ISM ‘Death Blow’ Triggered Mechanical ‘Escalation Flows’, Nomura’s McElligott Says

Tuesday’s decade-low ISM manufacturing print in the US put markets squarely back in “growth scare” mode.

An inflation miss in the euro-area and the first negative inflation print in South Korea’s history didn’t help. Neither did final PMIs across the pond which largely confirmed the deepening factory malaise tipped by the flash reads last month.

Early Wednesday, US equity futures were some -2.6% from pre-ISM levels.

On Tuesday afternoon, in the course of documenting how one widely-followed trader is now pressing shorts in light of recent events, we noted that mechanical flows are probably in play. As is custom, we cited Nomura’s Charlie McElligott, who on Wednesday is out with a quick update.

“Yesterday’s early hours Rates selloff is all but a distant memory now, as a disastrous US ISM print has again kicked-off another ‘global growth scare'”, he writes, adding that these scares are “now regularly-scheduled monthly, it seems”.

We’ve seen the “escalation flows” movie before. “In prototypical ‘shock-down’ fashion, the ugly ISM miss was the macro catalyst to then trigger ‘escalation flows’ on this now 77-handle move lower in S&P futures from the 2994 highs made yesterday morning to today’s pre-open”, McElligott notes, before flagging “a much deeper and more sizable Short $Gamma position for Dealers in both SPX and Nasdaq”, with the former having “flipped ‘short’ under 2978, with combined $Gamma of SPX / SPY at -$7.1B” and the latter flipping “under 190.63, with $Gamma in QQQ of -$317.3mm, just 7.8th %ile since 2013”.


And what about CTAs? Well, some triggers were indeed hit on Tuesday according to Charlie’s QIS model.

“The final ‘escalation flow’ comes from CTA Trend triggers being hit, as the Nomura CTA model estimates that both the S&P- and Nasdaq- futures positions would be DELEVERAGING / REDUCING from the prior ‘+100% Long’ to now a ‘+54%’ signal”, McElligott writes. He adds that the three-month window has flipped “short” for both. Some of the flow going through overnight and early Wednesday may have then been attributable to trend deleveraging.


With the market now back in “growth scare” mode, ADP, ISM services and September payrolls have now become potential land mines.

Hopefully, no more “shock” disappointments are in the cards, especially at a time when the domestic political backdrop is deteriorating rapidly and the threat of capital restrictions on China casts a pall over the upcoming trade talks in D.C.


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