This means “a re-rack of the previously planned September in-person meetings looks like a real likelihood again and further, there is even speculation from some DC consultants that this could potentially set up yet ANOTHER tariff delay from the Trump Administration”, Nomura’s Charlie McElligott writes on Thursday, of the latest twist in the ongoing trade war soap opera.
At his regular briefing in Beijing, Chinese Commerce Ministry spokesman Gao Feng said that although China has plenty of scope to hit back at the Trump administration, it would be preferable to chat with the US about the removal of the new duties.
Risk quickly bounced, and the yuan dodged its longest losing streak on record.
Read more about the apparent olive branch from Beijing
Of course, the narrative lives and dies by Donald Trump’s mood swings, so as ever, it’s a “fingers crossed” scenario when it comes to hoping the US president doesn’t fire off an errant tweet that deep-sixes September’s negotiations in response to some perceived slight.
But, with that obligatory disclaimer aside, the good vibes could play into a September setup that sees US equities rally into mid-month (if only to fade in the back-half as the risk of central bank disappointment comes calling and corporates enter blackout windows).
“I believe risk trades higher into the ‘Gamma’ events mid-month around VIX and Equities Options Serial Expiry”, McElligott said Thursday morning, reiterating the main points from recent notes, which have variously documented upside potential from “sequencing” given the rolling of in-the-money calls from overwriters and corporate management looking to get in buybacks ahead of their blackouts.
Those catalysts, to the extent they serve to accelerate any trade-related rally predicated on Thursday’s good news, may force the fundamental/discretionary crowd into the game. As Charlie notes, net exposure there is still absurdly low.
Rippling on down the line, if realized vol. moves lower (“bleeds out”, as McElligott puts it), that could prompt re-leveraging from vol.-control funds and other systematic strats. That, as CTAs “who” flipped short on Wednesday are “already ‘stopped-out’ per today’s spot”.
“It’s likely that this is heavy CTA-driven covering in global equities”, Charlie says, adding that his QIS model’s 23% “short” position would be covering on a close about 2,877. Note also that McElligott says dealers’ gamma positioning is back in positive territory, which, to oversimplify, means volatility could be tamped down as opposed to pernicious “selling begets more selling” dynamic that has bedeviled markets during acute risk-off periods.
(Nomura)
All of that said, Charlie retains his thesis that past mid-month (i.e., in the back half of September), it’s possible that we see a local peak in equities as a variety of positive (i.e., bullish) flow factors roll off or otherwise dissipate.
And just in time for the Fed to (maybe) disappoint both the market and president Trump.
