Taking the x86 pxelinux.0 from /usr/lib/PXELINUX/pxelinux.0 and otherwise doing the same tftp setup as in [1] and switching from the "maas" to the "default" network where I have set up dhcp to netboot by libvirt as in [1]. I can see netboot happening.

With that instead of pushing things from libvirt via kernel/initrd tags I now provide it via PXE similar to your config.

TL;DR
- tftp serves:  lpxelinux.0 + pxe modules + PXEconfig 
- nginx serves: kernel/initrd/squashfs
- qemu started directly without libvirt

Still gets the inintial kernel booting fine and then failing to mount the squash:
mount: mounting squash:http://192.168.122.1:80/squashfs on /root failed: No such device

I can from the initramfs mount it:
(initramfs) wget http://192.168.122.1:80/squashfs
Connecting to 192.168.122.1:80 (192.168.122.1:80)
squashfs             100% |*******************************|   174M  0:00:00 ETA
(initramfs) mount -t squashfs squashfs /root/
It is mounted just fine:
/dev/loop0 on /root type squashfs (ro,relatime)

It is possible that I'm back at the same ordering issue that I had of the IP coming up too late to mount the squashfs, but later works fine.

I mounted it with 2047/2048/2049 mb gusts without a problem.

Despite all work on this I'd still need a better reproducer :-/
I might take a look at rebuilding a more verbose initramfs for that after lunch.

--- config details ---

$ find /srv/tftp/
/srv/tftp/
/srv/tftp/squashfs
/srv/tftp/boot-kernel
/srv/tftp/ldlinux.c32
/srv/tftp/lpxelinux.0
/srv/tftp/pxelinux.cfg
/srv/tftp/pxelinux.cfg/01-52-54-00-3b-72-0a
/srv/tftp/boot-initrd

Kernel/initrd/squash as described in comment #18

# modified to get scrollable direct console (but no iPXE VGA output)
#!/bin/bash                                                                                                                                                                  
/usr/bin/qemu-system-x86_64 -name guest=horsea-kvm-pod-2047,debug-threads=on -machine pc-i440fx-bionic,accel=kvm,usb=off,dump-guest-core=off -m 2047 -realtime mlock=off -smp 1,sockets=1,cores=1,threads=1 -cpu kvm64 -rtc base=utc -no-shutdown \
 \
-nographic -serial mon:stdio \
 \
-drive file=/var/lib/uvtool/libvirt/images/d9658e2f-d4c7-4a55-8ecc-b216612fe410,format=raw,if=none,id=drive-virtio-disk0 \
-device virtio-blk-pci,scsi=off,bus=pci.0,addr=0x6,drive=drive-virtio-disk0,id=virtio-disk0,serial=d9658e2f-d4c7-4a55-8ecc-b216612fe410 \
 \
-boot order=n,strict=on \
 \
-net bridge,br=virbr0,helper=/usr/lib/qemu/qemu-bridge-helper -net nic,model=virtio,macaddr=52:54:00:3b:72:0a
# For access to the iPXE / lpxelinux graphical output
#-curses \
#-chardev stdio,mux=on,id=charserial0,logfile=/tmp/test.log \
#-serial chardev:charserial0 \
#-mon chardev=charserial0,mode=readline \
# For access to a scrollable direct console and monitor
# -nographic -serial mon:stdio

$ cat /srv/tftp/pxelinux.cfg/default 
DEFAULT execute

LABEL execute
  SAY Booting under MY direction...
  KERNEL http://192.168.122.1:80/boot-kernel
  INITRD http://192.168.122.1:80/boot-initrd
  APPEND console=ttyS0 nomodeset ro root=squash:http://192.168.122.1:80/squashfs ip=::::horsea-kvm-pod-2047:BOOTIF ip6=off overlayroot=tmpfs overlayroot_cfgdisk=disabled apparmor=0
  IPAPPEND 2


[1]: http://ubuntu-on-big-iron.blogspot.com/2017/12/pxe-netboot-kvm-s390x.html