"A Perfect Storm": Why Are Stocks Crashing

With all due respect to Marko Kolanovic, it appears that it was more than just the "severe snowstorm" that spooked stocks yesterday (and certainly today).

As Nomura's Charlie McElligott writes this morning, a perfect storm (if not of the snow variety) converged and risk-off catalysts abound as "Growth-Scare" murmurs gain further steam, driving not only the Dow Jones nearly 500 points lower, but also a robust UST bull-flattening as duration is grabbed and as Spooz break-below their 100dma.

The Dow has broken below the Fib 38.2% retracement, tested and failed to break its triangle from the February crash, and is at its lowest in almost 6 weeks. The Dow is down 450 points, breaking to the downside of the "triangle formation"....

... and tumbling...

... While the S&P 500 has broken back below its 100DMA:

So what's causing this? Here are the details from McElligott:

  • Trump / China tariff-hype ‘realizes,’ trade wars” meme ensues
  • PBoC decision to piggyback the Fed’s hike with their own +5bps reverse repo borrowing-rate increase adds to Asia-ex Japan sentiment swoon
  • An idiosyncratic placing of mega-long momentum name Tencent Holdings which saw the stock close -5% and dragged-down HSI (a 9.9% weighting) and will negatively impact EEM (largest holding at 5.9%)
  • While Fed and PBoC hike, the data continues to soften as “growth slowdown” fears mount: Japan PMI miss; French Composite PMIs dropped to a seven-month low; German Composite PMIs missed for the second consecutive month while all three IFO measures of German sentiment fell for March as well; EZ Composite PMIs grew at the slowest pace in 14 months with misses in Manu and Service

Then there was the just announced resignation of Trump's head Mueller-probe lawyer, John Down, which has reignited Trump impeachment jitters, and suggests that the president is becoming increasingly nervous what Mueller can and will do next.

Turning back to Fed, the Nomura derivatives guru reiterates his belief that there was a “high bar” for the market to interpret this meeting as a “hawkish hike” was spot-on.

  • Powell then actually delivered a de facto “dovish” message, as the optically “hawkish” ’19 / ’20 dots and terminal rate views were based off of “unprecedented at best” economic projections from the Fed--which Powell himself downplayed as low-confidence forecasts with negligible “predictive” power
  • Equities instead focused on the near-term “tangibles”: by communicating “3 dots only” in ’18; by focusing on a willingness to “overshoot on inflation”; by not committing to press conferences at every meeting; by talking-down the neutral-rate etc--equities instead heard a “dovish pivot” from the HH version of Powell and didn’t get that “growth confirmation” I believe that many were actually looking-for
  • Remember, equities bulls have remained of the view that we can handle higher interest rates if “growth” is driving a higher “neutral rate” in conjunction—so in that sense, his lack of “growth conviction” was interpreted as a disappointment
  • However what the equities audience DID hear was a very pro-cyclical / pro-inflation “dovish” message which helped facilitate the extension of the rally in crude and S&P sector leadership from Energy, Materials, Industrials and Financials
  • This move in “Deep-Value Cyclicals”—in conjunction with the idiosyncratic Tech sector negative drivers which are being exacerbated by asymmetrically ‘crowded’ positioning—created a number of outlier “factor” moves below the index-level.

Putting it all together, this fits with the long-term view McElligott has been espousing: a medium-term (3-6m) “cyclical melt-up” as inflation “realizes” (higher commods and breakevens while “Value” outperforms “Growth”) before ultimately forcing the Fed to “tighten” at a pace which exceeds market expectations, driving higher UST term premium and “spilling-over” into higher cross-asset vol / lower risk-assets / wider spreads by end of year.

Additionally, some observations on the short-end/funding markets, where tactically-speaking, the “short-squeeze” potential remains a focal-point going-forward, as hawkish Fed expectations were not met, which in conjunction with the scale of the short-positioning and ongoing “softening” in global data COULD set the table for bull-steepening.

Furthermore, today’s “disappointing” LIBOR set (was pricing 1.6 yday, fixed today at 1.45--below mkt expectations) may further add to this “squeeze” pressure, especially as recent foreign buying “could embolden” further purchases in the front-end, as well as “lead to the re-emergence of domestic real money buying”

Today we see this acceleration of the rates rally getting folks pretty nervous, along with the USD rallying back near flat—in turn pressuring / reversing some of yday’s gains in corresponding “short USD” trades.  The good news is that EU and Japan equities longs have been very reduced; the SPX / NDX exposure however remains very high within the macro universe—albeit hedged.

Tactically within equities, the rally in fixed-income should continue the equities ‘pain-trade’ that is the MTD rally in ‘duration-sensitives’—while ‘growth’ feels tired and crowded right now.

With mega-underweights Energy (best two-month seasonality since ’94 = March and April) and Utilities leading S&P performance against Tech’s fade, this has been a rough two-week stretch for equities funds, especially heading into the April “momentum unwind” seasonality.

* *  *

Finally, some troubling observations on April seasonals from McElligott, who notes the April performance of ‘momentum’ when it comes into the seasonality with top decile of performance (currently we sit at this +14% band)...

... as both longs and shorts get hit hard:

Comments

snblitz Ahmeexnal Thu, 03/22/2018 - 14:44 Permalink

So if I put a picture (child porn) in a UPS or Fedex package and ship it, does UPS or Fedex go to jail?

Lookup "common carrier" at wikipedia.  (at least for the US)

Facebook, Google, et al, actually used to argue that they are protected by "common carrier" laws in the US and thus not liable for the "content" posted on the site.

They still make this argument today in court, but no one reports on it.

But the "common carrier" exemption carries a couple of other requirements:

One, you **must** not "look" inside the package

Two, you **must** offer your service on an equal footing to everyone.

Google, et al, must not look inside the package.  If they do look and there is child porn in there they must report it.  So they must not look.  The fact is that Google, Facebook, and Twitter are all looking.

Google, Facebook, et al, are not offering their service on an equal footing to all.

Try suing google for content on their site.  In court they will quickly argue that they are a common carrier, while at the same time not abiding by the requirements to be a common carrier.

This is perhaps the biggest indicator of Google, et al, corrupt nature.  Their lawyers know the law.  They know exactly how they are misusing it and what crimes they are committing.  They will argue that what they are doing is not a crime unless they are found guilty in a court of law.

This is a big advantage for criminal enterprises like Google and others. 

Saps like you an me look at the law and self-censor.  We say to ourselves the law says this is a crime and therefore we will not do it.

Google, et al, thinks differently.  They say we will do it until someone stops us.  In other words, regardless of the written law, it is not a crime unless we are found guilty in a court of law.

And their behavior is actually way worse and destructive.  Google, et al, funds "charitable" organizations and others who are actually attack dogs using the written law to destroy their competitors while carry on the very behavior they are attacking others for.  This is a form of enforced monopoly.

 

 

In reply to by Ahmeexnal

Captain Chlamydia whatswhat1@yahoo.com Thu, 03/22/2018 - 18:17 Permalink

Too many people. 

Within 50 years we are  past the post-oil point in time. Prolly 20. One super bug and we die. Super volcano dito. Nuclear conflict. 

We kill rhino's whales tigers. We shit plastic. We eat Monsanto. We make petrodollars on the backs of the ordinary people, we let the government fuck us, tax us, JAIL us. 

Elite laughs his ass off. Rothschild and the other banksters investing in the military industrial financial intelligence complex. Central banks fucking it up. They are skimming off the wealth, in their villa's on their yachts.

CIA wars in the middle east. False flags, proxy wars. And that Bitch May with her Russian poison hoax this whole NATO stuff stincks high heaven. 

Merkel and her 12th Century friends that flood Europe, well fuck you multi-culturalism....

We are lied to about the wmd in Iraq, bout 911, jfk, fiat money. Think people. 

 

Qui bono

 

There is a storm coming. Social. Financial. Armed conflict. The BEST TIME WE HAVE EVER EXPERIENCED as HUMANS is the PAST 50 YEARS. 

 

Downhill from here. 

 

Did i mention Georgia guidestones? 

In reply to by whatswhat1@yahoo.com

Ghost of PartysOver overbet Thu, 03/22/2018 - 12:14 Permalink

Just throwing out  thinker:  What if a trade war is the only way to get China to changes its ways.  Force them to join the rest of the developed world and float its currency.  Force them to stop the intellectual property theft.  Do away with child labor and forced labor.........  Basically level the playing field.  Lets be honest here, nothing else has worked.

Would a trade war be worth it?

In reply to by overbet

Bemused Observer Ghost of PartysOver Thu, 03/22/2018 - 13:40 Permalink

Well, ask yourself how it worked with us...have WE been 'honest' here? When is the last time global realities have ever convinced our own PTB to alter their ways? Or did we just ignore it all and press on ahead anyway?

Yeah...so expect the same from China. Why on earth should they be any different from us? As for trade wars? Well, I think we are several years too late with that one...the time for a trade war is when you actually have power as a trading nation. We willingly handed that power to China decades ago, and just in the event they missed the purpose of that, we went ahead and helped build out their manufacturing capacity while dismantling our own.

So now THEY make the stuff the world wants to buy. Does anyone think they aren't aware of that? Being the only nation with a major manufacturing capacity was what led us to world leader position after WW2, because at the end of the day, the one with the cranking factories will be the one to recover fastest.

We have become so enamored with tech that we have forgotten that the tech is only useful in a world where all the basics are in place. An I-Phone only has value in a world were you can use it to interact with the hi-tech society around you. If all that's 'around you' are closed factories, your friends are all unemployed, and you've been hacked so many times you are afraid to do any business online anymore, what good is that phone to you?

Yeah, we make good tech. But in a world were we make nothing ELSE, what good is it? And once China figures out how to duplicate it, anything we DO make will just end up being the 'expensive' version of the tech du jour that everyone else will be buying from China at half the US price.

In reply to by Ghost of PartysOver

Giant Meteor whatswhat1@yahoo.com Thu, 03/22/2018 - 12:20 Permalink

Well there are many theories as to why ..

But the one I subscribe too, after awhile you can only hide the dirt under the rug so long. By now most thinking folks know, as they were put on that bulletin sans 2007-08, the Great Pumpkin Patch of financial collapse of global markets, smoke meets mirror, folks play along nicely, because after all, TINA ..

There was never anything such as a "recovery" without the heavy hand of the central banker modern day alchemists, never any there, there .. aside from rebuilding the fraud in spades .. We can rebuild !

Frauds, manupulation, insider double dealing, and hyperbolic debt. To the moon Alice. Mars perhaps. The global troops are restless, edgy, as everyone looks around the room trying to figure out who the sucker is .. and then, in a monumental surge of clarity, in one breathless moment, the shocking answer becomes crystal clear.

Facebook? Seriously ? Amazon? Seriously? $1000 phones, 7 year car payments? Broke ass plebians, far as the ete can see ? Pensions? , unpayable promises in the future. Suspension of reality does not change reality ..

There will be wars, and rumors of wars ..

The world is run by madmen ... and ad men, modern day Bernays, the novelty wears thin, the bullshit tired, even my own bullshit ..

Wish the news were better ..

As to the technical explanation. I'll leave that to the technocrats, who never falter in their own attempts at weak explanation, and excuse making ..

Let them talk THEIR book ..

In reply to by whatswhat1@yahoo.com

Giant Meteor Troy Ounce Thu, 03/22/2018 - 14:36 Permalink

“Patience is bitter, but its fruit is sweet.”

― Aristotle

However it must be said, both good and bad comes to those who wait. While patience may be a virtue, it's manifest blessings are hardly assured .. So then, on a long enough time line ....

In reply to by Troy Ounce