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The election in Japan resulted in a minority party gaining control of both the lower and upper houses, leaving the fate of Prime Minister Ishiba uncertain. If you were wondering why Japanese rates were flat last night, it was because markets were closed for Marine Day and will resume trading tonight.
The Yen was stronger today, although it’s unclear whether this was due to positioning around the election or the closing out of hedges. Tonight’s trading should provide a better insight into potential impacts on the long end of the yield curve. It could turn out to be a non-event, but based on price action and reports before the election, there seemed to be heightened anxiety around the vote, similar to events seen in France last summer and perhaps Germany this year. Those effects mainly appeared in bond spreads, particularly with both countries’ 10-year rates trading at their tightest relative to Italian bonds in quite some time.
Additionally, supporting the case for higher long-term rates, 1- and 2-year CPI swaps rose again today, likely driven by rising copper prices. It’s hard to see how rates don’t start climbing.
The market recently feels very similar to the setup in July 2024, particularly in terms of volatility. Today, for example, the 1-month implied correlation index was slightly higher, indicating the market may have been offside.
Moreover, the VIX index was down for most of the day, while the VIX 9-day index was significantly higher, creating a notable divergence. Fortunately, the VIX index eventually closed higher, resolving that inconsistency.
Realized volatility reached a point where, if the S&P 500 continued rising, the 10-day realized volatility would likely increase. However, the index closed up only 14 basis points, allowing the 10-day realized volatility to finish lower. Tomorrow, if there’s a move exceeding 30 basis points, expect 10-day realized volatility to move higher. If the VIX starts rising tomorrow, it is a warning signal.
Essentially, we are at a point where volatility and correlations have very little room to move, given that the big earnings start on Wednesday and realized volatility is low. The market has been pushed almost to the maximum, and while I can’t say with certainty that it can’t go higher, the returns should continue to decrease.
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-Mike
Terms by ChatGPT
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Marine Day – A Japanese public holiday (the market closure context may not be universally understood).
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Long-end of the yield curve – Refers to long-term bonds, typically 10 years or longer, and how their yields fluctuate.
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Bond spreads – Differences in yield between bonds of different issuers or maturities, a measure of relative risk.
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CPI swaps – Derivative instruments allowing investors to speculate or hedge against future inflation rates.
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Implied correlation index – Measures market expectation about how stocks move together, indicating market sentiment.
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VIX and VIX 9-day index – Volatility indexes representing market expectations of short-term price fluctuations in the S&P 500.
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Realized volatility (r-vol) – Actual historical volatility calculated from recent price changes.
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Basis points (bps) – A unit of measurement for interest rates and financial percentages (one basis point equals 0.01%).
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.
Subscribe to receive this FREE daily commentary directly in your email
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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