“This further acceleration in the rates selloff is re-triggering the same point I’ve made in Equities for years now,” Nomura’s Charlie McElligott said, in a Tuesday note.
If you’ve been awake and are fortunate enough to have a pulse 12 months on from the worst public health crisis in a century, you can write the rest of this story yourself.
Equities expressions tethered to the yearslong “duration infatuation” in rates are now extremely vulnerable, as the US curve bear steepens to 2014 wides and bonds remain in the throes of a deepening selloff. Markets were looking for Jerome Powell to calm things down in his remarks to lawmakers Tuesday.
While you might not view the selloff in bonds as particularly acute (yet), the fact is, ever lower rates and bull flattening curves were part and parcel of the trade that drove secular growth favorites into the stratosphere. Now, that’s in jeopardy, with the market anticipating reopening, fiscal stimulus, and eventual herd immunity.
“That legacy positioning in ‘secular growth’ is simply a duration proxy which benefits from a bull-flattening environment,” McElligott reiterated Tuesday. “Which is why we’ve seen [the] Nasdaq getting rocked again, certainly relative to the Russell.”
But it’s not all about the macro regime shift. Post-OpEx, there was scope for a wider distribution of outcomes. Charlie calls it “binary index-level price movement” due to the “unclenching” effect from a large $Gamma rolloff. On Tuesday, he noted that’s “particularly” the case for the Nasdaq, “with QQQ experiencing over 50% drop in aggregate $Gamma.”
What does that mean? Well, colloquially, it means freedom of movement. “The prior Dealer hedging barriers have also collapsed and are no longer providing insulation,” McElligott went on to remark.
He then set this against the “broken” VIX market, a hot topic over the past couple of weeks (see here and here, for example). Those interested in the specifics can peruse the linked posts for a longer discussion, but the most important takeaway is that, as things currently stand, you don’t need a macro event or a price trigger to get deleveraging.
As Charlie put it Tuesday, “if we have a ‘vol accident,’ we risk mechanically generating a deleveraging event, regardless [of] whether the macro backdrop or even the price-level itself changes.”
Of course, any such deleveraging into a market characterized (generally speaking anyway) by impaired depth, risks activating the infamous flows-volatility-liquidity feedback spiral. (Nobody call it the “doom loop.”)
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