European shares officially fell into correction territory on Thursday, as the Stoxx 600 added to recent declines, dropping around 4% at one juncture.
Risk assets globally are recoiling at an unrelenting stream of dour news flow around the coronavirus.
As of Thursday morning, just after the open on Wall Street, US equities were on track for their worst week since 2008.
As documented here, travel restrictions and other measures aimed at containing the spread are becoming more commonplace, which in turn presages a severe curtailment of economic activity.
That, in turn, means revenues and profits for multinationals could suffer a body blow. Goldman on Thursday said S&P EPS growth will likely flatline in 2020.
On Wednesday, I spent some time parsing the analyst commentary in an effort to put some numbers to the amount of systematic selling pressure that hit markets on Monday and Tuesday.
According to estimates from JPMorgan’s Marko Kolanovic, the total across CTAs, vol.-targeters and option hedging was around $150 billion.
De-leveraging from vol.-targeters likely hasn’t entirely run its course, but the implied allocation and percentile exposure ranking has collapsed, so the scope for further de-risking is obviously lower.
When it comes to the prospect of more CTA de-leveraging, the usual “smart people can disagree” assessment applies. On Wednesday, Nomura’s Charlie McElligott was on the record saying that “we would expect to see CTA deleveraging on a close in Spooz below 3139”. He also warned that the 3-month look-back window “now has ‘loading’” and would likely flip short.
On Thursday, prior to the open, McElligott reiterated that, noting that the 3-month window is “now the single largest ‘loading’ at 42.7%”, which in turn means the legacy “‘100% long’ signal de-leverages” to the tune of an “enormous notional drop to just ‘+15%'”.
Incidentally, McElligott notes that his model was “bang on”, at least if you look at volume spikes in futs.
We’re now approaching a pivotal juncture, and you can take “pivotal” both figuratively and literally in this case.
On this model, further de-leveraging and an outright flip to overall “short” occurs on a break through 2,915. That said, re-leveraging to “+57%” occurs on a close above 3,149.
The situation, as they say, is fluid.
Oh, and one more thing. “What a difference a week makes”…
(Nomura)
