Friday’s price action seemed suspicious at best and full casino mode, especially during an options expiration that appeared intent on wiping out as many 6,000 puts and calls as possible. It was a bizarre trading session that likely left many frustrated or unsure about what they had just witnessed.
For no apparent reason, the S&P 500 and NASDAQ 100 futures caught a bid around 8 a.m., sending both indexes higher on what appeared to be zero news. At that point in the day, the only headlines were about President Xi Jinping of China and President Trump speaking on the phone.
Whether that justified a market move of more than 1% is questionable. I’m sure this will be just the first among many calls and headlines that say nothing about the direction of anything.
What it did manage to do, however, was push the S&P 500 higher, allowing it to open around 6,000 and effectively wipe out any of the 6,000 puts set to expire that day. The value of the 6,000 puts closed at $2.95, down from nearly $73 the day before, on the options that expired in the afternoon.
Meanwhile, the 6,000 calls went from being nearly worthless on January 16 to almost $17 intraday on Friday, only to close worthless by the end of the day.
The only aspect that made some sense on Friday was the 30-day realized volatility moving higher, which seems to support the VIX likely remaining around 16 for now.
Another logical development on Friday was the rise in fixed strike volatility, based on the implied volatility for S&P 500 options expiring on February 21 versus Thursday.
In the meantime, this will likely be one of the more uneventful weeks of the month, with very little economic data scheduled for release. The highlight might be the University of Michigan number on Friday, underscoring just how uneventful the week is shaping up. However, last week provided plenty of noteworthy data points, highlighted by the CPI report’s hot headline number.
This was reinforced by the Philly and Empire State Fed surveys, both of which showed meaningful jumps in their six-month-ahead prices paid indexes. While it’s uncertain what data from other regional Fed surveys will reveal, if this trend persists, it could suggest that inflation is not as under control as some would have us believe.
The Bank of Japan meeting is scheduled for Friday, with an 83% probability of a rate hike at this meeting and the potential for a second rate hike in October.
This likely indicates that rates in Japan will continue to rise over time. However, for now, the 10-Year JGB appears to be overextended and may be poised for some consolidation.
Meanwhile, the USD/JPY basis swap spread appears to be widening slightly. While it remains negative, making the yen carry trade advantageous, it is not as negative as it once was. This suggests that the yen carry trade is likely not as appealing today as it has been over the past couple of years.
Markets in the US will be closed tomorrow, so I will be back on Tuesday with more.