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The Moody’s downgrade caught nearly everyone off guard on Friday afternoon. Most are dismissing the news as not a big deal, and perhaps it’s not. After all, the US has already had two prior downgrades. However, the timing is particularly sensitive, especially given the current negotiations around the tax bill. The key issue is that this downgrade comes at a moment when term premiums were already rising, potentially adding even more upward pressure.
At this point, the bond market is essentially in control—and more importantly, it has put the administration in a tight spot. Scott Bessent had been trying unsuccessfully to lower the 10-year rate, and now the market clearly knows how to provoke a response from him and his team. With rates already back to levels seen before the pre-Liberation Day pause, one must assume the market will continue pushing rates higher until it gets a meaningful reaction from the administration.
Additionally, rates have already been rising, and given the recent breakout, it’s plausible that the 10-year could continue to climb—perhaps back toward 4.6%.
It’s a similar scenario for the 30-year, which is likely to push above 5%. It has already tested that level twice after breaking out of a bull flag, and we could see another attempt at surpassing that mark.
The dollar has also been the focus of attention; the ironic thing about the dollar is that there was a “source” noting during the week, trade deals are not working to include currency policy pledges in the agreements. Interestly, just a couple of days later, Japan’s finance minister Kato said, “If circumstances allow, I’d like to use this opportunity to have a meeting with Treasury Secretary Scott Bessent and continue to discuss foreign exchange”. This would be at this week’s upcoming G7 conference. There were also reports that Taiwan and South Korea could use these as part of trade deals.
Indeed, the movements in the USDTWD—a typically stable currency—have been historic over the past few days.
The way I see it, we have a bond market and a dollar that are vulnerable to further weakness, with the USDJPY now positioned to strengthen again against the dollar—especially given its recent failure to break above 148.
As for the stock market, not much has stopped its recovery so far, but there’s also not much good news left to propel it higher. In fact, one could argue the news flow will likely worsen from here, given that the major positive trade news has already been announced. We probably won’t see any trade deals better than the one reached with the UK, and the China trade pause was arguably the largest possible deal. Additionally, President Trump has signaled plans to start assigning specific tariff rates to various countries. On top of that, announcements regarding pharmaceutical and semiconductor tariffs are still pending.
If anything, the market’s significant rally has likely given the President the green light to move forward with his tariff agenda. Previously, rising rates, a weakening dollar, and falling stocks were the key factors that prompted the administration’s pause. Now that stocks have recovered most of their losses, it seems like the ideal moment for the administration to advance its tariff plans.
To me, considering where realized volatility currently stands and the thin liquidity at the top of the order book, implied volatility levels should be higher than they are now. In fact, we’ve already started to see the VVIX move upward.
With the recent market surge likely driven by repositioning after the trade pause and the announcement of the agreement with China, markets have probably overshot to the upside and are now due for a correction. Considering the post-OPEX landscape coupled with the Moody’s downgrade, conditions seem ideal for a substantial decline.
I don’t see any reason why we couldn’t fill the gap at 5,680 and then reassess from there.
-Mike
Terms by ChatGPT
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Term premium:
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The extra yield investors require to hold a longer-term bond compared to a series of shorter-term bonds.
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Bull flag:
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A technical chart pattern that resembles a flag on a flagpole, indicating a period of consolidation before the continuation of an upward move.
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USDTWD:
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The currency pairing between the US dollar (USD) and the Taiwanese dollar (TWD).
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USDJPY:
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The currency pairing between the US dollar (USD) and the Japanese yen (JPY).
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Implied volatility (IV):
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A measure reflecting the market’s expectation of future volatility in the price of an asset, usually derived from options pricing.
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Realized volatility:
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The actual observed volatility of an asset’s price over a past period.
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VVIX:
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An index measuring the volatility of the VIX itself, often called the “volatility of volatility.”
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Top of the order book:
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The area in the order book (a list of current buy and sell orders) containing the best bid and ask prices, typically showing immediate liquidity.
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OPEX (Options expiration):
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The date when options contracts expire, often associated with increased volatility and trading activity due to position adjustments.
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Overshoot:
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When market prices move too far in one direction, beyond the point justified by fundamentals or technical factors, often leading to a reversal or correction.
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Gap fill:
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A technical trading scenario in which the market price moves back to cover an earlier gap (area of skipped prices), considered significant support or resistance.
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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