Nomura’s McElligott Weighs In On Monday Mayhem: ‘Never Get Caught Short Gamma In August’

Markets could be in for a messy couple of days, as two local risks are now squarely in play.

Last week, after Donald Trump reignited the trade war, we noted that although one bank’s popular CTA model still had spot SPX well above levels that would trigger de-leveraging from trend followers, the market was through levels where dealers’ gamma profile likely flipped negative.

On Monday, Nomura’s Charlie McElligott cautions that “not only did Dealer options positions in S&P- and Nasdaq- both shift ‘Short Gamma’ by midweek, but the feedback loop on the gap lower has now triggered CTA Trend model deleveraging in each as well”.


McElligott’s CTA model shows selling under 2946 SPX, where the signal gets cut from +100% to +66%, triggering deleveraging. Futures were well through 2,900 on Monday. The next ‘sell’ level triggering more deleveraging sits at 2830, where the model would flip to -59% ‘short’ with ‘Max Short’ under 2714.

On the Nasdaq, the model already showed a reduction from 100% long to 66% long on Friday. The next “sell” threshold is 7375, where the model flips outright short.


Obviously, the turmoil on Monday was catalyzed by the yuan’s plunge through 7 and news that China has instructed state buyers to halt purchases of US agricultural goods. Beijing would subsequently water down the farm products news by suggesting that it wasn’t wholly accurate, but the damage to sentiment was done – and then some.

“The Yuan free fall has again reinvigorated the ‘worst fears’ of outright currency warfare across global CBs in ‘beggar thy neighbor’ fashion, with the Yuan in-and-of-itself capable of triggering a global disinflationary impulse”, McElligott said Monday, nothing that SGX Iron Ore was crushed overnight.

“Expect the PBoC however to use fixings, capital controls and potentially FX swaps with local banks (deter USD buying) in order to manage the Yuan and prevent full-fledged capital outflows / market breakdown, while at the same time try to minimize the depletion of FX reserves”, he goes on to say. Remember, China learned valuable lessons in 2015 about how to manage just this kind of situation.

Fed cut expectations are now into hyperdrive again, with the market implying 32bps of cuts in September, and 100bps worth of cuts over the next year.

“The ‘controlled’ trade war escalation move from POTUS has the market once again dictating terms to the Fed”, Charlie sighs. The title of his Monday missive: “Never get caught ‘short gamma’ in August”.


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