Nomura’s McElligott Tells You ‘Why We’re Here’ And Where He Thinks We’re Going

McElligott of Nomura writes in a note …..how the calendar and thin liquidity are together contributing to wild price action before again suggesting that January could be better.

“This seizure-like behavior isn’t endearing risk-taking in the final days of 2018, despite panicking some who are always under the grasp of FOMO, however, my belief of ‘the January effect’ is alive and well on the buy-side, with many PMs stating to me that they plan to significantly gross-up both longs- and shorts- as the calendar turns”, Charlie writes, adding that his view “continues to be that we will see powerful risk-rallies in standard bear-market fashion in the coming-months which ‘traders can trade’.”
That said, this is all “for rent” – so to speak. “In time [these] will be faded 1) as long as the Fed continues with normalization and 2) against the backdrop of the simple realities of the late-stage business cycle”, he continues, before warning that similar to October, January is set to be another large “QT month” as “the Fed’s balance sheet run-off continues including two heavy weekly QT periods during the first- and third- weeks of January along with [next month] being the first month following the cessation of the ECB’s bond-buying program.”

As far as the broader macro backdrop, McElligott notes that the stage still appears set for the U.S. econ to come in weak. The catalysts are familiar and include steady real yields despite the bleed in breakevens, the waning of the fiscal impulse, the lagged wealth effect from plunging stock prices and “the cyclical reality of corporate deleveraging which inherently means lower CAPEX.”
With all of the above in mind, the environment is conduce only to tactical trading, with directional expressions stuck in suspended animation and conviction lacking until we get a definitive sign from the Fed