September 26, 2023
Investment Grade, High Yield and Emerging Markets CDX credit spreads continue to widen as a possible sign of emerging credit stress.
Nominal bond yields took another step higher yesterday into a heavy week of Treasury issuance. Inflation expectations remain unchanged, while supply and demand dynamics drive markets. Higher nominal yields and unchanged inflation breakeven yields put real yields at highly restrictive levels. Yesterday, 10-year real yields reached a new cycle high of +220bp.
Breakdowns in cyclically-sensitive indices like the Russell 2000 (RTY), Philadelphia Semiconductor Index (SOX) and EuroStoxx 50 (SX5E) are now leading the broader US benchmarks lower. The close matters most, but the S&P 500 (SPX) is currently trading below key support at ~4330. The Nasdaq 100 (NDX) is currently holding above support at 14550.
Realized equity volatility continues to move higher with the VIX currently above its 200-day moving average at 17.57 and above 18. In our experience, VIX levels north of 18 tend to become progressive, while VIX levels north of 22 often result in accelerated downside momentum. The close in the VIX also matters more than intraday levels.
The bearish technical distribution patterns that developed over the past two months are starting to break down, as expected. The RTY and SOX are now in oversold territory and could soon find a foothold if equity volatility can remain at benign levels. Our concern is that equity volatility could reach escape velocity defined by VIX levels north of 22. We keep our tactically bearish outlook and see a near-term break in the SPX challenging the June 1 bullish inflection at 4200.
We remain in a news-vacuum, which leads to trend continuation in most instances. The earliest likely catalysts that can shift market attention will arrive Friday with the release of Eurozone CPI and US PCE. The Fed speakers tour continues with Minneapolis President Kashkari saying he expects one more rate hike this year, which matches expectations from the dot plot. Reports suggest the Senate is nearing a deal on short-term spending measures to keep the government open, but it’s not expected to gain much traction in the House.