Markets stocks volatility

Nomura’s McElligott Talks Post-Election ‘Right-Tail Risk,’ Return Of ‘The Ghost Of August’

Fiscal stimulus is the “new QE,” Nomura’s Charlie McElligott wrote Monday, editorializing a bit around why it is that market participants are suddenly enamored with the prospect of a Democratic sweep in November.

Over the weekend, I talked at length about the recent change of heart from investors, who would normally cringe at a “blue sweep” scenario and the likelihood of higher taxes, more regulations, and a less “business friendly” government.

There are two key reasons why markets are, in one way or another, happily resigned to rising odds of a Democratic victory. The first is that even as Trump attempts to paint himself as a champion of (not an impediment to) big spending, the market knows the surest way to more fiscal stimulus is a Democratic sweep. “This is the smoothest path to obtain a new magnitude of government spending going forward and the largest fiscal stimulus possible,” McElligott said. The second is simply that a clear-cut, decisive win for Joe Biden would reduce the chances of a disputed outcome and thereby lower the odds of protracted post-election uncertainty.

Read more: Wild Blue Yonder

Over the past two weeks, McElligott has discussed the possibility that equities get pushed mechanically higher following a knee-jerk selloff on the realization of a “blue wave.” He reiterated that on Monday.

“Core to my baseline narrative has been the underappreciated ‘right tail’ risk, which is that as a ‘no shock’ scenario is potentially delivered (likely a clear-cut Biden win and delivered without the extended period of uncertainty currently priced into markets), ‘crash’ hedge buying will then ultimately be unwound back into the market as they decay hard into their expiries, acting to slingshot equities higher,” he said.

Again, that’s a reiteration of a thesis he’s expounded on at length recently, as market participants struggle with how to conceptualize “the day after tomorrow,” if you will.

Read more: Nomura’s McElligott On ‘Doomsday Prepping’ And The Underpriced ‘Risk’ Of No Chaos

In the near-term, Charlie flags two key dynamics that could dictate price action this week.

The first is dealers sitting “near peak ‘long Gamma'” at the index and ETF level. The market is “again approaching ‘extreme long’ via options [with] SPX / SPY net delta +$325.3B / 88th %ile [and]  QQQ net delta +$10.8B / 96th %ile,” he writes.

That could help keep things insulated at the index level, and the more realized vol. compression you get, the more likely it is that the vol.-control universe provides a lagging, mechanical “background” bid for equities, suppressing volatility further in what Charlie aptly describes as a “virtuous feedback loop.”

The other key dynamic is the return of the setup that drove tech shares into the stratosphere two months back or, as Charlie puts it, “the ghost of August [has] return[ed].”

Earlier this month, market participants flagged a possible resurfacing of the “Nasdaq whale,” which means tech could exhibit the kind of panicky, upside moves seen during the final, frothy blow-off phase of the summer surge.

“Looking at today’s ‘panic grab’ price action in Equities futures (particularly with NQ screaming higher), the buy flows are being driven by a legacy dynamic in SINGLE-STOCK VOL… where we see massive upside call strikes suddenly back ‘in-play’,” Charlie said, flagging “VERY large upside pin-risk in a few of the mega-cap Tech names into Friday’s Op-Ex with Dealer ‘short gamma’ there forcing early Nasdaq buying to hedge the higher we go.”


 

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