Timing Is Everything

ZH: Kolanovic: "The Current Crisis Is Playing Out Exactly The Same As The Aug 2015 Crisis"

From the aspect of systematic flow and electronic liquidity, the current crisis has played exactly the same as the Aug 2015 crisis. It started with the de-risking of trend followers, short volatility positions, and strategies sensitive to bond-equity correlation. Similar to Aug 24th, by far the largest and quickest punch came from hedging flows for the trillion dollar+ S&P 500 index put option complex (gamma hedging) on Monday, and was compounded this time with liquidations in the VIX complex. As this was unfolding, electronic liquidity, in the once most liquid product, S&P 500 e-mini futures, evaporated.

As measured by market depth in futures, liquidity on 2/6 dropped by ~90% (compared to the first few weeks of the year). Once volatility was out of the bottle (~5% move on Monday), various forms of volatility targeting strategies (with AUM in excess of $300bn) were set in motion and added outflows that will keep investors on edge for several days.

He sees one difference:

"while for equities this looks like a 2015 type of crisis, other asset classes disagree. This is because there is a big macro/fundamental difference between now and the Aug 2015 market crisis. In 2015, we dealt with an EM crisis (e.g. China), crisis of credit spreads, collapse in commodity prices, and weak global growth. There were legitimate fears of a global recession. Now, the situation is exactly the opposite: global growth is very strong, US corporate earnings are at record highs (and continue to be revised higher), commodities have stabilized, and the USD is weak."

The 2015 event wasn't the start of something, it was the middle of something. The difference this time is the timing of a liquidity squeeze within a larger downturn. Commodities will fall, credit spreads will widen, global growth will weaken, there will be fears of recession and an EM crisis (China).