“From our conversations, trade had either fallen out of focus or had generated optimism among many investors, with [Trump’s] announcement coming during a period of relative calm and few announcements compared with 2018”, Goldman wrote on Monday evening, describing the extent to which the administration’s latest trade escalation hit at a time when market participants had become ambivalent, at best, and complacent, at worst, about a prospective Sino-US trade pact.
Once you’ve tackled prospective de-leveraging from CTAs (the market’s perpetual boogeyman), fingered one group as a source of potential profit-taking (in this case asset managers sitting on a massive notional long in equity futures, half of which was accumulated amid this year’s rally – see table below) and documented a possible negative gamma flip (beyond which dealer hedging exacerbates directional moves), there’s not a lot left to say about Tuesday’s rout on Wall Street.
(Nomura)
All of the points mentioned above were detailed by Nomura’s Charlie McElligott on Tuesday afternoon. He also flagged the VIX curve inversion as the source “behind much of this now-forced covering of short vega from systematics and ‘roll-down’ strategies.” The VIX itself hit the highest since January.
Beyond all of that, you’re left with a simple read, which is just that Tuesday was a reckoning of sorts – payback for Monday’s stick-save and the only “rational” reaction to news that the US will in fact more than double the tariff rate on $200 billion in Chinese goods come Friday, unless Vice Premier Liu He can somehow convince the US side not to go forward with the promised escalation (perhaps he can bribe Trump with Quarter Pounders).
Tuesday was one of the worst days of the year for US stocks. Given that, it might seem odd to characterize a session during which the Dow fell more than 600 points at one juncture as “nothing to write home about”. That said, the chart below suggests Tuesday really wasn’t all that dramatic in the grand scheme of things.
The Nasdaq fell harder, but there again, Tuesday’s losses paled in comparison to some of 2018’s worst sessions.
It’s also worth noting that we’re not far from seeing the 3-month/10-year invert again. The usefulness of this signal has been called into question by any number of analysts and commentators this year, but it is what it is.
The turmoil in risk assets has weighed on crude. Despite the incessant exchange of aggressive banter between Washington and Tehran, Brent is back below $70, as the specter of a trade war escalation clouds the global growth outlook.
We’ll see how long that lasts once John Bolton starts bombing some folks (sorry, the Bolton jokes are tired, but his reputation precedes him, just like his mustache).
At the end of the day, Trump is getting what he surely knew was coming in the event he decided to upend the trade talks at the last minute. Of course, just because this was entirely predictable doesn’t mean he considered it in the heat of the moment on Sunday evening when he opened his Twitter app.
And besides, if things go too far off the rails, he can always just blame Jerome Powell.
Speaking of Powell, the last time stocks had a week this bad, Donald Trump quite literally picked up the phone and called the Fed.
With that in mind, it bears mentioning (again) that Clarida reiterated Powell’s position on policy early Tuesday. That, we argued, doesn’t bode particularly well for sentiment as it suggests the Fed is possibly in denial when it comes to inflation and also in “push-back” mode when it comes to countering market expectations for a cut and affirming their independence.
Perhaps Powell should turn his ringer off on Tuesday evening, lest he should he find himself having to send the president straight to voicemail.
