Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are off 20bps, with FOMC Mins on deck at 2PM EST.

Rates are back at highs, with the 10Y at 5.33%. There is a 10 year auction today at 11 AM EST.

Support is at 7,750, 7,720 and 7,700. Resistance is at 7,800, 7,830, 7,850.

The level of anxiety seems to increase daily, with rates. However, the equity market continues to make fresh highs, climbing that wall of worry. And, to be clear, the anxiety is simply in the minds of traders, not priced into the vols. Equity vols remain at lows, wether its 0DTE or longer dated options. Consider today’s straddle, with the auction and FOMC on deck: $32/41bps (ref 7,800). That is nearing lower bounds.

Below is the VVIX, which is at 1 year lows. This is a sign of upside call demand in the VIX. This positioning suggests that downside moves should still be absorbed, and we note positive gamma broadly persists >7,800. Given this we keep our Risk Pivot at 7,690, as we think dips will be bought given these vol & gamma dynamics.

The above being said, yields making new highs is likely going to keep a lid on stocks, particularly with a sharp upside rate-of-change for yields. Given that rates are at fresh highs, and equities don’t really care, it seems that what we’ll need to see is some type of real credit stress to spark selling in stocks. As an example, we plotted the trailing 1-week return in JNK vs the forward returns of SPY. Overall JNK is off 4% in the last month, matching 1-year lows. What we see here is that the forward SPY returns in this case are positive after JNK moves lower. This is admittedly a dirty proxy, but it speaks to a lack of correlation between higher rates and lower stocks. If credit issues appear, then we can start to see price-agnostic buyers of puts, which could really impact stocks.

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