Nomura’s McElligott Explains The ‘QE-Like Stasis’ Of An ‘Everything Works’ Market

The “Phase One” deal between the US and China is either “the most momentous” achievement in the history of trade or an entirely nebulous handshake agreement backed up by a set of promises documented on reams of bound paper that are worth more than the words written on them.

That’s the joke on Monday. As ever, the reality is likely somewhere in between. Beijing clearly isn’t keen to commit to a specific number when it comes to agricultural purchases from the US, but after nearly 20 months, Trump has seemingly badgered the Chinese into agreeing to something, if only because they, like the rest of us, would like a few weeks of respite from hearing the president shriek at them.

But whatever the truth is about the “deal”, Nomura’s Charlie McElligott on Monday notes that the postponement of the December 15 escalation was enough to disappoint “an investor universe which was ‘long crash’ / tail-hedge protection”.

Read more: Nomura’s McElligott On A Possible ‘Impulse Gap Higher’

With two key event risks now cleared (the trade deal and the UK election) those hedges are subject to a power decay and a summary “puking”. Hence “Spooz +2.3% from last Tuesday’s low to current levels, while UX1 currently -4 vols from last Tuesday’s highs in VIX futures”, Charlie writes.

Where things go from here – i.e., looking “tactically” at where the “local” next stop is for US equities – McElligott notes that SPX spot is “pinned” between the “gravity” of the “two largest strikes on the board” at 3175 and 3200. He also notes incremental downdraft potential in the VIX complex from longs in the ETNs rolling.

But stepping back a bit, Charlie cites four factors which contribute to a constructive outlook for equities and bonds in true “everything rally” fashion. To wit:

• Still-collapsing cross-asset volatility, as event-risk is cleared and “crash” hedges (US / China trade disaster, U.S. Recession, Brexit etc) decay harshly and are “puked”
• US Dollar Index -2.4% in less than 3 months—-> “easier” financial conditions catalyst as well
• A “goldilocks” U.S. economy (~2% GDP Growth) now being re-priced vs prior “imminent recession” fears of just a few months back
• And all stabilized by an “asymmetric” global Central Bank policy function (almost “no bar” to CUT in light of “still-benign” inflation against an impossibly “high bar” to hike as we move forward), which perpetuates this “QE-like” stasis of an “everything works” market

That neatly encapsulates the current zeitgeist as we enter 2020. The Fed has seemingly succeeded in engineering a slide in the dollar (if only temporarily) and stabilizing the US economy (again, if only temporarily).

Meanwhile, inflation continues to “behave”, as it were, giving not just the Fed, but central banks the world over all the plausible deniability they need to persist in an accommodative lean even if growth perks up materially.

Remember, the easing impulse (i.e., the net number of cuts) is spectacular this year:

Is there any risk? Well, yes. From a macro perspective the risk is always the same: Unpredictable US foreign policy.

From a more local, mechanical perspective, McElligott notes that “the 1) EXTREME SPX OPTIONS $DELTA- (99.9th %Ile since 2013) and 2) EXTREME SPX OPTIONS $GAMMA- (94.7th %ile) in the market” could engender de-risking flows unless it’s rolled this week.

(Nomura)