Markets stocks VIX volatility

Nomura’s McElligott: ‘That Was One Of The Most Manic 36 Hours Of Trading I’ve Ever Witnessed’

There's no room for the mincing of words.

Nomura’s Charlie McElligott didn’t mince words when it came to describing the last couple of days.

“Well that was one of the most manic 36 hours of trading I have ever witnessed in my 18 year career”, he remarked, in a Friday note.

Obviously, Donald Trump’s decision to escalate the trade conflict with China changes the game when it comes to Fed prognosticating. Goldman, for example, quickly raised their subjective odds for a September cut from 60% to 80% on Thursday evening in light of the president’s tweets.

Read more: Trump’s New Tariffs And What They May Mean For GDP

For McElligott, Trump’s latest (and, the president would say, “greatest”) trade broadside renders a fledgling long dollar/short duration trade idea null and void. “I was ready to enter a tactical ‘long USD’ + ‘short duration’ position into August’s seasonal volatility and high likelihood of Fed disappointment in September as per the Powell commentary”, he writes, while simultaneously noting how “laughable” that idea now seems after yet another out-of-the-blue Twitter declaration from the commander-in-chief.

“President Trump has again changed the market calculus and thus investors are now forced to adjust their views on the monetary policy path from here, as this re-escalation of the China trade war likely forces the Fed (and ‘competing’ Central Banks in beggar-thy-neighbor currency devaluation fashion) to once again ‘bend the knee’ in a preemptive strike against the negative forward growth implications”, Charlie says.

And so, a September cut is fully priced (versus almost a coin flip following the Fed meeting). Between the renewed trade tensions (which are now “boiling over”, not just “simmering” to employ Powell’s vernacular from the press conference) and fresh evidence that the global manufacturing slump is finally making landfall stateside, the idea of crowded cross-asset macro positioning being grossed down “has been conceptually ‘stopped-out’ dead in its tracks”, McElligott declares, citing (among other things) the “fresh wave of stop-ins’ to all things Duration- and Rates- linked” including a multi-standard deviation move in reds on Thursday.

He goes on to cite the following reinvigorated duration grab expressions:

  • Real Money—both foreign and domestic—have been driving the demand seen on our desk for weeks, and that continued yday
  • Overnight there was talk of Asian Real $ flatteners going-through, as well as outright long-end buying
  • Suffice to say that on any breakout to new levels (in this case, fresh multi-year levels), you are likely going to see (negative) convexity hedgers active—which from the looks of the trade in swaps yday, we got that in the form of new Receiving flows
  • Also too then it’s likely that there are fresh duration buys in the long-end originated from Vol Dealer desks, who too are being forced-in as per Gamma hedging requirements from the incessant Receiver demand

As far as equities go, McElligott quips that he “certainly got [his] anticipated August ‘Vol Spike’ call correct, with US Equities ‘vol of vol’ seeing a 9.2 vols move yesterday alone and indicating a massive grab for tails, as the whole curve was lifted”.

Clearly, the door is open for a correction and as we highlighted on Thursday afternoon (citing Charlie’s Wednesday note), dealers are now short gamma after yesterday’s selloff.


That’s one local risk realized. In addition, McElligott flags “bulk” dealer vol. shorts and recent reengagement (in “significant size”) from systematic VIX roll-down players, who will now have to hedge. Then there’s VIX seasonality, and the prospect of a sustained vol. spike pulling up trailing realized and thereby forcing de-leveraging from the vol.-control crowd. As far as CTAs go, the QIS model shows de-leveraging under 2,916 SPX.

For what it’s worth, the VIX is on track for its longest stretch of daily gains since October.

Of course, the irony in all of this is that the crazier things get, the more inclined the Fed will be to ease. Indeed, it seems entirely likely that Trump is angling to engineer just that outcome.

As Charlie puts it, “these market shock events only firm the case for more investor-conditioned ‘buy the escalated Fed easing case’, as external risks to growth further percolate”.



8 comments on “Nomura’s McElligott: ‘That Was One Of The Most Manic 36 Hours Of Trading I’ve Ever Witnessed’

  1. Or, as Duvall’s Col. Kilgore, would say: “I love the smell of napalm in the morning.”

  2. Bitter Pill

    At the risk of being perceived as wrapped in tinfoil, I’ve always wondered what would happen with trump in the White House, playing with supercomputer analysis. I think the Fed rate cut meeting the other day was an example of an algorithm poker game, where a computer had spit out an analysis for a quarter percent cut and a half percent, thus, as Powell playing into the hedged insurance bet for his play, trump knew in advance that if that card was played, he’s start tweeting about China and tariffs, essentially working on some insane evil plan to short the market. One has to wonder what his strategy is all about and how it makes America better, maybe the computers know? It’s easy for many people to be united with cynicism. The poker game apparently is about trump winning biggly, but I can’t help but think that manipulating the markets is all about trump winning in some dirty (illegal) way, benefitting himself, in terms of personal wealth. My concern about supercomputers goes back to trumps interactions with Cambridge Analytica and datamining. I’m still very focused on trump’s statement that he could shoot an individual on a widely trafficked New York City street and not “lose one voter.” That suggests some deep-level shift in datamining input and output, suggesting that trump had statistically accurate data which encouraged bat-crazy stupidity to be a part of his expanding media manipulation efforts. I was worried back then, in 2016, but my real fear was that trump would be able to use data mining in new ways, with govt supercomputers, taking 2016 jet fuel and then ramming his insanity into a skyscraper, just like a terrorist — and then get away with it as the fans cheer on.

    • Harvey Cotton

      Like Frank Underwood, but with everyone else having an 85 I.Q.

    • Election Crimes Bulletin – Trump and the 13 Losers behind him
      AUGUST 11, 2016
      Greg Palast With Dennis J Bernstein for Nation of Change

      Trump is a loaded weapon let loose on this election, and now he’s backed by 13 people he once called “losers.” Let’s take a look at who these guys are and just what they have in mind for this election, shall we?

    • henkema22

      nice comment, my thinking goes in the same direction. trump must have a constant orgasm by moving the markets with his tweets and having insider knowledge all the time. he and his cronies are getting veeery rich these days….

    • henkema22

      oh no, he would never do that, because it is not fair against the other market participants. he has a high moral standard !

    • I’d argue he’s more like Chauncey Gardiner as opposed to some data-mining mastermind.

  3. One way to end this “Trumpian” nightmare we are all living in is to take his ball away and quit playing the game. I have no idea how “Walt Heisenberg” stomach monitoring Trumps bullshit day after day.

    I hate to admit it but I’m so tired of that man’s shit I’ve considered more than once moving everything into cash and refusing to reinvest until he is out of the White House for good.

    If more and more investors did decided to do just that then “Problem solved” he’d be gone in a heartbeat.

    Before anyone rolls their eyes at my naivete, Yes I know the implications of everyone pulling their money at once.. I am aware of the Great Depression… It’s ok to daydream once in a while. 🙂

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