S&P 500 Rebounds as Markets Brace for a Hawkish BOJ

Better late than never, said the post-Fed volatility reset that sent the S&P 500 up about 1% at the open and then did nothing else for the rest of the day. I guess the great news for the bulls is that the VIX 1-Day managed to finish the day at 13, so there will be some vol to crush again overnight into tomorrow. The moral of the story is that if the market rallies again tomorrow, albeit to a lesser degree, I wouldn’t be surprised either.

In the meantime, tonight is the highly anticipated rate decision from the Bank of Japan. I think it would be a really bad idea for the BOJ to pass on raising rates, and for that reason, I think it will hike. I also think it will signal that more rate hikes are coming and, more importantly, potentially at a faster pace. Japan’s 10-year breakeven inflation rate is at 2%. What more could the BOJ possibly want? It is time for it to hike.

The AUD/JPY probably matters more than the USD/JPY at this point, given its carry-trade positioning. For now, support has held, but a hawkish BOJ that signals more rate hikes could result in the AUD/JPY breaking below support at 110 and potentially moving sharply lower. That would likely be a negative for risk assets globally. This is probably the most important chart to watch over the next few days, particularly following the BOJ meeting.

Mike

Glossary by ChatGPT

AUD/JPY — The currency pair measuring the value of the Australian dollar against the Japanese yen, often viewed as a gauge of carry-trade and global risk sentiment.

Breakeven Inflation Rate — A market-implied measure of expected inflation derived from the yield difference between nominal and inflation-linked government bonds.

Carry Trade — A strategy that involves borrowing in a lower-yielding currency to invest in assets denominated in a higher-yielding currency.

Gap Fill — A price move that returns an asset to a previously untraded price range created by a gap between trading sessions.

Hawkish — A monetary-policy stance favoring higher interest rates or tighter financial conditions to restrain inflation.

VIX 1-Day — The Cboe 1-Day Volatility Index, which measures the market’s expectation of S&P 500 volatility over approximately the next trading day.

Volatility Unwind — A decline in implied or realized volatility that can support asset prices as volatility-sensitive positioning and hedges are reduced.

Volatility Crush — A sharp decline in implied volatility, often following the resolution of a major scheduled event or uncertainty.

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