Some Midweek Relief

In the current market environment, three down days in a row is a long streak.  It’s not at all surprising that stocks would look for a chance to rebound after a modest drop, even if it would be considered insignificant under normal circumstances.  The key to today’s reaction started in the bond market, where the recent jump in yields was indeed relatively momentous.  It then continued when oil dropped after some optimistic comments about Iran from the President.  The pattern continues…

Stocks took another leg higher at 11:15 ET after a White House pool report emerged with a comment from the President saying the US was in the “final stages” of talks with Iran.  That certainly seems like a solid reason for a combined move higher in stocks, bonds, and the dollar, alongside a drop in oil futures.  But these moves were already in effect well before that key headline.  It turns out that the pool report was utilizing comments that were made by the President at Joint Base Andrews as he boarded a flight to Connecticut to address the graduates of the Coast Guard Academy in New London (huzzah!). Thus, although many traders had not seen the full report, news of that comment had clearly taken root among traders in the affected assets shortly after it was made around 10 AM.

Although we have commented that the recent decline in major stock indices is historically modest, that is not the case for the jump in bond yields over the past week.  The 10-year yield was 4.41% last Monday, the day prior to the most recent CPI report.  Yesterday, six trading days later, that same yield was 4.67%. It’s not typical for yields to jump by more than ¼% in a week, and stock traders should be thankful that the S&P 500 (SPX) fell by less than 1% during the same span. 

Then again, the market demonstrates very low expectations for volatility.  The Cboe Volatility Index (VIX) has been mired in the high teens for weeks and showed little inclination to bounce even during Friday’s selloff or yesterday’s more modest drop.  Part of that can be explained by the relatively low levels of correlation among index components.  The COR1M Index (Cboe 1-Month Implied Correlation Index) has been dragging itself along at relatively depressed levels over the past few weeks.  The latter is not quite at its 1-year lows, but it is by no means boosting volatility.

1-Year, VIX (daily candles), COR1M (blue line)

Source: Interactive Brokers, past performance is not indicative of future returns.

We have previously mentioned the sort of ratchet effect that accompanies positive rhetoric about the situation in the Persian Gulf.  Stocks and bonds rally (yields fall) and oil sinks whenever there is positive news about peace talks or a possible resolution to the war.  Yet the aftereffects have differed since the end of March.  When the talks lead nowhere, as they unfortunately have done multiple times, yields and oil return to their now-prevailing uptrends but stocks suffer no lasting ill effects. 

We’ll see if that continues in the coming days.  We have our usual hopes that today’s comments about the final stages of the war prove to be true, though we retain our now-well-earned skepticism that it will be the case immediately (especially when followed by comments like “we’ll see what happens” and “we’re going to do some things that are a little bit nasty, but hopefully that won’t happen”).  It is more likely that this afternoon’s highly anticipated Nvidia (NVDA) earnings will set the tone for tomorrow’s trading.