Midday Market 09/25: Capital flows indecisive ahead of interest rate fears

News summary:

SPX long-term 4300 Put Wall tested
Bond yields rise to highest since 2007
Government spending deficit hits 10% GDP 6 days before budget deal deadline
China: Investors prepare for prolonged real estate decline
JPMorgan predicts oil price rise to 150 USD/barrel

SPX long-term 4300 Put Wall tested

Market opened the trading session of the last week of Q3 in rather subdued sentiment. The aftermath of the post-FOMC sell-off last week remains quite significant as liquidity has hardly improved compared to Friday, with most investors still staying out of the market in the morning.

Large amount of put hedges expired last week only sufficient to pull mega cap tech for a slight recovery early in the session before the absence of buyers could ignite a shorts-cover rally. SPX retreated close to the long-term 4300 put wall before recovering. 4300 is also the level JPM must defend as it is the lower end of JPM Collar Trade Q3 expiring this week.

Volatility remained almost unchanged even when SPX/SPY touched the put wall, indicating the market's clear bias that SPX will hold this support level with put buyers almost not appearing at the morning low.

After the first 2 hours of opening, Europe began closing and capital flows started entering the market more steadily with bond yields cooling off during the day, mega cap tech started bouncing first followed by value stocks. Accordingly, today's SPY flow and gamma heat map show a clear range trade at 430-435 for the week.

Bond yields rise to highest since 2007

This week, 10-year Treasury bond yields rose to 4.513%, the highest in 16 years. 30-year bond yields also rose to 4.65%, the highest since 2011.

Capital flows into the bond market for the 32nd consecutive week, pulling liquidity out of other markets.

Credit companies are also facing the fastest rising losses in 30 years. Consumers owe over 1 trillion USD in credit cards - record high.

Meanwhile, people's inflation expectations for next year remain high

Government spending deficit hits 10% GDP 6 days before budget deal deadline

Only 6 days left for US Congress to pass agreement preventing government shutdown with government spending deficit accounting for nearly 10% of GDP, close to 2008 levels.

On average every hour, the government borrows 1.3 billion USD and pays 125 million USD in interest. This debt is expected to increase by 5.2 billion USD per day over the next 10 years.

For the first time this year, Fed laid off about 300 employees right at a sensitive time, warning of government shutdown risk from 10/1. According to the 2019 report, the three most recent government shutdowns cost taxpayers nearly 4 billion USD.

China: Investors prepare for prolonged real estate decline

Government support policies seem unable to change buyer sentiment. New home sales in the first 2 weeks of September in tier-one cities have decreased compared to last month.

Real estate stocks across the sector also fell the most in 9 months (-6.4%) due to concerns over Evergrande Group's bankruptcy risk.

JPMorgan predicts oil price rise to 150 USD/barrel

According to JPMorgan, OPEC+ supply cuts initiated by Saudi Arabia and Russia, along with rising demand and the current production energy shock, could push oil prices to 150 USD/barrel in 2025. Currently, WTI crude futures are up 0.7% to over 90 USD/barrel.

Russia's fuel export ban also pushes up Asian diesel prices, not to mention China's aviation sector recovery boosting fuel consumption.

In the first 20 days of September, Russia's diesel exports fell nearly 30% ahead of the export ban to stabilize domestic prices.

Expected August PCE inflation data to be released at the end of this week will rise due to oil price impact.

Key events this week:

Consumer confidence index - Tuesday.
Data on building permits/New home sales - Tuesday.
Q2 GDP - Thursday.
Pending home sales index - Thursday.
Fed Chair Powell speech - Thursday.
August PCE inflation data - Friday.

Other news:

Private equity firms limit buyouts of traditional companies (down 37% this year) and focus on private credit and infrastructure investments.
US auto workers strike causes car prices to rise: Although car buyers haven't seen immediate impact, it's quite certain that upcoming car prices will rise sharply. Dealers will be short of inventory in coming weeks and used car prices will also rise.

Fitch adjusts Bangladesh outlook to negative, maintains rating at "BB-".

Amazon invests up to 4 billion USD in Anthropic, rival of ChatGPT developer OpenAI.