Nomura: If S&P Hits 2535, CTAs Go "Max Short", Sell $100 Billion
By Charlie McElligott, Nomura head of Equity Derivative Sales
Loud Noises
- Asian equities and price action reversals in Gold / CDX / VIX further evidences that this is another “US equities-centric” de-risking
- $100B for sale from systematic CTA’s in SPX IF we were to breach the 2535 level,as they would pivot from current “43% long” all the way through “Neutral” and immediately “MAX SHORT” across 1m, 3m and 6m models
- This 2535 level ‘clusters’ along with the 1Y ES1 VWAP (2539) and the YTD lows (2532.5) in the same range, effectively creating a “stop loss” for many where ‘longs’ turn into losses
- Volumes are in the index futures / VIX futures / ETF space are screaming higher, as ‘dynamic hedging’ adds incremental “short gamma” effect to market on top of dealer gamma hedging
- As thematic trades and “momentum” / sectors reverse recent performance, “Growth over Value” is the largest area of ”factor” pain as it has been the de-facto trade since the GFC
- US equities outlook remains medium-term constructive however (before late-year / early ’19 “financial tightening” convo), as after the next two weeks of chop around the seasonal “momentum unwind” phenomenon, you have “earning macro blinders” kick-in which synchronizes with Banks resuming buy-backs (mid-April) and Tech EPS growth leaders doing the same shortly thereafter (last week April)
- Additional, both “200dma breach after sustained period above-“ and “TRIN index / exposure purge-” analogs show excellent forward returns for SPX
- Broad CTA “macro positioning” however is reflecting loss of “global growth” momentum, as SPX nears “max short,” Crude nears “sell” level, Industrial Metals pivot from “long” to “neutral” and broad Fixed-Income “longs” are established over the past month
OVERNIGHT:
Asian equities open on lows but close on highs, as the US “growth-down” catches its breath after a rollicking first day of the quarter for equities. Hang Seng actually bounced, closing higher by the end of the session, while Nikkei / SHCOMP / Kospi were all effectively ‘flat’. And despite BoJ Gov Kuroda’s overnight comments stating that there are internal discussions over an eventual exit from stimulus / easing policy, Yen actually weakened. Net / net, Asia ‘risk’ performed very well last night.
And not for nuthin’, but is anybody else getting that “Plaza Accord” vibe from the Chinese Yuan and Korean Won price-action of late? Since the Korean “trade deal” was announced 3/26, Won has strengthened 2.5% vs USD. Similarly, we see Yuan +3.5% versus USD since the start of the year, while 12m USDCNY NDF’s are -4.3%--indicating further expectations of Yuan strengthening. Just ‘feels’ like there might be something to the idea of a larger ‘deal’ already in the works with US and Asian counterparts regarding this long-time US complaint of artificially-suppressed currencies. QUID-PRO-QUO.
Europe however continues to trade poorly, with today’s Euro Zone Markit PMI showing another meaningful MoM decline (to 56.6 from 58.6 in Feb), while German and Italian PMIs missed as well, with factories noting delayed production due to increasing capacity constraints. And while we’re speaking about ‘mehhh’ EU data, we should throw in the fact that German Retail Sales printed an absolute clunker, -0.7% MoM vs ests. +0.7%.
Spooz are catching a modest respite from the incessant ‘dynamic hedging’ being seen over the past week and a half as funds (asset managers and HF’s) pukehedge with futures and ETFs. This is evidenced by flattish cash volumes yday, butETFs at 24% of the total cash volume (near ‘extreme’ stress levels), and with SPY volume +70% vs 30adv by mid-afternoon; SPX futs running +40%; NDX futs +39%; QQQ +77%; VIX futs +34%; VXX +28%; HYG +58% and IWM +34%. For all of those crowing about “where’s the volume on the selloff?”, THAT’S where the volume is…the ‘tail’ is once again “wagging the dog.”