Charlie McElligott might be getting his way. RBC’s Managing Director and Head of US Cross-Asset Strategy has been watching for a mean reversion, and Thursday, with the S&P 500 down nearly 18 points near lunchtime trading, he is getting it. What could be one of the triggers for today’s market losses? It could be what McElligott calls Wednesday’s “goat rodeo,” also known as President-elect Donald Trump’s press conference.
Charlie McElligott expected “Presidential tone” but was disappointed
There are of course many factors that can be driving Thursday’s sell-off. But McElligott’s most colorful point of potential causation is what he thinks was yesterday’s surprise.
Trump had not held a press conference since July 2016. For his part, McElligott notes that market expectations were for a more “Presidential tone” featuring “granular policy talk.”
While Trump has no past performance statistics to bolster the expectation that his tone would change, the statistically minded McElligott was nonetheless looking for “nuances of the tax plan, fiscal stimulus, and the Obamacare unwind” to be discussed in meaningful tones.
That didn’t happen. Instead, what occurred was a “Barnum-esque circus of a press conference,” one that “spooked a lot of the TACTICALLY long reflation crowd.” Other analysts have pointed to a potential breakdown in support for repealing Obamacare in the Senate showing cracks in the Republican majority as partial causation for the stock market slide.
Charlie McElligott – Fade the consensus
Thursday’s early market sell-off is part of a larger move McElligott has been monitoring. The consensus trade has been getting too long in the tooth and January’s tendency to mean revert may live up to its statistical tendency.
McElligott is looking at the parade of people who have been long the US dollar, stocks, particularly small cap and those that are domestically levered. He also notes the long concusses is long value factor, cyclicals beta, inflation, high tax rate, HY / high beta credit, curve steepeners and copper
Likewise, those assets that have been out of favor might mean revert as well. The short trades include US Treasuries, VIX, gold, low volatility and beta issues, emerging market equities and bonds as well as currencies normally paired with the US dollar such as the euro, yen, as well as emerging market currencies.
“As some of the reversion was ‘pre-traded’ in the back-half of Dec, it made sense to us that this January wouldn’t be an outright repeat of the violent VaR shocks experienced in a number of recent Januarys as ‘momentum’ reversed hard and everything from ‘bonds vs stocks’ to equity factors turned upside-down,” he wrote. “Early all of the gains from these ‘reflation’ trades were ‘last year’s business.’ Point being, YTD, most of these trades are moving from ‘not great’ to now approaching ‘REAL negative PNL.’ As risk-managers are highly-sensitive to such start of year drawdowns and we near the ever-present ‘tight stops.’”
Charlie McElligott – US dollar trends
One of the more interesting performance drivers of the US dollar trade could be tax changes.
It has been reflationary growth expectations that have “clearly been a significant driver of the USD ‘bull case.’” But the tax component, including overseas profits relative to repatriation as well as the much whispered border-adjusted tax (BAT) ValueWalk has been following, these are theoretically driving close to 15% currency appreciation, he notes. If the BAT tax is watered down the dollar will move lower as well, he says.
While net dollar positioning is at 1 year highs, the RBC strategists should consider what is driving investments.
“Even more than ‘just’ the cumulative FX positioning itself is the observation that the Dollar is the ‘grand unifying asset’ of the ‘domestic growth / reflation’ trade theme. So in that sense, ‘long USD’ is a factor embedded in nearly every one of the aforementioned popular macro longs and shorts.