The Nasdaq bore the brunt of Wednesday’s Fitch-inspired selloff on Wall Street, and it’s no secret why.

The US downgrade conspired with Treasury’s refunding announcement (which actually went over pretty well under the circumstances, if you ask me) and another scorching-hot ADP print to bear-steepen the US curve.

Although 10-year yields were only a few basis points higher, the short-end actually rallied a little bit. “As a contributor to the bear-steepening price action, issuance was undoubtedly the driver in 10s and 30s,” BMO’s Ian Lyngen and Ben Jeffery wrote, in a note called “The Supply Steepener.” “That the two-year sector remained comparatively well anchored suggest[ed] ADP hasn’t materially impacted investors’ Fed expectations.”

The steepening impulse wasn’t dramatic by any stretch, but the bear steepener is anathema to the tech-driven equity rally, something Nomura’s Charlie McElligott underscored in a late Wednesday note. “Bear steepening is historically the most benevolent environment for the cyclical value factor, which by definition is short the now exceedingly expensive secular growth / tech heavies that have almost entirely driven equities higher [for] most of year,” he said. “So with the selloff in USTs driving yields and upper-right rate vols higher, expensive tech gets the long-awaited, multiple-compression throat punch.”

Wednesday was among the worst sessions of 2023 for the Nasdaq 100, although that’s not saying a lot in a year when big-cap US tech notched its best first half in history.

Charlie cited the refunding announcement, but also the ADP print, which evidenced an economy that’s still “too resilient” for a Fed struggling to engineer below-trend growth in the service of restoring price stability.

But the most interesting bit from McElligott on Wednesday were his remarks around spot equities spending most of the session below the lower-end of the straddle band, something I’ve discussed here on multiple occasions of late (usually citing Charlie), including on Tuesday afternoon, just an hour prior to the Fitch downgrade.

With some signs of tension in the vol complex, “we need to start thinking about the potential for a larger move knocking-into vol-sensitive systematic strats,” Charlie went on. That’s a reference to the unstable exposure accumulation I’ve talked about again and again recently.

Consider this: Had the S&P dropped 2% at the close on Wednesday (it didn’t, mercifully), Nomura’s model would’ve suggested more than $27 billion of equities-selling from vol control cohorts.

The issue is the relentless decline in realized vol, which was 1%ile (or lower) headed into Wednesday. Such extremes “increase the asymmetry and convexity of the notional selling potentials,” McElligott remarked.

Speaking of realized vol, he went on to cite Macro Risk Advisors’ Dean Curnutt, who’s an acquaintance. The scatterplot below, a version of which Dean posted on social media, gives you a sense of just how anomalous the current situation really is.

Before you go jumping off any bridges, note that forward returns following such conjunctures actually show equities up, according to Nomura, even as the median VIX is indeed higher out six- and 12 months.

The sample size, at just four since 2015, is too small to draw any real conclusions.