Friday unfolded largely as expected from an overnight funding perspective, with liquidity remaining very tight due to the month-end and Treasury settlement date. This caused the overnight rate to surge and led to increased use of both the Standing Repo Facility and the Reverse Repo Facility. The Standing Repo Facility alone rose by more than $50 billion on Friday.
The average repo rate on Friday surged to 4.29%, about 29 basis points above the Standing Repo Facility rate.
SOFR will likely print closer to 4.25% than 4.00% on Monday at 8:00 a.m. ET.
Liquidity pressures should ease somewhat this week now that we’re past month-end, and Treasury settlements are expected to total around $50 billion — roughly half of last week’s $100 billion. But “easier” is an understatement; by easier, I simply mean compared with Friday. Overall conditions are likely to remain tight, and overnight rates are expected to stay elevated for the foreseeable future.
More interestingly, on Friday, the S&P 500 rose alongside implied volatility and correlations, while dispersion fell. The unusual move in the S&P 500 was largely driven by Amazon’s gain, while the rise in the VIX reflected the unwind of the dispersion trade we’ve discussed extensively, as the VIXEQ declined.
These conditions are likely to keep unwinding, with the DSPX continuing to decline and the 3-month implied correlation index likely to keep rising.
As long as that spread continues to contract, the S&P 500 can be expected to decline as well, as that has historically been the case.
As I noted on Thursday, Amazon’s call wall at $250 proved too strong, preventing the stock from breaking through on Friday. Based on current positioning, that $250 call wall is likely to remain in place at the start of this week, leaving the stock with little room to move higher from a bullish standpoint.
If Costco (COST) serves as a proxy for the health of the consumer, then the consumer doesn’t appear to be in good shape. COST has formed a clear descending triangle pattern, with the RSI trending lower. A break below support around $890 would be very bearish, with the potential for the stock to fall back into the low $700s when projecting the move from the top of the triangle to its base.
Meanwhile, there’s been some chatter on social media about Oracle and its CDS rate spiking — and it has, significantly. The CDS spread has risen to 83.9 from roughly 42 in mid-September. Generally, a company’s stock price and CDS move in opposite directions, so the recent simultaneous rise in Oracle’s stock and CDS is unusual. It suggests that someone may be on the wrong side of the trade — whether in the stock market or the CDS — which could help explain why the stock has started to pull back recently.
Anyway, have a good Sunday.
Mike
Glossary by ChatGPT
Basis Points (bps): A unit of measure equal to one hundredth of one percent (0.01%), used to express interest rate changes.
Call Wall: A strike price level with a large concentration of call options, often acting as resistance for a stock’s price.
CDS (Credit Default Swap): A financial derivative that provides protection against the default of a borrower, reflecting perceived credit risk.
Descending Triangle: A bearish technical pattern characterized by a series of lower highs and a flat support level.
Dispersion Trade: A strategy that exploits differences between index volatility and the volatility of individual components.
DSPX: A dispersion index tracking the difference between implied volatility of the S&P 500 and its constituent stocks.
Implied Correlation Index: A measure estimating how closely S&P 500 components are expected to move together.
Reverse Repo Facility (RRP): A Federal Reserve tool allowing counterparties to lend cash overnight in exchange for securities, draining liquidity.
SOFR (Secured Overnight Financing Rate): The benchmark U.S. overnight interest rate for secured borrowing and lending, replacing LIBOR.
Standing Repo Facility (SRF): A Federal Reserve mechanism allowing eligible counterparties to borrow cash overnight against Treasury collateral to maintain liquidity.
Treasury Settlement Date: The date on which newly issued Treasury securities are paid for and delivered, often impacting short-term funding markets.
VIX: The CBOE Volatility Index, measuring the market’s expectations for volatility in the S&P 500 over the next 30 days.
VIXEQ: An exchange-traded product designed to provide exposure to the VIX, reflecting investor positioning in volatility markets.
Disclosure
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