Nomura Outlines Key Downside Market Levels as Markets Pull Back

(Bloomberg) -- Investors surprised by U.S. President Donald Trump’s tweet that he plans to more than double tariffs on $200 billion of Chinese goods may need to take stock of where the downside risks are.

Key potential pitfalls include positioning from asset managers and systematic funds, Nomura Holdings Inc. cross-asset strategist Charlie McElligott said in a note.

“Asset managers have accumulated around $62 billion of U.S. equity futures year-to-date alone and those trades are obviously ‘winners,’ so an acceleration of profit-taking into a renewed trade war/growth scare is a risk that we could see aggressive monetization from asset managers,” McElligott wrote.

Potential deleveraging levels from commodity trading advisers are below market, but “within reach if any de-risking were to accelerate dangerously,” McElligott said. He sees the trigger levels as around 2,879 on the S&P 500 Index, 7,578 on the Nasdaq 100 and 1,565 on the Russell 2000.

He added that consolidated options gamma on the S&P 500 and SPDR S&P 500 ETF Trust would flip to negative around 2,890, “an acceleration point where moves could get sloppy with dealer hedging.”

Nomura Outlines Key Downside Market Levels as Markets Pull Back

A trigger level of 2,879 on the S&P 500 is about 2.3 percent below the gauge’s close on Friday at 2,945.64. Futures on the gauge were down 1.7 percent as of 8:17 a.m. in Singapore, around 2,896 after the Wall Street Journal reported that China is considering canceling a planned Washington trip this week by the country’s top trade negotiator.

Other thoughts from McElligott include:

  • The early FX moves “are real, with China-centric risk proxy AUD/JPY” down
  • USD is likely “to gap meaningfully higher”
  • “I expect a pretty potent resumption of the UST rally, with the curve likely bull steepening once again, as the market perceives that this trade/growth uncertainty will pivot the Fed back more dovish with the front-end again rallying (after being hit hard post last week’s FOMC), on top of obvious risk-off/flight to safety/liquidity bid”
  • Expect U.S. equities defensives/low volatility and quality (high cash) to outperform, while cyclicals and value stocks now are likely to be hit hard again

“Either this is an epic act of ‘rope-a-dope’ posturing and poker-playing” from Trump “to collect a self-perceived better deal,” McElligott said, “or a raging miscalculation with ‘vigilante’ markets.”

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