December 19, 2024 | VIX Spike and Near Term Support

December 19, 2024 | VIX Spike and Near Term Support

MARKETS


S&P 500: Up +41 points to 5913, VIX: 22.15

Asia: Japan -0.69%, China -0.36%, Hong Kong -0.56%

Europe: Euro Stoxx 50 -1.53%, FTSE -1.23%, DAX -1.20%

FX: USD (DXY) up 0.23%, EUR up 0.11%, GBP down 0.27%, JPY down 1.87%, CNY down 0.13%

Energy: WTI Crude down 0.60% to $70.16, Brent down 0.87% to $72.75

Cross markets: Terminal rate down ~3bp at 4.33, Implied rate cuts 2-years from terminal down ~17bp at 60bp, 2/10 yield spread +26bp

Treasuries: 2-year yields down ~5bp at 4.302%, 10-year yields up ~5bp at 4.564%, 30-year yields up ~7bp at 4.747%


WHAT WE'RE THINKING


Snapshot: US equities are mostly higher but off best levels following yesterday’s Fed-induced sell-off and volatility spike. Utilities outperform led by independent power producers that were sold in yesterday’s risk-off trade. Tech trades well despite weakness in semi cap equipment stocks linked to MU’s downbeat guidance. LW is the worst performing stock (MU is close behind) in the SPX after the company missed and cut guidance, citing higher manufacturing costs and softer volumes.  Biotech and pharma underperform with VRTX a downside standout on disappointing outcomes from its LSR Phase 2 pain study. Homebuilders are also weak after soft FQ4 results and guidance from LEN with the company citing affordability limitations from higher interest rates.  Financials trade well with banks, credit cards and asset managers lifting from oversold levels, while airlines rally as sell-side analysts defend the group on earnings power and valuations. Treasury yields are mixed as short-end rates fully reflect yesterday’s rate cut, while longer-dated yields rise on the Fed’s higher inflation outlook.  The Dollar Index is higher with yen weakness the big story in FX.  Gold ticks higher after falling -2.3% yesterday on dollar strength, while copper and WTI crude are lower on China demand concerns. 

  • Yesterday’s Fed meeting continues to dominate the narrative despite an inline policy decision and mostly inline updated dot plot.  The large reaction in markets was likely influenced by coincident headlines regarding the incoming administration’s opposition to the House stopgap bill.  Markets have a long history of ignoring government shutdowns with the reaction linked to a more difficult legislative path for the pro-growth agenda.  
  • US weekly jobless claims came in at +220,000, which was below consensus and below last week’s jump to +242,000.  Final Q3 GDP moved up to +3.1% from +2.8% prior and November existing home sales were a bit better.  The downside print came from the December Philadelphia Fed manufacturing index that came in at -16.4, which was well below forecasts for +3.5, as new orders and shipments turned negative.
  • Tomorrow brings November core PCE inflation and final University of Michigan consumer sentiment for December.
  • Elsewhere, the BOE kept rates on hold with three members in favor of a cut and forward guidance that was incrementally dovish.  This followed the BOJ decision to leave rates unchanged with Governor Ueda's comments leaning dovish.  There was a 25bp rate cut out of the Philippines and from Sweden's Riksbank that came with more hawkish forward guidance.  
  • The list of earnings-driven underperformers also includes CAG, CTAS, MLKN and WS, while ACN, DRI, KMX, PAYX and SCS trade higher after reporting.  Earnings after the close include results from FDX, NKE and SCHL.

Vol: The CBOE Volatility Index (implied equity volatility) closed at elevated levels (27.62) yesterday.  Elevated VIX levels >22 usually act as a headwind for rally attempts.  Big spikes in equity volatility – like the one we saw yesterday – tend to start in other larger markets like fixed income or FX.  Recall the last spike in equity volatility (August 5) started in FX markets after a surprise BOJ rate hike resulted in a violent unwinding of the yen carry trade.  The VIX reached an intraday high of 65.73 and closed at 38.57 on that day before a surprising return to subdued levels (<20) in the six sessions that followed.  Once implied equity volatility spikes above ~30, it usually takes months to unwind.  Interestingly, yesterday’s spike in implied equity volatility didn’t start in FX markets or fixed income. The MOVE Index (bond market volatility index) actually ticked lower yesterday, despite a ~12bp backup in 10-year yields. Unfortunately, this fact doesn’t make the rise in equity volatility any less valid and the SPX will have difficulty moving higher while the VIX remains north of ~22.

 

Near-term SPX: The SPX closed below its 50-day moving average of 5922 yesterday that CTAs and other systematic funds often use as a buy/sell trigger.  Now that the SPX is below its 50-day average, we see increased likelihood for the index to close the 11/6 upside gap at ~5783 and use that level as near-term support. 


FACT OF THE DAY


A South African Chacma baboon named Jackie served in the 3rd South African Infantry Brigade for three years at the frontlines in WW1, eventually being awarded the Pretoria Citizen’s Service Medal upon his return home. 



JSC IN THE MEDIA


Outlook for Mag 7: Andrew joins a Schwab Network panel to discuss the narrowing gap between the Magnificent 7 and the rest of the S&P 500. Watch Now

 

The Close on Bloomberg:  Andrew discusses AMDs downbeat earnings report and its challenges gaining meaningful market share in AI training. He also highlights a potential opportunity for AMD and others when the majority of AI workloads transition from the training to inferencing. Watch Now

 

Markets react as tensions rise in the Middle East: Andrew comments on recent events in the context of a market that is richly valued and therefore more sensitive to shocks of all kinds. Read on Reuters

  

See more of JSC in the Media.


THIS DAY IN HISTORY


December 19, 1917: The National Hockey League (NHL) opens its first season. Two hockey games played at nearly the same time the inaugural day, but for nearly a century, it was unknown which of the two games started first. Though the game between the Ottawa Senators and the Montreal Canadiens was long known to have started at 8:30 p.m., nobody knew when the Montreal Wanderers and the Toronto Arenas game began until 2017, when an old newspaper ad was discovered that showed a start time of 8:15 p.m.



CATALYST CALENDAR


Tomorrow: 1) US personal income/spending for November; 2) US November PCE; 3) Final Michigan sentiment report for December; 4) Germany PPI for November and; 5) earnings before the open WGO.

 

Next week: A very quiet week of data with some interest in Japan November services PPI (Tuesday), Japan industrial production/retail sales (Thursday), BOJ summary of opinions (Thursday) and China industrial profits (Thursday).   


Jackson Square Capital produces Inside Markets. We also offer financial planning and investment management services. Learn more here and catch up on our recent media appearances.

Investment Advisory Services offered through Jackson Square Capital, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.



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