Volatility drops post-Jackson Hole creating momentum for shorts-cover rally
Market opens last trading session of August much more stable post-Jackson Hole with clear money rotation into stock sectors that faced heavy pressure last week. Commodities, energy, and industrials surged after China's economic support package last night, pulling Asian stocks back into recovery.
With volatility dropping sharply post-Jackson Hole, most net negative short-term gamma disappeared from the market last week helping create momentum for a shorts-cover rally right from the opening bell with current key gamma pivot level focused at 4400/440~SPX/SPY.
Although there are quite a few important economic data releases this week, most investors rolled hedges further out to cover the FOMC event on 09/20 making the market less sensitive to gamma and suppressing volatility, clearly shown as the market moves with little volatility today. This also makes initial overhead resistance in the 4400-4500~SPX range quite open if SPX can hold the 4400 pivot long enough.
The morning session's highlight was the 2-year note auction at 10:30 Central with results at 10:45AM Central showing solid domestic demand, although yields pushed up to 5.024% creating mild volatility pulling SPX below 4420 before stabilizing again.
In terms of today's flow, nearly 100% is 0DTE with insignificant volume, contributing to short-lived volatility but unable to create large sustained swings throughout the first half of the trading session, at least until European markets close.
BTFP support package hits new record, money continues to flow out of bank accounts
Fed's BTFP rescue package for banks once again rises to a new record of 107 billion USD (up 144 million USD from last week). The BTFP support package has only 6 months left while interest rates continue to rise leading to increasingly larger mark-to-market losses.
Total bank deposits have declined for 2 consecutive weeks, down -49 billion USD last week.
A very small bright spot is that for the first time in 6 weeks, money market funds recorded outflows (slight decrease of ~1 billion USD).
This result comes from outflows from financial institutions (-10.18 billion USD), while retail investment funds still record the 18th consecutive week of inflows.
Excess household liquidity depleting - JPM warns of pressure on the entire consumer sector
Retail ETF index plunges last week, following a series of news on credit delinquency warnings and depleting household savings, alongside seasonal factors.
Excess household savings are depleting signaling a decline in consumer spending and economic recession.
Household liquidity levels continue to decline and return to pre-COVID trajectory, indicating pressure on consumption levels will continue to rise.
Gloomy European economic data signals recession risk. Rent prices rise at fastest pace in 2 decades
Business activity in Europe declined in August, down to lowest level since November 2020. Annual M3 money supply growth slowed to 0.4% in July (from 0.6% in June). Real M1 money supply inflation fell -14.5% year-over-year indicating bleak prospects in coming months.
Annual growth rate of loans to the private sector slowed to 1.6% in July (from 2.0% in June).
Credit loans to the private sector are hovering at 0%. Home purchase lending pace is also declining sharply, partly explaining the drop in house prices in some countries including Germany.
Current house prices in Germany have fallen more than -10% in July.
This is also gradually forming a new term, “extreme renting”, as European rental prices rise at the fastest pace in 2 decades due to rising mortgages.
China: Eases home buying policies, cuts stock transfer taxes to boost stock market
Some of China's support proposals:
Those with borrowing history - even if debt fully repaid - are no longer classified as first-time home buyers.
Apply lower interest rates for first-time home buyers if new home prices decline for 3 consecutive months.
Extend personal income tax reduction until end of 2025 for residents buying new homes within one year after selling old homes.
Allow private equity funds to raise capital for real estate development.
Commit to lending 27 billion USD to continue completing stalled projects.
On 15/8, PBOC implemented the largest base rate cut in 3 years to stimulate the housing market.
In major cities, home buyers with mortgage records but no property ownership must pay higher down payments and face tighter lending.
For the first time since 2008, China cuts stock transfer tax on stock transactions and commits to slowing IPO processes, reducing from 0.1% to 0.05% from 08/28. CSI 300 fell about 4% in 2023, however the market rose last week after support measures (CSI 300 +2.7%, Shanghai Composite +2.6%, Hang Seng +2.2%).
Some other news:
High-yield bonds still attract investors even as Jerome Powell says ready to hike rates again to curb inflation.
Evergrande shares plunge 87% after resuming trading after 1.5 years.
In August, 4 “tech giants” - Apple, Microsoft, Tesla and Meta lost a total of 625 billion USD in market value, partly due to higher bond yields.
Shares of Chinese EV company Xpeng rise 13% after announcing 744 million USD deal with Didi.
Cybersecurity firm CrowdStrike shares down 2.6% premarket after Morgan Stanley downgrade.
Key events this week:
JOLTs Job Openings Report (July) - Tuesday
U.S. GDP Q2 - Wednesday
Pending Home Sales (July) - Wednesday
Core PCE Price Index July - Thursday
July Jobs Report - Friday
ISM Manufacturing PMI (August) - Friday
Comments (2)
Thank you so much!
Thank you for a consice report !
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