Nomura Shows “The Moment Everything Broke”

Wednesday, November 28, 2018
By Paul Martin

by Tyler Durden
ZeroHedge.com
Wed, 11/28/2018

With the exception of the VIXtermination event in early February which followed a euphoric blow-off top at the end of January, the US stock market for most of 2018 was relatively smooth sailing for most traders, with the S&P – largely oblivious to events in the rest of the world – hitting an all time high on Sept. 20. And then everything changed.

As Nomura’s Charlie McElligott writes, “the moment everything broke” took place just as October rolled in.

It is debatable what catalyzed it: some will point to Powell’s October 4 “we may go past neutral” speech (which we discussed in “Fed Chair Powell Hints He May Soon Crash The Market”); others note that this is precisely when central bank liquidity took another major step lower as the Fed’s maximum quantitative tightening kicked in (as the balance sheet run off increased from $40Bn to its maximum $50Bn per month), when the ECB’s bond purchase tapered from €30Bn to €15Bn/month and the BOJ stealth tapered via its YCC ‘tweak.’

Whatever the reason, it was then that between sliding risk assets, and sharply tighter financial conditions US inflation expectations via 10Y Breakevens collapsed, the first cracks in long/short hedge fund performance appeared, the CTA trend index snapped, beta market neutral funds broke down and risk-parity stopped working as the correlation between stocks and bonds inverted.

And once “everything broke” at the start of October, speculation that the Fed will soon be forced to stop its tightening cycle started to grow, peaking this week with traders quietly hoping that either Clarida, Powell or tomorrow’s Fed minutes would hint that the Fed is relenting on its “dot plot” projections which still expect 3 rate hikes in 2019.

Meanwhile, as Nomura’s Charlie McEllgiott writes, despite expectations for a “balanced, data-dependent” tone from Fed Chair Powell today (in-line with Clarida yesterday), the March 19 implied hike probability has now “shockingly” diped to now just 48% as the market buys-into the “Fed Pause” thesis.

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