Nomura’s Charlie McElligott has a lot on his mind, but he’s got “no long-form prose today”, so his adoring faithful will have to be satisfied with a bullet point update on what he calls “a number of important developing trends and analogs.”
The title of McElligott’s Wednesday piece is – and I kid you not – “BIGLY UPDATES” (all caps in the original as usual).
Just what, you might ask, is so “bigly”? Well, a lot of things.
For one, Charlie notes that “Fed rate cut bets are accelerating again, with ED$ curves flattening powerfully overnight after the past few days of US data misses’.”
Rate cut bets were stoked last year as i) the data began to come in soft, ii) parts of the cash curve inverted and iii) the recession narrative proliferated as markets began to fear the Fed had tightened the economy into a slowdown. Now, rate cut bets are being bolstered by the Fed itself, with the language in last week’s statement suggesting the next move could be a cut or a hike with the onus squarely on the data to flip the committee back hawkish.
That said, Charlie goes on to flag signs that stimulus is finally starting to work its way through China’s clogged transmission channel. We talked at length about this over the weekend.
“However, the ‘Chinese Credit Impulse’ looks to be pivoting HIGHER after printing post-GFC cycle lows in 4Q18, as the lagging impact of easing / stimulus / liquidity injections begins to show in the ‘rate of change’ trajectory now pointing upwards”, he writes, adding that as a consequence, “we are seeing highly ‘liquidity-sensitive’ Industrial Metals too turn higher, which has shown to be a precursor to a short-term boost in Inflation Expectations and Cyclical / Value Equities.”
As for systematic flows, McElligott reiterates his call from Monday, when he flagged a positioning flip in S&P and the Russell futures, as CTAs pivoted from short to “Max Long”, just as they did in the Nasdaq last week.
“CTA Trend continuing their pivot from recent shorts in Global Equities to now ‘Max Long’ in Nikkei, FTSE and CAC over the past day, joining recently made ‘Max Longs’ in U.S. Equities SPX, NDX and Russell which have driven a large notional buying impulse in the market”, he writes on Wednesday.
Next, Charlie circles back to a point he made a couple of weeks ago (or at least it seems like it was a couple of weeks ago – every day feels like five on Trump time), noting that roll-down vol strats are “again short vega for the first time since Oct ’18, as the curve reverses the nearly 4 month inversion and has again moved upward sloping since Powell synthetically shorted vol last Wednesday with his epic ‘bending the knee’.”
Finally, he notes that the NY Fed Recession Probability Index touched 21.35% at the end of December. It’s crossed that Rubicon 11 times previously and 8 of those presaged a recession with an average / median lag of 13 months (after crossing 21.35 or higher):
As ever, Charlie has some trade ideas too, but the above represent the macro themes.
As you can see, it’s a tug of war and also a race against time as STIR traders bet on cuts, algos go long equities as upward momentum builds thanks to those same rate cut/policy put bets and China’s stimulus measures (slowly) work their way through to the real economy stoking some signs of reflation, all set against a backdrop where recession probabilities are rising.