The S&P 500 Faces Challenges From Rising Oil and a Stronger Yen

The S&P 500 fell about 60 basis points on the day—hardly an exciting move. Given where the index stands, there isn’t much to say unless it breaks below 7,600. For now, it could remain range-bound or potentially retest the highs. If this market calm persists.

Volatility was largely a nonfactor today. However, as I’ve said many times, it remains very low, especially when looking at implied correlations. At this point, a macro shock—or simply a couple of days of selling pressure on the index—could trigger a sharp, rapid increase in volatility. One thing to watch is oil volatility; if it starts rising, it could pull the VIX higher.

Meanwhile, WTI crude appeared to break through resistance at $93 today, potentially clearing the way for a surge back to $101. An ascending triangle pattern also appears to have formed, supporting the bullish case for a move to $100 or higher.

Higher oil prices will likely push the 2-year Treasury yield higher as well. Oil prices and the 2-year yield have trended together over time, and I don’t see why that would change now. I think we’re in the part of the cycle where front-end rates rise faster than long-end rates as the market begins to price in the potential for Fed rate hikes.

Finally, USD/JPY has broken below support at 155 and is now threatening to fall toward its next support region around 152. A stronger yen will eventually pose a problem for markets, especially if it begins to weigh on Japanese equity prices. More importantly, yen strength has led to increased volatility across global markets in recent years.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

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Glossary by ChatGPT

Ascending Triangle — A bullish chart pattern characterized by rising lows against a relatively flat resistance level, often preceding an upside breakout.

Basis Point — One-hundredth of a percentage point, commonly used to measure changes in yields, interest rates, or market returns.

Front-End Rates — Interest rates on shorter-maturity debt instruments, typically most sensitive to expectations for central bank policy.

Implied Correlation — A market-derived measure of the expected relationship among the price movements of individual securities within an index.

Long-End Rates — Interest rates on longer-maturity debt instruments, which are influenced by growth, inflation, monetary policy expectations, and term premiums.

VIX — The Cboe Volatility Index, which measures the options market’s expectation of near-term volatility in the S&P 500.

WTI Crude — West Texas Intermediate, a major U.S. crude oil benchmark used to price oil contracts and gauge energy-market conditions.

USD/JPY — The foreign-exchange rate representing the number of Japanese yen required to purchase one U.S. dollar.

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