“Ahhhh, a tail”, Nomura’s Charlie McElligott wrote Friday morning, in a brief note that takes a look at key levels now that things are “moving” following a geopolitical earthquake of epic proportions.
Crude is obviously soaring in the wake of Donald Trump’s decision to assassinate Qassem Soleimani, the most powerful general in the Mideast and the second-most powerful man in Iran.
Brent surged as much as 4.4%, while WTI is up more than 3.5%.
“Crude now +3.8% (Gasoline +3.5%) following the US strike which killed Soleimani, while Supreme Leader Ayatollah Ali Khamenei promises ‘severe retaliation’ thereafter likely via their numerous proxy groups in the region”, McElligott writes, noting that the “standard safe-haven bid” is now in full swing.
With long-end US Treasurys extending Thursday’s rally, 10-year yields are now back down to 1.82% and had fallen as much as 8bps to 1.80%, at one juncture.
This is potentially significant. “As per the Nomura QIS model we estimate that long-term CTA models could see potential re-leveraging to a ‘+100% Long’ position from the current aggregate ‘+51% Long’ position across all model tenors in both Eurodollar- and TY- futures contracts ***IF OVERNIGHT LEVELS WERE TO HOLD BY E.O.D.”, Charlie notes.
The risk-off mood is rippling through equities, with US futures pointing to a rough session on Wall Street. As things stand currently, McElligott doesn’t see much scope for the kind of cascading, selling-begets-selling, nightmare scenario to develop.
“Is this event enough of a macro catalyst to trigger a larger deleveraging / unwind in Spooz?’, Charlie asks, before answering his own question: “Currently my response would be ‘NO’.”
For one thing, the dreaded gamma “flip” zone is some 40 handles below spot. 3173 (SPX obviously) is “where things could get slippery”, McElligott writes.
In addition, we’re still very much “in trend”, so to speak, when it comes to CTAs. Specifically, Charlie writes that the Nomura QIS CTA model “shows the current trend signal in SPX futures remaining deeply ‘in the money’ and still ‘+100% Long’, not seeing any potential deleveraging as it currently stands until a breach of 2970 (-8% from spot)”.
The good news for stocks is that it would be nearly impossible for Donald Trump to make this situation any more tenuous. After all, he’s just carried out an extraterritorial assassination targeting one of the world’s most infamous intelligence operatives and battlefield generals.
With Trump, it’s never safe to assume things can’t get any more tumultuous, but barring a strike inside Iran that kills Khamenei himself (or an invasion) the US has escalated things as far as they can be escalated.