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Today, the VIX index was up slightly, and 10-day realized volatility began to rise from its depressed levels, as the S&P 500 moved by 60 basis points instead of its usual 25 bps. With a Jobs report on Friday, a CPI report next week, a FOMC meeting coming up, and a BOJ meeting, volatility will likely continue rising.
The VIX 1-day rose somewhat intraday, though not as much as expected given Powell’s speech. Still, with an important Jobs report on Friday, it’s likely to continue climbing through tomorrow. Reaching 20 remains possible, as this has been the level that the VIX 1-day has reached in previous instances.
The one-month implied correlation index closed below 11 today, and while it could go lower, historically, this has been very rare.
In the meantime, HY credit spreads continue to contract, with the CDX high yield index falling and being at the very low end of the historical range.
There appears to be a significant strain on liquidity in the overall market structure. The spread between the first-month generic BTIC on Adjusted Interest Rate S&P 500 Total Return Index Futures and the second-month generic contracts has been widening recently. Essentially, this widening spread indicates deteriorating liquidity conditions and increasing costs for maintaining near-term futures positions compared to longer-dated contracts.
You are seeing these strains everywhere, as noted by the USD Swap spread for 10-year SOFR, which has fallen to some historically low levels.
It is the same issue in Europe, based on the Euro 10-year swap spread.
Something isn’t right in this market at the moment. While the exact cause isn’t clear, rising funding costs and unusual spread movements suggest a potential squeeze causing market distortions. This could be related to year-end positioning or contracting balance sheets at the Fed and ECB, with liquidity not being as plentiful as commonly believed.
Markets can undoubtedly continue to squeeze, and this dynamic may be partially responsible for rising stock prices and declining implied volatility. However, the duration of these conditions remains uncertain.
Adding to these concerns is the Yen carry trade situation, particularly if the BOJ decides to adjust rates in December, which could cause conditions to deteriorate further. It seems prudent to watch how these market conditions evolve.
In fact, we have recently seen the 5-year USDJPY currency swap spreads rising, as the market may be beginning to prepare for the BOJ potentially raising rates in the future and lower rates in the U.S. This dynamic could make the yen carry trade less favorable.
-Mike
Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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