

(Bloomberg)

Finally, we would gently suggest that anyone who was still concerned about trade probably didn’t take much comfort in Donald Trump proclaiming himself “Tariff Man” on Tuesday morning.

As noted, that is precisely the opposite of what everyone wants to hear right now, although we imagine that tweet has already spawned innumerable memes which you can get a chuckle out of once you’re done surveying the damage Tuesday inflicted on your P / L.

Nothing further. For now, anyway.


 

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1 comment on “Post-Mortem.

  1. How can anyone really know positioning? CTAs, HFs (quant, fundy), plain vanilla. And how they roll up. I don’t believe there is a roll up of prime brokers etc. so how can these guys know positioning? Say i am long calls at Citi but short at Goldman. Citi guessesi might be long and Goldman guesses I might be short. And i dont tell either where I am at. Guessing maybe but really know? Of course if enough money follows it it can be self fulfilling and be made to look right but I am just not buying the positioning. Count me as skeptical. Not a biz model I would stake my money or career on. I’ll stick to fundamentals, technicals and events.

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