The Cat’s Out Of The Bag.

“Traders [are] questioning the ability of even lower rates and their ability to alter consumer spending and corporate behavior”, Nomura’s Charlie McElligott wrote Monday morning, on a day when rates markets are on fire with speculation around another “save the world” moment for central banks.

Through the cash open on Wall Street, the market had heard from the BoJ, the BOE and the ECB. Expectations for rate cuts went Defcon 1.

But the issue is, it’s just not clear that you can drown a virus in liquidity – although, to be fair to central banks, the past five years have proven that many problems the world previously thought weren’t addressable by underwriting the short vol. trade in all its various manifestations, were, in fact, amenable to such treatment.

Kidding aside, it’s getting bad out there. The US has two deaths from the coronavirus, New York has its first case, and the situation is deteriorating in Italy, South Korea, and Iran, with the latter obviously in a far more precarious position in terms of being able to deal with the problem.

Indonesia reported its first case on Monday, as did Portugal and India said it has two new infections. Germany’s case total jumped to 150. Iran’s cases jumped a harrowing 50% to 1,501. The death toll in the country is now 66. There are 7,280 suspected cases. Brussels and Berlin reported infections.

“I think the slow realization as to [the] coronavirus ‘cat being out the bag’ in the United States and the rest of the world… now has people scared to go more than ‘rental long’ in stocks, knowing that eventual global mega-city ‘cluster outbreak’ headline is a simple inevitability”, McElligott goes on to write, in his Monday missive.

On Sunday, in “Sometimes, The Entire Edifice Simply Implodes“, I reminded folks that in addition to the self-feeding, systematic “doom loop”, another source of vulnerability for the market headed into last week was the massive asset manager long, which was ripe for profit-taking.

McElligott on Monday notes that through last Tuesday (you’re reminded that CFTC data is “through the week ended Tuesday”)  showed a “biblical purge” of S&P futures from asset managers, who dumped around $52 billion in the week through February 25. That, Charlie marvels, is a “0.1%ile 1-week change”.

(Nomura)

And yet, given how extreme that position was, it still leaves a 98%ile net long at $139 billion “thus remaining a source of further potential de-risking”, McElligott goes on to say (of course, some of that may have been further puked over the rest of the week).

If you’re wondering just how impactful the sudden flip from the benign long gamma environment (where hedging dampens volatility) to one were hedging flows amplify moves (i.e., selling into selling) really is, consider an updated version of the following visual:

(Nomura)

That’s “another optical expression of how impulse moves lower from prior ‘Extreme Long $Gamma’ matter, as they set-up ‘rolling shocks’ out of previous ranges, particularly as they almost always correspond with triggered deleveraging from vol control’ funds”, Charlie writes.

He goes on to say there’s a “ton of (short) hedge $Delta trading in the market right now” and cautions that “$Gamma too remains extremely ‘short / negative'”.

As far as CTAs go, we’re on the fence. 2,916 would see McElligott’s model pivot to a larger short impulse (and don’t even ask what’s under 2,729), while re-leveraging from the trend universe could be triggered at 3,130.

And while volatility is always the “toggle” on which it all turns, the entire market is obviously hostage to COVID-19 headlines at this juncture.