Citi Doubles Down Goldman Sell Call, Says Market "Heading Lower... Liquidity Support Around 1285"

Even though it was one of the first to call for a coordinated market crash (remember XO going over 1000 bps?) last month before a coordinated policy response can come into play, today Citi's Mohammed Apabhai has doubled down on yesterday's market moving Goldman call, once again making it quite clear that only a collapse can bring the much needed policy "salvation." The bogey? 12% down according to Citi, before the "liquidity put" comes in play and 1285 could "indicate liquidity support." In other words: in order to go up, first the market must go down.

From Apabhai


  •  Markets correct back, unclear now whether bulls or bears are in charge
  •  Inflexion point seen within 1% of current levels for bulls or bears to assert
  •  Move lower to encourage bears to press home their advantage, put on new shorts
  •  Move up will encourage bulls but liquidity will need to be provided
  • Large divergence - economy/bond/credit/commodities/ oil & money/equity mkts
  • Central Bank liquidity pumped in pre-Moody's downgrades to avoid disruption
  • Fear of month end disruption like 2010 Reg 2a-7 shift, which led to QE2

Watch out for the occasional liquidation:

  • View remains unchanged - break below previous lows will trigger liquidation
  • Would lead to significant change in vol, credit, market dynamics
  • Central banks, bulls need to re-assert their authority around current levels
  • Seen eventually being answered by liquidity put 12% lower, more in Asia

Bull vs Bear

  •  BULL
  • Central Banks liquidity near highs
  • Market supported by QE3, policy hope
  • Money markets relaxed, flashing amber
  • Pressure on Europe to do something
  • Valuations starting to look attractive
  • Positions lighter, inflow sensitive
  • Quarter end approaching, inflows
  • Potential for China Jul credit crunch
  • Potential for ECB rate cut in July
  • EM inflation slowing, policy easing

  • Economic activity slowing down sharply
  • Relaxation not going to come here
  • Bond, credit, commodity, bonds bearish
  • No resolution of European situation
  • Not sure if E or BV is true
  • Long funds still seen very long
  • Funds have lost money, may sell stock
  • Potential for China rate, RRR cut
  • Irrelevance, policy paralysis
  • Potential stagflation, esp on QE3

The kicker: 12% more to drop before intervention:

  • Liquidity put seen 12% below current levels, up liquidity drive seen up 12%
  • QE3, liquidity action only unleashed if markets move lower, negative for Asia
  • If markets want liquidity action, need to move lower and trigger the put

And there it is: the market should stop frontrunning its own QE salvation as it will never come above 1300.

In summary:

  • *** GUT FEEL? ***
    Heading lower, Central Banks may defend with liquidity but economic weakness indicated by bonds, credit and commodities is a reality. Failure to break below previous lows would indicate that Central Banks are continuing to win the Battle of 1285 and would indicate liquidity support. Keyrate above 35 increases probability of break below previous lows to over 50%.

And some trade recos:

  • Bears should be buying gamma at this level, will start working on break down
  • Nifty Sep 12 90% puts offered at 1.24%,
  • Kospi200 Sep 12 90% puts offered 1.23%,
  • HSI Sep 12 90% puts offered at 1.8%.
  • Sell puts on gold on fall below 1500 - increased likelihood of QE expected
  • Time for the market jury to consider its verdict, judgement likely out soon