Nomura’s Charlie McElligott is “running to the airport” (hopefully not in Hong Kong), but that didn’t stop him from sending out a second note of the day, which serves to crystallize his thoughts on the tariff news and concurrent risk rally.
As noted here earlier, this can-kicking exercise may not, in fact, be a game changer and Donald Trump has a penchant for changing his mind at the drop of a hat, which means this latest pseudo-truce could fall apart just as quickly as the Osaka deal.
That said, it has obvious short-term implications for markets. “Does this change a belief by most that ‘they’ are again only ‘delaying the inevitable?'”, McElligott asks, before answering his own question. “NO—but in the short-term, it simply reverses the Price-Signal and Volatility inputs for broad ‘trend’ trades”, he adds.
You might recall that over the past several sessions, Charlie has talked about the prospects for a pause in the duration rally to help bring down rates vol., and thereby stabilize things on a cross-asset basis.
He hits on that Tuesday in the context of the tariff news.
“As per recent commentary, ↑ Duration has meant ↑ Rate Vol, thus it makes sense that as USTs weaken and Rates selloff on this easing of tensions that we see the Vol Grid come off in conjunction”, he writes.
That, in turn, plays into what he’s variously described as one of the more potentially impactful near-term catalysts for equities – namely the “other side” of the 50 Cent VIX positions.
“What it very clearly means right now in US Stocks is the potential for an even larger underlying impact [as] this re-pricing lower in the VIX complex should drive powerful second-order impacts on Equities, especially [via] Dealer Short Gamma positioning per the ’50 Cent’ VIX Call Wing flow into Friday’s expiry”, he writes, recapping a series of recent notes, before summing it up by reiterating that with dealers long a lot of ‘crash’ headed into expiry, they’re wrong-footed, which should mean that “as VIX futs grind lower and ‘long vol’ positions across ETN’s are incentivized to take profits, they’ll have to sell more futures on a move lower VIX in order to stay hedged”.
As a kind of addendum that speaks to rates vol. as a standout in the current environment (characterized as it is by an insatiable bid for duration and pile-ons in popular rate cut expressions) Bloomberg’s Luke Kawa notes that “by one-year Z-score, the most elevated implied cross-asset vol right now belongs to US Treasurys – and it’s not even close”.
All of the good trade vibes can reverse with one Trump tweet or errant soundbite, although the US president’s comments to reporters in the wake of the tariff news were broadly optimistic.
“[We] had a good talk with China on trade”, Trump said, describing the tariff delays as something that will “help lots of different groups”.
One of those “groups” is, of course, Christmas shoppers, something the president readily acknowledged.