"Calamity": Nomura Warns Or VaR Shock Adding To "Untradeable Markets" Over the weekend, in our initial response to the shocking Saudi "scorched earth" price war declaration, we said that "once Brent craters on Monday to the mid-$30S or lower, the accompanying implosion in 10Y yields could make the record plunge in yields seen on Friday a dress rehearsal for what could be the biggest VaR shock of all time." Sure enough, among the many panic touchpoint on Monday morning which have seen virtually every risk market in persistent liquidation, Nomura's Charlie McElligott writes that the fresh VaR shock is adding to "undtradeable markets" as the crude price shock adds to cross-asset VaR-down as traders are forced to liquidate a substantial portion of their long books; Amid the chaos, Fed Funds futures are pricing 100bps of cuts by end of month, with systematic/CTA models showing Nasdaq is set to sell/deleverage large dollar notional from what was the last of the legacy “+100% Longs” in Equities, with McElligott warning that this "probable Nasdaq puke comes at a dangerous seasonal for “Momentum” factor, where April is the worst monthly return for the factor back to ’84." * * * Taking a step back, it all started with oil, and specifically the start of the Saudi price war, which sent Brent and WTI -31% in last night’s reopen, both currently trading around -20.0%. Why such an "outsized" move in Crude? As the Nomura quant explains, adding to what we already said about the commodity's forced selling threat, "crude is particularly exposed to “Negative Gamma” shocks due the inherent and massive “Commercial” nature of (downside) hedgers in the space—so on top of already being an illiquid mess in the futures contract, then imagine being a market maker who has sold Puts to major E&Ps and was already staring into the abyss after the last two weeks’ -25% move…now having to sell futures deep in-the-hole of the reopen gap lower last night/today." The oil puke triggered "cross-asset pandemonium", as dealers in both Cash- and Vol- space are already operating under the abovementioned “VaR-down” reality via Coronavirus-tied risk- and staffing- curbs which are choking-off market liquidity to even more extreme levels. Among the key cross-asset observations highlighted by McElligott are: With the addition of yet another “macro shock” catalyst, UST futures/Rates experienced yet-another illiquid “negative convexity” shock overnight, as for context we saw UST 10Y yields down to 31bps (currently 48bps), while UST 30Y yields plunged 59bps from reopen level to the 0.69% low (currently 90bps) White ED$ (Mar and Apr) are seeing another insane +~23 ticks move as yet more “emergency cuts” are expected from markets to offset rapidly tightening “financial conditions” The VIX curve has entered a new realm of inversion while S&P e-minis go -5% “limit down” last night, which means they’re prevented from going lower until they “re-open” at 930am EST Cash trading launch Upon S&P e-mini reopening with the US Cash markets, a 7% decline (level 1 circuit breaker, 15 min pause), 13% (L2, 15 min pause) or 20% (L3) downside move will trigger a NYSE rule 80B trading halt for both the cash equity market AND all US-based equity index futures and options, where a 20% decline in the underlying S&P 500 index will terminate trading for the remainder of the trading day in both cash AND futures / options markets While ES remains locked, the SPY ETF is still trading and is currently at around -7%, as global indices / futs trade off the earlier “worst” levels (i.e. DAX nearly -8.4% earlier, now “just” -6.6%) with some incremental covering of dynamic hedges earlier off the back of Xinhua Twitter stating “No new indigenous COVID-19 cases reported on Chinese mainland excluding Hubei over weekend" (whether anyone believes China's updates is a different matter). Which brings us to what traders expect (or hope) comes next, with markets now effectively expecting another Fed emergency cut as soon as today, with 100bps of easing priced in FFs by end March... The fed fund futures are now pricing a 73% chance the Fed cuts to zero next week. So, cut to zero is now the consensus call. Note markets are so extreme that that Bloomberg's WIRP is NOT correct. CME Fed watch is closer to what is priced. Use this.https://t.co/36oZ9wbTcE pic.twitter.com/SnWUrrYK8x — Jim Bianco (@biancoresearch) https://twitter.com/biancoresearch/status/1236987247536340992?ref_src=twsrc%5Etfw!function(d,s,id){var js,fjs=d.getElementsByTagName(s)[0],p=/^http:/.test(d.location)?'http':'https';if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src=p+"://platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs"); ... although as Nomura notes echoing what we said last night, the real market focus remains not on “imminent” policy rate cuts to ZIRP, but instead fixated on fiscal stimulus potentials (“Trump’s Aides Drafting Economic Measures to Combat Virus Fallout” per Bloomberg), new liquidity measures (FX Swap Lines announced, additional / larger O/N and Term Repo ops), and potential size- and scope- of Large Scale Asset Purchases (LSAP)—which the entire world is now expecting to be expanded in a broader asset fashion a la BoJ/ECB. And while we wait for policymakers to start panicking (Mike Hartnett's favorite trigger to buy, as that's when markets to stop panicking), a quick look at the technicals, starting with CTAs, where as McElligott writes, trigger levels for Equities will "increasingly matter again as we hold lower in Stocks, because outright SHORTS are again being initiated and can thus be “grossed-up” from the recently deleveraging small notional position exposures—although more importantly today however is the legacy “+100% Long” signal in Nasdaq, which is set to deleverage size $ down to just “+16% Long” signal." Of course, in light of the surge in VIX, it is likely that manual overrides will force CTAs into outright shorting mode: S&P 500, currently -56.1% short, [2964.1 Friday close], more selling under 2757.74 (-6.96%) to get to -78% , max short under 2757.44 (-6.97%), buying over 2962.91 (-0.04%) to get to -20% , more buying over 3126.71 (+5.49%) to get to 57%, flip to long over 2963.2 (-0.03%), max long over 3127.01 (+5.50%) NASDAQ 100, currently 100.0% long, [8503.25], selling under 8368.4 (-1.59%) to get to 16% , more selling under 7780.29 (-8.50%) to get to -56% , flip to short under 7781.14 (-8.49%), max short under 7017.65 (-17.47%) A full breakdown of CTA trigger points courtesy of Nomura is below: Focusing on the potential Nasdaq turmoil, McElligott writes that what is especially notable about the "last of the generals" - i.e., Nasdaq - now seeing deleveraging from CTA Trend "is that we are nearing an incredibly volatile seasonal for “1Y Price Momentum” factor (data table since 1984), where you typically see a very significant late March +++ performance dynamic for the factor before April typically sees a powerful reversal LOWER in the factor performance." Finally, it will probably not come as a surprise that option hedging, i.e., "Dealer Gamma" positions relative to spot have turned even more deeply "negative", with the "flip long" line far higher, at ~3156-58 in futures... ... while the options-implied Delta position remains ridiculously “short” relative to spot (flips at 3156) and from a dollar notional perspective (-$492B, 0.9 %ile since 2013)... ... which will keep bouts of covering rallies extremely violent and will almost certainly result in another violent puke in the last hour of trading absent some central bank intervention during the day. Tyler Durden Mon, 03/09/2020 - 08:36