Institutional Insights: Nomura Cross Asset: 'All The Things'
Nomura sales commentary by Charlie McElligott, detailing the current "de-grossing" cycle and the shifting volatility regime.
The Current "VaR Shock" and Unwind
The market is currently experiencing a violent mechanical deleveraging process. After a long period of low volatility, investors accumulated "Lazy Leverage" and "High Gross" exposures. The Iran conflict acted as a catalyst, forcing a "Flight to USD Liquidity" that is crushing crowded trades. Because many of these positions were effectively "Short Dollar" proxies, their rapid reversal is creating a systemic shock.
Key "Wrong-Way" Trades Being Liquidated:
Crowded Longs: Gold, Emerging Markets (KOSPI/Local FX), and Equity Momentum (which saw a -3 SD collapse).
Rates/Fixed Income: Long Steepeners, Front-End Rates, and Long Swap Spreads are all being capitulated as Rate Volatility reprices higher.
The "Dirty Secret": Every asset class was essentially "Short Interest Rate Volatility," making the current spike in Rate Vol across the G10 particularly destructive to broad Beta.
Inflation Volatility and the Energy Shock
The market is shifting from "Disinflation Optimism" to a "Resumption of Inflation Volatility." The potential for a long-term "force majeure" on energy infrastructure (Strait of Hormuz) suggests that higher inflation may not be transitory. This forces central banks (specifically the ECB) into a hawkish corner, where they may have to hike rates into a slowdown, further breaking the traditional bond-as-a-equity-hedge relationship.
The 2022 Analog: "Controlled Demolition"
McElligott highlights a potential "sequencing" shift similar to the 2022 bear market:
De-Risking over Hedging: If a commodity shock forces aggressive tightening, investors don't just buy puts; they dump "Beta" (equities) for Cash.
Flattening Skew: As investors exit positions, they also unwind their hedges. This causes Index Skew to flatten rather than steepen during a sell-off.
Positive Spot/Vol Correlation: This creates a "Controlled Demolition" where markets bleed lower but volatility (VIX) actually drops alongside price (Spot Down / Vol Down).
The "Crash Up": Eventually, this leads to a market that is so under-positioned that any positive news causes a "Right Tail" surge, where the market crashes upward because nobody owns the upside.
Tactical Observations
Tech Leadership: For the S&P 500 to reclaim all-time highs, the "Mag 7" must lead. Some "offensive" buying of calls in NVDA and Mag 7 was noted yesterday despite the gloom.
Corporate Headwinds: News of mass layoffs at Oracle due to rising data center costs adds to the "souring mood" and highlights the pressure on the AI/Cloud spend narrative.
Safe Harbors: Investors are scrambling for "uncorrelated" alpha, specifically Commodity Trend (CTAs), Energy Equities, and Long Vega/Gamma swaptions.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!