Nomura's McElligott Dishes On China's Slowdown, His CTA
Model & Why Traders Should Fear The Steepener
In the years after the financial crisis, as central banks engineered a blissfully uninterrupted rally in risk assets, investors could easily afford to remain ignorant of the growing influence of systematic, trend-following strategies that have come to dominate price dynamics in global equity markets.
But, as evidence by the sudden reintroduction of two-way equity market volatility beginning with the 'Shocktober' selloff and continuing through the historic pre-Christmas selloff, those days are over. And as investors from Leon Cooperman on down to aging workers plunking their retirement savings in SPY struggle to understand the nuances of the new investing paradigm, one equity derivatives strategist has emerged as the market's eerily prophetic guiding light. That man is Nomura's Charlie McElligott, and his CTA model that tracks one of the most influential class of systematic traders.
As we have assiduously documented in these pages, as other strategists were left slackjawed by the violent downturn in US equities and the bottom falling out of the formerly market-leading tech stocks, McElligott successfully lined up the dominoes of the selloff, leading him to make a series of eerily accurate calls about the duration of the selloff and - even more importantly - the 'bear market rally' that has endured for the past three weeks.
Fortunately for investors who don't have access to his daily market notes, McElligott laid out his views on everything from the implications of the yield curve on equity markets to the risk that a slowing Chinese economy to the mechanics undergirding his CTA model in an epic, hour-long interview with MacroVoices (readers can listen to the full interview below) that is reminiscent of the final scene from the Godfather:
Here's a breakdown of the topics discussed:
China Trade Collapse
Update on China Credit Impulse
PBoC Liquidity Operations
Bear market rally or continuation of bull market?
Fading the Fed’s economic optimism
Sequencing that could cause a force in on the equity markets
CTA Model Positioning across asset classes
Positioning in risk parity funds
Purge in equity fund flows in Q4 2018
Fear the steepener
True to form, the McElligott interview was accompanied by a chart book where the Nomura strategist - whose calls elicited blowback from strategists at other banks (and even from within Nomura itself) over whether systematic funds were truly to blame for the selloff - offered more support for his calls.
Instead of offering a detailed breakdown of topic explored by McElligott and Townsend during the interview, we're going to break out a few highlights (and their attendant charts), separated by topic.
Weakening Chinese Data
Townsend: Why don’t we jump into your chart book and talk about China? What is driving the situation, and how China is going to play into market action as this whole trade talk thing gets resolved in the next several weeks or months?
McElligott: I appreciate the opportunity to be on again and speak with you.
rest at link
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this is not wrong and it is also a day late and many yuan short.
Any skillful trader could see that this situation was brewing for a very long time. One of the reasons I stay away from anything china related is the absolute train-wreck of economic numbers
that are produced by the gov't. You think our economy was manipulated and in bad shape?…multiply it by about 40x and you have china.
https://www.zerohedge.com/news/2019-01-21/nomuras-mcelligott-dishes-chinas-slowdown-his-cta-model-and-why-traders-should-fear