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Nomura: Where Do We Even Begin With These Broken Markets

Courtesy of ZeroHedge View original post here.

Picking up where he left of with his "stuff is beginning to break" magnum opus yesterday, this morning Nomura's Charlie McElligott writes that on top of the already well-established macro supply-demand “inflation shock” catalysts of the past 2 year period, the Ukraine-linked Commodities price/collateral/dollar funding squeeze -> "margin-call exercise" (which left a prominent Chinese trading tycoon significantly poorer after billions in margin calls), further amplifies the recent price-action in pockets of Energy, Metals and Ags.

As we discussed on Monday, it took just hours to get confirmation of Zoltan's commodity producer scenario materializing, after Peabody Energy confirmed some $534mm of margin losses on short Coal hedges (after requiring a new Credit line drawdown that went public), while overnight, LME Nickel goes suspended yet again (now cancelling trades) as the purported Xiang Guangda / Tsingshan short-position was estimated at upwards of $12B MtM loss (the price is, well, all over the place but a record +250% 2 day rally at the highs)…

… with no physical available into an already airtight market, and his various banks and Chinese brokers struggling to meet their margin-calls, despite as noted last last night, the LME giving one of the "Big 4" Chinese banks reprieve of additional time to come up with funds, supposedly with nothing stopped-out yet, although a later follow-up headline…

  • *CHINA ASKS BANKS TO REPORT DERIVATIVES EXPOSURE AS MARKETS REEL

… suggests that not all is peacy in China.

And then there is another factor, which McElligott says is "potentially paradigm-shifting in the global currency reserve space"

  •  *CHINA MULLS BUYING STAKES IN RUSSIAN ENERGY, COMMODITY FIRMS

… with possibly enormous implications for the future of the world’s reserve currency (which is still the US dollar) while China positions to control the world’s Commod flows (+RMB), as Zoltan Pozsar writes in his latest must read note (available to pro subscribers in the usual place) while also accelerating the move and acceptance of Crypto and Digital alternatives.

Meanwhile, as discussing in our morning wrap, after Monday's bloodbath, stocks bounced off another earlier overnight selloff escalation (ES was -1.4% on lows) following earlier Russian threats about cutting off European Gas supply which seemingly failed to materialize (GAZPROM SAYS UKRAINE GAS TRANSIT TO EUROPE CONTINUES AS NORMAL), with German Economic Affairs Minister Habeck stating that they could “..manage this winter if Nord Stream I is stopped.”

Adding to the bullish sentiment was fresh hope for de-escalation headlines from Ukraine’s Zelenskiy interview with ABC News, saying compromise is possible on Putin’s demands he cede Crimea / DPR / LPR and not join NATO:

“I've cooled down regarding this question a long time ago after we understood that NATO isn't prepared to accept Ukraine."

And as noted yesterday, thanks to the exponential surge in commod, the move Breakevens which skyrocketed to new highs / wides has been accordingly violent, which as Charlie notes, this is becoming a two risk for the Fed:

  1. not-only do these “sticky higher” levels in fwd Breakevens risk resetting longer-term inflation expectations higher, but also,
  2. the move in inflation is keeping Real Yields far too negative / “easy” for the Fed’s liking

This, according to Nomura, will increase the risk that the Fed will again need to use the March meeting to increase their hawkish rhetoric in order to help and contain these Commodities / Inflation dynamics – even though the Fed has precisely zero control over supply shocks - which are counter-productive to their attempts at containing such powerful Price pressures, with more vigilant language against inflation being anticipated, and which should act as catalyst for a reversal in Real Rates / higher Real Rate Vol, leading to more “tightening” in FCI and the reason that Equities trading psychology remains "sell the rips", and why European banks have imploded in the past month (in additiion to their Russian exposure).

In the meantime, with US rate hike and massive “price discovery” cheapening to come via Fed QE turning into QT – as Treasuries/MBS no longer see the backstop of price-insensitive buying which we’ve become accustomed to for over a decade – McElligott sees "a potentially new and massive source of global fixed-income supply coming with reports about a proposal for EU joint debt to pay for the Energy and Defense forward implications of the Ukraine invasion from Russia"

Indeed, as we asked earlier, just how will Europe purchase all these bonds if it is ending QE. Spoiler alert: it isn't, and instead it will use the crisis to justify even more helicopter money.

As for equities, they remains in the same non tradeable zone, near peak “short Gamma,” with absolute extremes in “short Delta, feeding explosive two-way moves on Dealer hedge chasing down or up with accelerant “liquidity taker” flows, but just earlier, with yet another ~2.3% S&P swing rally off the lows, thanks to unprecedented “fodder” for a squeeze due to said extreme “short Delta” from short-dated Puts. Here are the key gamma levels to watch.

  • SPX $Gamma -$6.4B / 10.5%ile (short below 4350), $Delta -$530.7B / 0.7%ile (short below 4412)
  • QQQ $Gamma -$512mm / 3.0%ile (short below 346.41), $Delta -$45.8B / 0.1%ile (more than 10% away from ‘flip’)
  • IWM $Gamma -$313mm / 7.3%ile (short below 203.70), $Delta -$13.5B / 2.6%ile (short below 208.90)
  • HYG $Gamma -$659mm / 3.4%ile (more than 10% away from ‘flip’), $Delta -$14.1B / 0.4%ile (short below 86.22)
  • EEM $Gamma -$56mm / 14.2%ile (more than 10% away from ‘flip’), $Delta  -$3.0B / 9.4%ile (more than 10% away from ‘flip’)

Finally, according to McElligott's models, yesterday was "the worst day of equity fund performance in a long, long time." As the Nomura x-asset strategist notes, it was def a “single stock” cash day de-risking day (and not a macro day), just a crushing stop-out for hedge funds in the short-term (Hedge Fund Crowding Factor -2.2% / -3.3 z-score; HF L/S Basket -1.9% / -3.8 z-score) as Crowding, Growth and Leverage was REKT vs Low Risk and Reversal exploding higher; a similar mauling also took place for MFs, where Nomura's positioning data shows them continuing to get smashed without the benefit of grossed-up short books, awkwardly recently adding / overweight Semis, Regional Banks, Media, Consumer Durables, Autos, Software & Services and Retailing…vs underweights in Food, Beverage & Tobacco, Telcos, Food & Staples, Pharma, Household & Personal, Utilities, Oil & Gas, Health Care Equp, Real Estate, Capital Goods.

Now if only all those ESG poseurs hadn't dumped their "dirty, fossil" portfolios a year ago…


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