S&P 500 Stalls as CPI Report and USD/KRW Move Into Focus
Stocks rallied by about 30 bps on the day, which was a rather unimpressive showing for the S&P 500 given Friday’s sizeable decline. Additionally, implied volatility melted lower on Monday, with the VIX 1-Day falling by more than 12 points to close around 16, down from roughly 28.
In reality, it was the rebound in semiconductor stocks that helped keep the index from finishing in the red. Even so, the S&P 500 stalled at its 20-day exponential moving average, suggesting that resistance remains intact for now.
At least from my point of view, today was a rather boring day, with not much really changing. The one notable exception was USD/KRW, which fell by more than 2% on rumors that a pension fund was hedging its exposure to US dollars. That is a very large move for a currency and could prove important to watch in the context of the AI trade, especially given how much the Korean market has rallied over the past few months.
A weaker won tends to benefit exporters, and we also know that Korean investment in U.S. assets has surged in recent years. As a result, a rising USD/KRW is generally consistent with investors selling won, buying U.S. dollars, and using those dollars to purchase U.S. assets.
Conversely, if investors are selling U.S. assets and repatriating capital to Korea, one would expect USD/KRW to fall as USD is sold and KRW is purchased. That makes today’s move particularly interesting because, if sustained, it could signal a shift in capital flows with implications beyond the currency market.
Finally, the CPI report will be released on Wednesday, and my guess is that the market will take this report more seriously than it did the jobs report, which probably means the VIX 1-day won’t close Tuesday higher than 12.
As of today, CPI swaps are pricing in headline inflation at 4.27%, which rounds to 4.3%, compared with the consensus analyst estimate of 4.2%.
That is something worth paying attention to and monitoring closely to see whether CPI swap pricing moves lower or analysts’ estimates move higher ahead of the release.
That’s all. More tomorrow
-Mike
Glossary by ChatGPT
AI Trade — A market theme centered on companies expected to benefit from artificial intelligence-related investment and adoption.
Capital Flows — The movement of money between countries, markets, or asset classes for investment purposes.
CPI (Consumer Price Index) — A measure of inflation that tracks changes in the prices consumers pay for a basket of goods and services.
CPI Swaps — Derivative contracts that allow investors to trade or hedge future inflation expectations.
Consensus Estimate — The average forecast from a group of analysts for an economic or financial data release.
Exponential Moving Average (EMA) — A moving average that places greater weight on recent price data to identify trends and potential support or resistance levels.
Implied Volatility — The market’s expectation of future price fluctuations derived from option prices.
Repatriation — The process of bringing capital or investment proceeds back to an investor’s home country.
USD/KRW — The exchange rate between the U.S. dollar and the South Korean won.
VIX 1-Day — A short-term volatility index measuring expected S&P 500 price fluctuations over the next trading day.
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