As noted, the mood was “buy it all” on Thursday as the promise of perpetual liquidity provision from the benefactors with the printing presses reinvigorates the QE trade.
Nomura’s Charlie McElligott reiterates the point in a note that finds everyone’s favorite rapid-fire derivatives strategist delivering what he calls – and this is a direct quote – “#BOOMSAUCE FROM THE FOMC.”
“The QE-trade is back in a major way overnight following yesterday’s Fed, the 2nd consecutive ‘dovish surprise’ from a major following the ECB’s own heavy tilt ‘easier’ on Tuesday”, Charlie writes, before running through US yields back through 2% (on the downside, obviously), US equity futures pushing towards records, credit spreads “galloping” tighter, EM FX rallying, commodities bubbling, gold up near a six-year high and, of course, the dollar on the back foot.
McElligott describes the Fed as delivering “just an epically dovish message… which evidences the most likely easing path to be one where they will cut big and fast in light of the proximity to the effective lower bound, in order to ‘prevent a weakening from turning into a prolonged weakening'”. That’s a reference to Powell’s “ounce of prevention is worth a pound of cure” comment with regard to a question about academic studies on how to conduct policy near the lower bound.
As far as the promised #BOOMSAUCE, Charlie takes you back to his long-standing contention that when the Fed does cut, they’ll “go big”. He’s reiterated that point on multiple occasions, including in late April.
“Well, it seems quite clear that the language used by the FOMC in its statement and by Chair Powell in the presser has in fact ‘green-lighted’ the Rates market into thinking this ‘bigger, sooner, faster; cutting dynamic is now the Fed’s base case”, he continues, before listing the following highlights from Wednesday’s decision/press conference as factors which tip a “big and imminent accommodation” push:
- Dropping “patient” and stating that “the case for additional accommodation has strengthened”
- Upping the severity of the inflation downgrade (no more “transitory,” as the SEPs showed inflation forecasts lowered with 2019 PCE revised to 1.5 from 1.8)
- Seeing 7 members mark-down FF targets 50bps lower by YE2019
- Indicating that QT is likely to end even earlier and concurrent with the first “cut”
- Finally, Powell himself hinting at preemptive and large cuts when answering a question about Fed research which shows that in a world where you are already this close to the ELB as-is that you should CUT BIG AND FAST—as JP hinted yesterday, “…an ounce of prevention is worth a pound of cure”
And, so, the “front goes mental” (Charlie flags EDH0 now +80 since the start of last month – top pane below) and the steepener breaks out in cash curves (2s10s steepened the most intraday since the election on Wednesday following the Fed).
So, what about stocks? Well, McElligott says this is “grabby, pain-trade” territory. To wit:
For US Equities, we are now in “grabby pain-trade” phase, as per the incredible under-positioning dynamic I’ve laid out this week: Over $150B outflows in Global Equities YTD vs $150B into Money Mkts YTD; PB Net-Exposure remaining near multi-year lows; HF L/S “Beta to SPX 3.9th %ile since 2003; heavy Defensive / Low Vol / Anti-Beta tilt; Leveraged Funds now with ~$53B of US Eq futures Shorts in aggregate YTD—and anecdotally, a LOT of clients saying “the highs are already in” going into yesterday.
Translation: “Liftoff”, as Jerome Powell’s unlikely hurdle of the high bar for a dovish surprise “plays directly into” a dynamic McElligott described on Wednesday, headed into the FOMC. Here’s another excerpt:
[There’s the] potential for a ‘rager’ into tomorrow’s Options Expiration—where we would likely see …the market ‘force-in’ with dovish-Fed this week and gap to new SPX highs, simultaneously into ‘bullish’ June serial Op-Ex seasonality (Friday 6/20/19), as buy-side Overwriters roll their in-the-money calls which creates large net buying of Delta.
As usual, Charlie delivers a dizzying array of additional color (and you can take “color” both figuratively and literally given McElligott’s original notes actually feature a color-coded font scheme), but for our purposes here, just note that he also flags a potential “sequencing risk”, which is as follows:
Witness this type of “force-in grab” into Stocks on account of the powerfully dovish CB moves this week, on top of the remarkable Equities “under-positioning” I’ve been highlighting the past few months. This then corresponds with the already VERY bullish analog / seasonality for SPX into the June serial Op-Ex (tomorrow), as options overwriters roll their in-the-money calls out and thus create big notional Delta to buy. But then dangerous the week AFTER Op-Ex (next week), you lose this overwriter “Delta buying” impulse (1w after June Op-Ex SPX perf -1.4% median and 87% of time LOWER, contingent on rallying the 1m into Op-Ex) and 37% of the Gamma expires tomorrow ($4.2 of the $9.4B at this monster 2950 SPX strike). Additionally you then too see the downgrade to the corporate buyback “bid,” as we are now deeply embedded within the “Buyback Blackout” window (over 75% of SPX companies within their blackout now)
And that’s just a small taste of Charlie’s #BOOMSAUCE.
You probably can’t handle a full dose.