Just before last week’s interest-rate driven market selloff entered its most acute phase, we cited CTA positioning data from Nomura showing that systematic funds had not yet begun the painful process of deleveraging as certain “triggers” had not yet been met. But shortly after this commentary from Nomura’s cross-asset strategist Charlie McElligott had been distributed to Nomura’s clients, the selling pressure intensified, busting through trigger levels in a way that only exacerbated what became the most intense selloff in SPX since February (and the biggest for NDX since Brexit).
With markets creeping higher again after Wednesday’s furious selloff, McElligott chimed in with an update to Nomura’s positioning models that incorporated this latest break. As of Wednesday’s close, McElligott acknowledged that the Nomura Quant Strategies CTA model was indicating that these systematic sellers had reduced down to “43% Long” from “100% Max Long” 1 week ago, resulting in an estimated $88BN in one day selling on the one day move from “97% Long”, the positioning at the start of Wednesday’s session, all the way down to “43% Long.”
With his audience clamoring for more guidance about what, exactly, triggered the market wreck of this past week, McElligott made a brief appearance Thursday afternoon on the MacroVoices podcast, where he got “philosophical” during an interview with Erik Townsend and Patrick Ceresna, arguing that this week’s equities driven selloff actually had a deeper “macro origin.”
Again, if I’m really stepping back and talking almost more philosophically, it’s the bigger picture here is that a higher real interest rate environment is resetting term premiums. And, with that, the cost of leverage, cross-asset correlations, asset price valuation – all of these constructs built into the post-crisis quantitative easing era are now ripe to tip over.
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