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Stocks fell sharply on Tuesday. The main headlines centered on Greenland, but in reality, I think it had much more to do with Japan. JGB yields surged overnight, with the 30-year rate rising by almost 32 basis points to 3.91%.
We have discussed Japan and its problems at length, and there is nothing new here, except that Japan continues to push for more stimulative policy while the BOJ sits on its hands. Basically, the market is now doing what the BOJ has failed to do: raising rates.
At this point, the BOJ either needs to raise rates at this week’s meeting or resume bond buying; otherwise, the PM may need to follow in Liz Truss’s footsteps, because the market clearly is not in agreement. But I’m not an expert on Japan, and this is merely an outsider’s view.
Not surprisingly, the 30-year rate in the US rose by 9 bps to close at 4.93%. Again, at this point, 5% is close, and the only question that remains is whether 5% will be a floor or a ceiling. I fear that rates can go much higher from here.
Meanwhile, the 30-year real yield rose to 2.66%, and, believe it or not, is not very far off its highs seen in May, around 2.8%.
Clearly, the S&P 500 broke through major support levels on Tuesday at 6,840 and the 50-day moving average. That means both are now in resistance, and support now lies around 6,720. The rising wedge is broken and, in theory, could return to the origin near 6,500. A lot of what happens from this point will depend on how quickly implied volatility rises and where interest rates go.
At this point, the market is also in a negative regime with those pinning effects from last week’s OPEX now well behind. Additionally, I would think CTA and Vol Control funds are sellers at this point; if not, they are probably very close to sellers.
The other issue isn’t just equity market volatility but also bond market volatility, because VXTLT is still at very suppressed levels. This means stress in the bond market is still fairly low.