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

So, is there any risk? Well, yes.

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)


 

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

  1. fed is putting liquidity into the markets…..prices go up, thats about all one needs to know. now “the economy” is another topic. it seems over the past several days, prices moving up have encouraged people to say that it indicates a bottoming of the global economy…while we wait for any data to support this to come in. muted, not-growing, no-falling data is most likely given china credit impulse over the past (lagged) 6 months. so how long will investors wait for ‘growth around the corner’. junk at all time highs, while 90 day auto lates is at 2009 levels and climbing. earnings down on the back of margin/labor exp, concurrent very slow econ growth, yet stocks up 25%, like 2014 which led to 15 months of flat with a -10% thrown in at the end. xmas season so far spending is down. so where exactly will the earnings growth come from if manufacturing is in a coma, and the US consumer is ‘budget-minded’? bullishness and morning gap ups feel like dec 2017 or dec 1999 (both got an extra kick of ‘insurance’) both didnt last to see pitchers report for training.

  2. It was the end of not just another year but a decade not like many others…. None the less it was over… The Beach was abandoned ,surprisingly for the time of year the good news being an end to the seemingly incessant clatter of the past days and months.. …the bad news was that the sunshine appeared to be in jeopardy from the storm clouds over the ocean… The good news was they appeared to be heading in any other direction who really knew after all. Actually no one really cared because the only two left on the beach were the gorgeous Tina Fomo and of course myself…Having just read Charlie’s prognostications I felt as well prepared as probably Ulysses was for the Sirens…What more could one ask for ????

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