Nomura’s McElligott: ‘It Would Take An Enormous Macro Shock’ To Tip Systematic Dominoes

Markets have cleared the final hurdle for the first full trading week of 2020. The December jobs report was passable, although the downside miss on the headline and the most sluggish pace of wage growth since July of 2018 perhaps brings “end of cycle” back into the lexicon.

Stocks could certainly use a breather after running to fresh highs this week thanks to the cancellation of World War III (if you reserved a seat at any Mar-a-Lago launch parties to watch the first cruise missiles strike Tehran, there will be no refunds).

And yet, barring another black swan, derailing equities could prove difficult, at least in the near-term.

Read more: As Stocks Power To Nosebleed Levels, Even Jeremy Siegel Is Worried

“This VERY ‘Long Gamma’ dynamic continues to act as a market shock-absorber alongside recently accelerated Buyback flows ahead of the imminent rolling ‘blackouts’ into [earnings]”, Nomura’s Charlie McElligott wrote Friday, underscoring points he made earlier this week.

It will take “an enormous macro shock catalyst to push us down to levels where we would see the Dealer position ‘flip'”, he goes on to say, in a note. The danger zone is a country mile below spot (3,198).


Charlie goes on to reiterate that levels which would trigger CTA de-leveraging now seem almost impossibly out of reach, down under 3,142.

Here, for reference, is how things developed over the course of this month’s geopolitical, Defcon 1 situation (remember, these are estimated levels and they change, so this is a “for illustrative purposes only” type of deal):

On Friday, McElligott underscores the power of “extreme greeks” (if you will). To wit:

SPX / SPY consolidated options are seeing both $Delta- and $Gamma- testing recent extremes (partially as a function of the market’s move higher), with $Gamma at 92nd %ile (rel 2014) and $Delta at 99th %ile now, and seeing “gravity” building at the massive 3300 strike in SPX (a whopping $10.5B-worth of $Gamma) helping keep us so “sticky” between there and the next-largest $Gamma strike at 3250 ($6.7B).

We should mention that the overall thrust of Charlie’s Friday note is aimed at reiterating just how well the reversal strategy he championed last month has played out. It’s been helped along by curve flattening in the new year.

From a macro perspective, the story remains the same in his eyes. Here’s that story (as repeated Friday and first expounded last month):

As stated repeatedly, I simply don’t see scope for a large US “reflation” trade in 2020–and thus, do not see scope for a large UST selloff in 2020 which some have prognosticated–because 1) the US economy remains positively “goldilocks,” 2) inflation remains benign, 3) Fed policy remains asymmetrically tilted towards “easing” and 4) my belief that due to the structural dysfunction within US funding markets that the current “QE-Lite” will eventually transition into OUTRIGHT “QE” with the Fed forced to purchase Duration / front-end USTs.

That, Charlie said three weeks back, is “much more realistic” than any consensus views calling for an outright reflationary dynamic in 2020 (and, incidentally, also more realistic than any outright bearish equities calls).

Read more: Nomura’s Charlie McElligott Delivers 2020 Macro Outlook: ‘My View Is Much More Realistic’

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