A Short Summary of the CNBC Interview of Charlie McElligott (Nomura Research Analyst) with 2020 Outlook

  • Charlie began by emphasizing that short- and long-term investment decisions should focus on:
    1. a view on rates,
    2. the economic environment (reflation vs inflation), and
    3. geopolitical risk (coronavirus outbreak and the 2020 election).
  • The December 2019 China Phase 1 deal, combined with a bear steepening in rates, brought about a relief rally that took the form of a “reflation trade”.
Note(1):  Bear steepening refers to a widening of the yield curve manifest by long-term rates increasing at a faster rate than short-term rates.
Note(2):  A reflationary environment is one marked by fiscal and political policies that increase money supply, lower interest rates, and reduce taxes. The “reflation trade” is characterized by an asset allocation that emphasizes momentum over value and has a short bias for cyclicals. Typical examples include secular growth (e.g. technology, software, healthcare) and leaders in defensive instruments and bond proxies (e.g. utilities, REITs, and staples).

 

  • January 2020 saw a seasonal inflow into Treasuries along with a rebalancing impulse that focused on secular growth, defensives, and bond proxies.

 

  • There is presently a lot of market uncertainty related to stories such as the ongoing manufacturing slowdown, the global economic impact attributed to coronavirus, along with metrics suggesting an inflection point in credit and economic cycles.  This had led to investors’ large scale positioning in downside protective puts.  As a result, dealers are heavily short puts and to offset that positive delta, have had to sell S&P futures. As the market approaches OPEX, a failure to sell down to those “crash protecton” levels could force dealers to short-cover and result in “…a slingshot higher.”

 

  • A move left in the senate and/or presidency, this year, would likely increase government spending and regulation, would be perceived as growth negative with reductions in tax haven status and corporate profits, and together might well provide a catalyst for inflation. Those forces would impact the market by disrupting the vol curve “…because dealer gamma moves the market, not single stocks.”  From a long-term portfolio perspective, a move left would support a rotation into cyclicals, value, and commodities (“flight-to-safety” assets). Keep an eye on “Super Tuesday.” (March 3)

 

Reference:  The Interview