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Why Stocks Stubbornly Refuse To Sell Off Despite The Escalating Trade War
05-22-2019, 10:36 AM,
#1
Why Stocks Stubbornly Refuse To Sell Off Despite The Escalating Trade War
Why Stocks Stubbornly Refuse To Sell Off Despite The Escalating Trade War

<p>While stocks are modestly lower overnight as "risk-off" returns, pushing yields and commodities lower and the VIX and gold higher, on one or more of the following catalysts - take your pick - listed by Nomura's Charlie McElligott:</p>

<ul><li>More trade war noise / rhetoric—Xi’s “New Long March” commentary, but particularly Mnuchin “no plans to go to Beijing yet” headline—which makes tariff imposition likely</li>
<li>US consumer concerns around outlook cuts from Nordstrom and Lowe’s</li>
<li>QCOM blow-up -12.5% on anti-trust ruling from FTC (crowded / favorite HF name)</li>
<li>Brexit again devolving with May “toast”</li>
<li>The DoJ recommending to block the Sprint / T-Mobile deal</li>
</ul><p>... the question remains why do markets continue to stubbornly selloff and reprice lower even as the probability of a drawn out, lengthy trade war with China, as neither Trump nor Xi will be willing to de-escalate <em><strong>absent a major market (or economic) shock lower</strong></em>, is now effectively 100%.</p>

<p>One possible explanation for this recurring refusal to drop suggested by McElligott (besides the now daily ramp in stocks at the open of trading) is a number of flow catalysts for "rolling squeezes" in Equities despite what the Nomura strategist calls "the deteriorating macro & trade — where despite the now very ‘neutral’ current options-implied Gamma & Delta profile of the market we see"...</p>

<ol><li>the recent bulking-up of Shorts and reduction of Nets (1Y + lows) from Leveraged Funds act as potential “upside risk” demand catalysts—especially with</li>
<li>Nomura's CTA models across Global Equities “well within” reach of COVERING levels in Russell, Eurostoxx, Nikkei, DAX, FTSE, CAC, Hang Seng / Hang Seng CH and KOSPI (while also near re-leveraging in critical SPX and Nasdaq, as well as Bovespa)—and while</li>
<li>the bank's Risk Parity model estimates exposure to US Equities futures at 26m lows—meaning there is plenty of room to add from systematic / vol-sensitive buyers—all at a time where</li>
<li>VIX roll-down strategies are again in position to sell vol with the term structure back neatly in contango, while we are also seeing</li>
<li>the gradual return of systematic vol sellers (i.e. put underwriters)—which not only means pressure on vol, but also then creates dealer Delta to “buy”</li>
</ol><p>Digging into the technical and positional reasons for the continued levitation despite deteriorating sentiment, Nomura charts the latest market "Greeks" (see below) and highlights that "<strong>the SPX / SPY combined $Delta is now effectively “Neutral” at just -$13.4B (27th %ile since 2014) and with the SPX / SPY options Delta position vs Spot near “flip” level at 2866; for QQQ the $Delta position too is just -$4.4B (12th %ile since ’14</strong>)"</p>

<p>At the same time, "<strong>the profile for SPX/SPY- and QQQ-options Gamma has changed meaningfully over the past week+ </strong>as well, with 1) the total notional $Gamma sum dropping significantly to VERY low historic %iles while also 2) the current spot location sees the overall Dealer Gamma profile at effectively “Neutral” (vs its recent “Negative Gamma” location)",</p>

<ul><li>SPX / SPY $Gamma just 20.8th %ile since 2014; QQQ just 17.5th %ile since 2014</li>
<li>SPX / SPY combined Gamma per 1% move vs Spot at “Neutral” position, with Spot essentially “at” the flip zone (@ 2871 including this week’s expiry; 2876 without this week’s expiry)</li>
</ul><p><a data-image-external-href="" data-image-href="/s3/files/inline-images/cme%201.jpg?itok=7Ft_-VjA" data-link-option="0" href="https://www.zerohedge.com/s3/files/inline-images/cme%201.jpg?itok=7Ft_-VjA"><picture><!--[if IE 9]><video style="display: none;"><![endif]--><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/cme%201.jpg?itok=4PyLyBnY 1x" media="all and (min-width: 1280px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/cme%201.jpg?itok=4PyLyBnY 1x" media="all and (min-width: 480px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/cme%201.jpg?itok=4PyLyBnY 1x, https://zh-prod-1cc738ca-7d3b-4a72-b792-...k=4PyLyBnY 2x" media="all and (min-width: 1024px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/cme%201.jpg?itok=4PyLyBnY 1x" media="all and (min-width: 768px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_mobile/public/inline-images/cme%201.jpg?itok=7Ft_-VjA 1x" type="image/jpeg"></source><!--[if IE 9]></video><![endif]--><img data-entity-type="file" data-entity-uuid="d44de1a8-8183-41ed-966b-5c53f7b20120" data-responsive-image-style="inline_images" height="307" width="500" src="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/cme%201.jpg" alt="" typeof="foaf:Image" /></picture></a></p>

<p><a data-image-external-href="" data-image-href="/s3/files/inline-images/cme%20%202.jpg?itok=_oYMxMef" data-link-option="0" href="https://www.zerohedge.com/s3/files/inline-images/cme%20%202.jpg?itok=_oYMxMef"><picture><!--[if IE 9]><video style="display: none;"><![endif]--><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/cme%20%202.jpg?itok=kMXw825Y 1x" media="all and (min-width: 1280px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/cme%20%202.jpg?itok=kMXw825Y 1x" media="all and (min-width: 480px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/cme%20%202.jpg?itok=kMXw825Y 1x, https://zh-prod-1cc738ca-7d3b-4a72-b792-...k=kMXw825Y 2x" media="all and (min-width: 1024px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/cme%20%202.jpg?itok=kMXw825Y 1x" media="all and (min-width: 768px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_mobile/public/inline-images/cme%20%202.jpg?itok=_oYMxMef 1x" type="image/jpeg"></source><!--[if IE 9]></video><![endif]--><img data-entity-type="file" data-entity-uuid="f7b86b7e-276a-42e9-ab76-f8f6777770bb" data-responsive-image-style="inline_images" height="150" width="500" src="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/cme%20%202.jpg" alt="" typeof="foaf:Image" /></picture></a></p>

<p>Finally, McElligott calculates that the two largest notional Gamma strikes in SPX/SPY consolidated options have spot “surrounded”, with the lower 2800 strike has $4.2B of Gamma, while the upper 2900 strike has $4.6B, serving as yet another source of "gamma gravity" around 2,850.</p>

<p><a data-image-external-href="" data-image-href="/s3/files/inline-images/gamma%20gravity%202.jpg?itok=iDZP879N" data-link-option="0" href="https://www.zerohedge.com/s3/files/inline-images/gamma%20gravity%202.jpg?itok=iDZP879N"><picture><!--[if IE 9]><video style="display: none;"><![endif]--><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/gamma%20gravity%202.jpg?itok=aTJnSxrA 1x" media="all and (min-width: 1280px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/gamma%20gravity%202.jpg?itok=aTJnSxrA 1x" media="all and (min-width: 480px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/gamma%20gravity%202.jpg?itok=aTJnSxrA 1x, https://zh-prod-1cc738ca-7d3b-4a72-b792-...k=aTJnSxrA 2x" media="all and (min-width: 1024px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/gamma%20gravity%202.jpg?itok=aTJnSxrA 1x" media="all and (min-width: 768px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_mobile/public/inline-images/gamma%20gravity%202.jpg?itok=iDZP879N 1x" type="image/jpeg"></source><!--[if IE 9]></video><![endif]--><img data-entity-type="file" data-entity-uuid="28164936-8b81-4de5-9f1e-e3c1964c3657" data-responsive-image-style="inline_images" height="697" width="222" src="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/gamma%20gravity%202.jpg" alt="" typeof="foaf:Image" /></picture></a></p>

<p>There is another reason for the lack of a selloff: the recent increase in shorts (at least according to Nomura, other sellside sources fail to find such a development) by leveraged funds has prompted fears of a short squeeze. Here are Nomura's observations:</p>

<ul><li>Leveraged Funds actually ADDED to their US Equities futures shorts last week with -$9.6B of incremental notional selling WoW across SPX -$6.4B, NDX -$3.1B and RTY -$100mm</li>
<li>Our intraday implied price distribution for SPX saw “real” shifts towards higher strikes yday, particularly for this Friday’s expiry:</li>
</ul><p><a data-image-external-href="" data-image-href="/s3/files/inline-images/squeezew%20cme.jpg?itok=XzWw8b5v" data-link-option="0" href="https://www.zerohedge.com/s3/files/inline-images/squeezew%20cme.jpg?itok=XzWw8b5v"><picture><!--[if IE 9]><video style="display: none;"><![endif]--><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/squeezew%20cme.jpg?itok=BjTosTfy 1x" media="all and (min-width: 1280px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/squeezew%20cme.jpg?itok=BjTosTfy 1x" media="all and (min-width: 480px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/squeezew%20cme.jpg?itok=BjTosTfy 1x, https://zh-prod-1cc738ca-7d3b-4a72-b792-...k=BjTosTfy 2x" media="all and (min-width: 1024px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/squeezew%20cme.jpg?itok=BjTosTfy 1x" media="all and (min-width: 768px)" type="image/jpeg"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_mobile/public/inline-images/squeezew%20cme.jpg?itok=XzWw8b5v 1x" type="image/jpeg"></source><!--[if IE 9]></video><![endif]--><img data-entity-type="file" data-entity-uuid="2d7f7c30-2a40-4d68-9e76-334a7a333f07" data-responsive-image-style="inline_images" height="307" width="500" src="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/squeezew%20cme.jpg" alt="" typeof="foaf:Image" /></picture></a></p>

<p>It's not just leveraged/hedge funds who have turned short: according to the Nomura QIS CTA model, there has been a "powerful blast of CTA deleveraging over the course of May, with Russell, Eurostoxx, Nikkei, DAX, FTSE, CAC, Hang Seng, Hang Seng Ch and KOSPI all flipping outright -100% Short—while SPX and NDX have reduced the size of their ‘long positions’ (although SPX and NDX are still the remaining ‘long’ holdouts along with ASX and Bovespa)"</p>

<p><a data-image-external-href="" data-image-href="/s3/files/inline-images/CTA%20short%20squeeze.png?itok=jh5-ELtq" data-link-option="0" href="https://www.zerohedge.com/s3/files/inline-images/CTA%20short%20squeeze.png?itok=jh5-ELtq"><picture><!--[if IE 9]><video style="display: none;"><![endif]--><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/CTA%20short%20squeeze.png?itok=QVWAeKuH 1x" media="all and (min-width: 1280px)" type="image/png"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/CTA%20short%20squeeze.png?itok=QVWAeKuH 1x" media="all and (min-width: 480px)" type="image/png"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/CTA%20short%20squeeze.png?itok=QVWAeKuH 1x, https://zh-prod-1cc738ca-7d3b-4a72-b792-...k=QVWAeKuH 2x" media="all and (min-width: 1024px)" type="image/png"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_desktop/public/inline-images/CTA%20short%20squeeze.png?itok=QVWAeKuH 1x" media="all and (min-width: 768px)" type="image/png"></source><source srcset="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_mobile/public/inline-images/CTA%20short%20squeeze.png?itok=jh5-ELtq 1x" type="image/png"></source><!--[if IE 9]></video><![endif]--><img data-entity-type="file" data-entity-uuid="e7d69cec-de02-4fcc-81a7-2214f215bc6c" data-responsive-image-style="inline_images" height="327" width="500" src="https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/inline-images/CTA%20short%20squeeze.png" alt="" typeof="foaf:Image" /></picture></a></p>

<p>The danger to McElligott, is this: <strong>the majority of the Equities futures we follow are well-within range of their “trigger” levels to COVER shorts or re-leverage longs (PARTICULARLY in global risk appetite indicators SPX and NDX).</strong></p>

<p>Putting all this together, McElligott - who one should note has been predicting that a squeeze-driven melt up in stocks is likely - doubles down on his narrative, noting that the factors listed above "are at risk of providing new “mechanical” sources of covering / buying demand for stocks in coming weeks, despite the clear degradation of the US / China trade situation."</p>

<p>His conclusion, "expect the sideways chop to continue despite this macro deterioration", which of course is without a sharp drop in equities, the probability of a push to compromise in the trade war is nil. Meanwhile, the longer trade war continues - without the market noticing - the more the imbalances will build up, eventually leading to a far more painful collapse in risk, once markets can no longer ignore what is happening to the global economy.</p>

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