Inside Markets — Volatility Spillover

Keep an eye on bond market volatility spillover into equity markets, as VIX levels above 22 are usually associated with multiple contraction.

The backup in 10-year yields should stall out at current levels with resistance in the 4.00%-4.03% range. This level will likely cap yields in Q4 with a move back to 3.82%-3.84% range expected in the days/weeks ahead.  The Fed doesn’t like a start/stop approach when it comes to monetary policy.  Notwithstanding a return of inflation, we look for the Fed to cut rates by 25bp per meeting until reaching a neutral rate of 3% next September.

The growth outlook remains the key driver of equity markets as the SPX decelerates into technical resistance near 5810. The SPX is currently in overbought territory with a pause/pullback looking like an opportunity to add exposure as long as the index holds above its post-FOMC low at ~5614 and simple 50-day moving average at ~5560.  An October break below the simple 50-day moving average would trigger CTA sell signals at a time when 35% of corporate buyback plans are in a blackout window (begins to roll off the week of 10/28).  Implied equity volatility remains key to the near-term outlook with the VIX index moving above ‘subdued levels’ at 20. Higher implied volatility becomes a headwind for rally attempts with VIX levels north of 22 associated with multiple contraction.

The CQ3 earnings season, which kicks off this Friday is the next major catalyst for equity markets.  Equity values are primarily driven by estimate revisions with updated guidance/commentary influencing consensus Q4 SPX EPS estimates of +14.6%.