Market 10/30: Rally ahead of a volatile week

SPX structure summary

SPX Put Wall moved down to 4100 on Friday, creating a magnet pulling the market down near the put wall before finding buying support. As a result, the market is entirely in the negative gamma zone with VIX above 20.

On a broader view, the largest gamma concentration for SPX is at 4000. In theory, this area will facilitate SPX recovery as time passes. However, the put pressure in the 4000-4200 range is too great, combined with high VIX, delta doesn't decrease enough to create momentum for market maker rally.

Overall, SPX/SPY will largely be pinned at 4100-4200 from now until FOMC with conditions for the market to continue rallying being:

VIX below 20
SPX above 4200
TNX (10Y Yield) < 5.00%

Notably, on Wednesday besides the FOMC event, US Treasury will announce the bond issuance plan for Q4. This event is rated by many analysts as more important than the FED's interest rate decision.

Bond market surges as yields continue to recover

Currently, the 10-year Treasury yield rose nearly 0.05% to 4.892%.

The rise in yields also simultaneously impacts the dollar as the DXY index rises again after 3 consecutive days of decline.

Deficit surges, US government borrows 1 trillion in Q4

After the budget nearly hit 0 in the recent debt ceiling crisis, US fiscal policy seems increasingly deadlocked.

US annual interest payments have nearly reached 1 trillion…

… all to fund this country's heavy budget deficit (budget deficit reached 1.39 trillion USD in the first 9 months of the fiscal year, up ~170% from the same period last year, indicating massive demand for government bond issuance)

The US Treasury's cash balance has increased by more than half a trillion dollars as Secretary Janet Yellen timely replenished cash, deposited at the Fed in the form of the Treasury General Account.

The funding source for buying back government bonds is not bank reserves, but from Fed's overnight reverse repo - which has decreased by more than 500 billion, matching the increase in the Treasury General Account.

In the Treasury Borrowing Estimates Report, it is estimated that:

In Q4, the Treasury is expected to borrow a record 1 trillion USD, sharply up from the previous estimate of 733 billion USD in May.
This is the second highest borrowing quarter in history, only behind the 2.8 trillion USD issued in Q2 2020 due to Covid.

Government spending in the Q3 GDP report was the largest growth category in GDP components: up +4.6% from the previous quarter.

Of which federal government spending increased +6.2% from the previous quarter.

Read more about Q3 government spending at here.

Economic survey from Dallas FED shows economy continues to slow

Survey participants' sentiment continues to weaken:

All survey categories declined:

New orders continue to plummet:

Update on Q3 business results of some major companies

McDonald's

McDonald’s reported Q3 business results better than analysts' expectations, as price increases offset declining customer traffic at US restaurants.

Revenue: 6.69 billion USD, up 14% YoY, beating expectations of 6.58 billion USD
- Same-store sales increased 8.8% in Q3, surpassing StreetAccount's estimate of 7.8%.

Despite higher food prices in some areas, this burger chain is still outperforming competitors in most major markets when it comes to consumer perceptions of value and affordability.

HSBC

HSBC's post-tax profit rose more than 235% YoY, announces 3 billion USD share buyback.

Revenue: surged 4.7 billion USD or 40% to 16.2 billion USD thanks to both net interest income and non-interest income.
Net interest margin (NIM): Up 19 basis points from Q3 '22 to 1.70%.
Post-tax profit: 6.26 billion USD, up 235% from 2.66 billion USD YoY.

Key events this week:

Consumer confidence data - Tuesday
JOLTS job openings data - Wednesday
FOMC meeting - Wednesday
Jobless Claims - Thursday
October Jobs Report - Friday

Some other news

23% of S&P 500 companies will report earnings this week with notable names such as: Apple, Qualcomm, PayPal, AMD, Roku, First Solar, Pfizer, Caterpillar…

Western Digital said on Monday that they will split into two companies focused on the hard drive and flash memory markets
Meta pauses advertising for users under 18 in Europe as they roll out membership subscription package
Semiconductor company ON announced Q3 earnings and revenue better than Wall Street estimates, but issued Q4 guidance below expectations