“Calamity”: Nomura Warns Or VaR Shock Adding To “Untradeable Markets”
Over the weekend, in our initial response to the shocking Saudi “scorched earth” price war declaration, we said that “once Brent craters on Monday to the mid-$30s or lower, the accompanying implosion in 10Y yields could make the record plunge in yields seen on Friday a dress rehearsal for what could be the biggest VaR shock of all time.“
Sure enough, among the many panic touchpoint on Monday morning which have seen virtually every risk market in persistent liquidation, Nomura’s Charlie McElligott writes that the fresh VaR shock is adding to “undtradeable markets” as the crude price shock adds to cross-asset VaR-down as traders are forced to liquidate a substantial portion of their long books; Amid the chaos, Fed Funds futures are pricing 100bps of cuts by end of month, with systematic/CTA models showing Nasdaq is set to sell/deleverage large dollar notional from what was the last of the legacy “+100% Longs” in Equities, with McElligott warning that this “probable Nasdaq puke comes at a dangerous seasonal for “Momentum” factor, where April is the worst monthly return for the factor back to ’84.“
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Taking a step back, it all started with oil, and specifically the start of the Saudi price war, which sent Brent and WTI -31% in last night’s reopen, both currently trading around -20.0%.
Why such an “outsized” move in Crude? As the Nomura quant explains, adding to what we already said about the commodity’s forced selling threat, “crude is particularly exposed to “Negative Gamma” shocks due the inherent and massive “Commercial” nature of (downside) hedgers in the space—so on top of already being an illiquid mess in the futures contract, then imagine being a market maker who has sold Puts to major E&Ps and was already staring into the abyss after the last two weeks’ -25% move…now having to sell futures deep in-the-hole of the reopen gap lower last night/today.“
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