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Risk-positioning is violently reversing across systematic strategies, according to Nomura's MD of cross-asset strategy Charlie McElligott, who warns that for the first time in a month, systematic volatility strategies will be forced to pivot back to "long vega" as the VIX curve re-inverts...

Prior “Max Longs” across Global Equities futures being are “at or nearing” de-leveraging / outright pivot SHORT levels as the market sells down through the “mechanically higher” SELL triggers in SPX, NDX, FTSE amongst others

  • S&P 500, currently 99% long, selling under 2763.25 to get flip to -80% short, more selling under 2728.08 to get to -100% max short (although note that “sell triggers” will temporarily “drop lower” for a few days—see day count 2-6 above--due to the 1Y lookback days, before resuming their move much higher over the course of March through current ‘spot’ in days 7 on out)

  • NASDAQ 100, currently 99% long, selling under 7021.94 to flip to -80% short , more selling under 6992.08 to get to -100% max short

  • Russell 2000, currently -79% short, more selling under 1516.36 to get to -90% , max short under 1516.21, buying over 1585.64 to get to 100% , more buying over 1585.49 to get to 10% , flip to long over 1585.49, max long over 1585.49

  • Euro Stoxx 50, currently 99% long, selling under 3250.55 to get to -80% short , more selling under 3202.36 to get to -100% max short  

  • Nikkei 225, currently 99% long, selling under 20826.55 to get to 80%, selling under 20700.39 to get to -100% max short

  • HangSeng CH, currently -79% short, more selling under 10985.05 to get to -90% , max short under 10983.91, buying over 11926.66 to get to 100% , more buying over 11925.52 to get to 10% , flip to long over 11925.52, max long over 11925.52

  • USD_10Y, currently 100% long, selling under to get to 121.95 to get to 60%, more selling under 119.59 to flip and get max short

  • GBP_10Y, currently 100% long, selling under 123.54 to get to 14% , more selling under 121.35 to get to -100% , flip to short under 121.36, max short under 121.35

  • JPY_10Y, currently 60% long, more buying over 152.71 to get to 71% , max long over 152.91, selling under 151.82 to get to 37% , more selling under 150.42 to get to -43% , flip to short under 150.42, max short under 150.42

  • EUR_10Y, currently 100% long, selling under 165.21 to get to 81% , more selling under 164.65 to get to 60% , flip to short under 160.0, max short under 159.99

  • EURUSD, currently -100% short, buying over 1.1465 to get to -49% , more buying over 1.2551 to get to 50% , flip to long over 1.1466, max long over 1.2551

  • USDJPY, currently 0% neutral, more buying over 111.6827 to get to 49% , flip to long over 111.6827, max long over 111.6939, selling under 104.3631 to get to -50% , more selling under 104.3519 to get to -100% , max short under 104.3519

  • GBPUSD, currently 0% neutral, more selling under 1.2823 to get to -49% , flip to short under 1.2823, max short under 1.2822, buying over 1.4014 to get to 50% , more buying over 1.4016 to get to 100% , max long over 1.4016

  • AUDUSD, currently -100% short, buying over 0.7221 to get to -49% , more buying over 0.7794 to get to 50% , flip to long over 0.7221, max long over 0.7794

  • USDCNH, currently 0% neutral, more buying over 6.8978 to get to 49% , flip to long over 6.8978, max long over 6.8984, selling under 6.4209 to get to -50% , more selling under 6.4202 to get to -100% , max short under 6.4202

  • WTI, currently 9% long, more selling under 56.0 to get to -17% , flip to short under 56.0, max short under 54.27, buying over 63.83 to get to 55% , more buying over 63.84 to get to 100% , max long over 63.84

  • Gold, currently -9% short, more buying over 1313.06 to get to 18% , flip to long over 1313.06, max long over 1354.32, selling under 1206.73 to get to -55% , more selling under 1206.6 to get to -100% , max short under 1206.6

  • Copper, currently 45% long, more selling under 6276.51 to get to 18% , flip to short under 6275.87, max short under 5893.46, buying over 6909.43 to get to 73% , more buying over 6910.08 to get to 100% , max long over 6910.08

What triggered the sudden realization? As McElligott notes, the papercuts were many...

  • The ECB’s decision to re-embark upon a new round of TLTROs after slashing their EU growth- and inflation- forecasts drove a powerful flattening of EGB curves which, in-turn, destroyed SX7E Banks (-5.2% currently since yday) and was a “worst fears confirmed” moment for Europe and the ECB—as the market sees the continent looking increasingly “recessionary,” yet with no normalization ever-begun / no room to cut further without completely “nuking” deeper into NIRP and existentially crushing Banks & Savers in the years-ahead (ECB looking increasingly BoJ)

  • Overnight we saw more weak Chinese data in the form of monthly trade data w/ ugly exports (-21% last month) and imports (-5.2%), which likely too corroborates the miss in German Factory Orders

  • We also saw Equities “purge” after an ultra-rare “Sell” rating from China’s largest brokerage Citic on “bubble” poster-child PICC (whose stock had previously surged “limit up” for five consecutive days, LOLOL) was read as a sign that Chinese authorities / regulators were signaling a desire to cool-down the recent speculative-froth of the market, with 75% of SHCOMP stocks having been above their 14d RSI into today (which was a four year high)—SHCOMP closed -4.4%, CSI 300 -4.0%

  • Under the radar for some yesterday was the mini-implosion in Emerging Markets currencies with the worst-day for my EMFX basket since the global cross-asset de-risking of Oct 4th 2018, as the US Dollar ran wild following the ECB’s gong-show meeting / Euro’s prompt collapse to lows since June 2017 (since moderating today FWIW)

And what happens next?

I continue to believe the seasonal Equities trading dynamic into / out –of March “serial” options-expiration on the 15th continues to weigh on sentiment here as highlighted at the core of my “March Surprise” thesis, and is eliciting some profit-taking from Asset Manager “longs” in US Equities futures

The previously “extreme” $Delta into OpEx in both SPX / SPY and NDX / QQQ options is coming-off hard now, ESPECIALLY as we cross-through into “negative Gamma” territory in SPX

Similarly the upcoming “Buyback Blackout” vacuum for US Stocks is also weighing on sentiment, as the key driver of a negative “supply / demand” impulse picking-up after 3/19/19 where we estimate 75% of S&P 500 corps enter their blackout

Additionally into / ahead of the upcoming EPS season, we’d expect to see the standard Equities PM “gross-down” behavior in the weeks ahead

What makes the Fed “more dovish” from here?  Worse data…which the of course feeds right back into the pervasive “end-of-cycle” sentiment and then ZOOMS to my core “bull-steepener” breakout, as Curve Caps trigger in conjunction with likely contingent “SPX lower”

A quick “aside” here:

ANOTHER catalyst for UST CURVE STEEPENING after some recent marketing with Japan Macro Strategist Naka Matsuzawa is that I am also now increasingly expecting the BoJ to undertake a similar “Reverse Operation Twist” route in the coming-months as to the one that George Goncalves and I have been advocating from the Fed…all while the BoJ too is likely to eventually further widen the YCC-band down the road AFTER the beginning of Summer two-week holiday as a further / additional STEEPENING driver (Golden Week / Emperor Ascension holiday all rolled-into one, creating an unprecented two week market closure)

This “end-of-US-cycle” investor sentiment pivot is continuing to be seen in US Fund Flow data, with WoW showing further inflows into Money Markets, US Bonds and US IG, while HY Credit and US Equities (Institutional, Active, Passive and Retail)  all see redemptions.

And finally, for those hoping for a hockey-stick, short-term rates continue to see the next move from the Fed as a rate-cut (2020 at -19bps) as US data breaks down...