The Stock Market May Be Ignoring A Growing Credit Risk

Stocks finished higher today, with the S&P 500 up 46 bps, which I thought was kind of weak given how much the VIX 1-day fell. The VIX 1-day closed near 24 on Friday, opened today around 9, and finished at 12. Given that drop, I’m surprised the S&P 500 moved by only 46 bps.

The 10-year rate rose nearly 6 bps today and rebounded off the 38.2% retracement level noted over the weekend. The big day to watch is Friday, when the S&P Global PMI Flash reading is released. This was the same report that sent rates higher back in September.

Brent oil is sitting at resistance at $111 and has been grinding higher. This is Brent’s second attempt at the $111 price point. If Brent breaks out, it is likely to head significantly higher, probably well beyond the $115 area, and maybe well over $120. If we treat the recent rises as part of a bull flag, it suggests a move toward around $125.

Credit Default Swaps for Oracle, Broadcom, and Nvidia continue to widen out, with Oracle at a 23% default probability, Nvidia at about 8%, and Broadcom at 12%. Which is pretty amazing, given these are among the largest companies in the world.

It’s taken a while, but we are finally starting to see the CDX High Yield index move up and keep pace with the CDS of some investment-grade names that already moved higher. It is something to watch, because I expect equity implied volatility to rise as CDS widen further, and the S&P 500 PE multiple to contract.

-Mike

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

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Glossary by ChatGPT

Basis Point (bps): A unit equal to one-hundredth of a percentage point, commonly used to measure changes in interest rates, yields and financial spreads.

Bull Flag: A technical chart pattern characterised by a strong upward price movement followed by consolidation, potentially signalling continuation of the previous uptrend.

CDX High Yield Index: A credit derivatives index tracking the cost of credit protection on a basket of North American high-yield corporate issuers.

Credit Default Swap (CDS): A derivative contract that provides protection against a borrower’s default, with its spread reflecting the market price of credit risk.

Credit Spread: The yield difference between a corporate debt instrument and a comparable benchmark, typically reflecting compensation for credit risk.

Default Probability: The estimated likelihood that a borrower will fail to meet its debt obligations over a specified period, often inferred from CDS spreads using assumptions about recovery rates.

Fibonacci Retracement: A technical analysis method using percentage levels, including 38.2% and 61.8%, to identify potential support or resistance during price corrections.

Flash PMI: A preliminary Purchasing Managers’ Index reading that provides an early indication of economic activity in the manufacturing and services sectors.

Implied Volatility: The level of future price fluctuations anticipated by the options market, derived from prevailing option prices.

Price-to-Earnings (P/E) Multiple: A valuation measure comparing a company’s share price with its earnings per share.

VIX 1-Day (VIX1D): A Cboe index measuring the market’s expectation of S&P 500 volatility over approximately the next trading day using short-dated options.

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