The S&P 500 finished the day essentially flat, up 16 basis points—little changed overall. The key focus remains at the 5870 level, which was tested again yesterday. We’ve discussed this level multiple times, as it is essential. It could set up a more significant decline if it were to be pierced—possibly through a gap lower, say, on Friday morning. Such a move might form an island reversal top, completing the head-and-shoulders pattern we’ve been tracking for weeks.
When equity markets reopen Friday morning, we’ll also get the much-anticipated jobs report.
Yesterday’s market action likely reflects some squaring up ahead of that news. This was evident in the VIX one-day index, which rose 4 points to 18.25.
Once the event risk passes, implied volatility tends to decline sharply, causing put values to drop. This triggers market makers to adjust their hedges, often resulting in market rebounds, regardless of the news. However, this effect is typically short-lived, with markets normalizing soon after.
Options activity for the January 10 S&P 500 expiration showed significant volume in puts at 5790, 5800, and 5850 levels. There was also call activity at 6000, 5950, and 6150, but most activity centered around puts, indicating a focus on downside protection. When implied volatility declines post-event, the puts lose value, potentially driving markets higher due to the hedging dynamics.
(BLOOMBERG)
Global Rates Keep Moving Higher
Rates are moving interestingly in global markets, particularly in the UK and Japan. The UK 30-year rate rose nearly 13 basis points yesterday to 5.37%, breaking out of an ascending triangle. The 10-year UK yield also reached its highest level since July 2008. Similarly, the British 2-year rose six basis points, reaching levels not seen since April 2024.
In Japan, the 10-year yield rose sharply to 1.18%, the highest since June 2011. If Japan’s overnight rate increases to 0.75% or 1% by year-end, as expected, the 10-year yield could climb further.
Meanwhile, China 10-Year yields declined to 1.61%, signaling a different trajectory.
One key area to watch is the Chinese yuan. The CNY is nearing the upper limit of its range.
I am speculating here that China may be selling U.S. Treasury bonds to support its currency. If the USD/CNY breaks above the 7.30–7.32 level, it could destabilize global markets.
Bitcoin’s recent sharp decline may also be a liquidity signal. If Bitcoin breaks below the $92,000–$91,000 range, it could retrace to $87,000 or even $68,000.
The current chart shows a potential head-and-shoulders pattern with a neckline at $92,000, adding to concerns.
Lastly, equity financing costs have dropped significantly. For example, the January BTIC S&P 500 total return futures, which had traded at 227 basis points above the Fed funds rate, closed yesterday at just 1 basis point above FFR. March and June contracts have also seen sharp declines, reflecting a drop in demand for leverage.
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•Ascending triangle: A bullish chart pattern in technical analysis formed by a horizontal resistance line and an ascending trendline.
•BTIC (Basis Trade at Index Close): A trading strategy where futures are priced based on the closing level of the underlying index.
•CNY: Chinese yuan (onshore), controlled within a set range by the Chinese government.
•CNH: Chinese yuan (offshore), which trades more freely than the CNY.
•Fed funds rate: The interest rate at which banks lend to each other overnight, set by the Federal Reserve.
•Head-and-shoulders pattern: A technical analysis pattern that signals a potential reversal of a trend.
•Implied volatility (IV): A measure of market expectations of future volatility, derived from options pricing.
•Island reversal top: A chart pattern indicating a reversal in the current trend, characterized by a gap up followed by a gap down, isolating a “top” of price action.
•Market maker hedges: Strategies used by market makers to offset their risks from selling options.
•Neckline: In technical analysis, the support level that connects the lows of a head-and-shoulders pattern.
•Option activity: The volume and type of trades (calls and puts) in options markets.
•Repo activity (overnight repo): Short-term borrowing where securities are sold and agreed to be repurchased the next day.
•VIX one-day: A volatility index specifically measuring expected volatility over a single day.