The Impact of Last Week’s Market Shift on US Equity Markets and Implied Volatility
Last week’s market shift, triggered by the BOJ’s decision to hike rates and cut back on bond purchases, followed by the US labor report, has led to significant changes in the financial markets. The yield curve has broken free of its trading range, while the USD is strengthening across FX pairs. This has caused the unwinding of the yen carry trade and a steepening yield curve, signaling a potential hard landing in the US.
Historically, a steepening yield curve has resulted in sizeable drawdowns in US equity markets. The recent acceleration in the steepening process suggests that equity prices may continue to decline. The S&P 500 has already broken out of a rising wedge pattern, with support levels potentially leading to further downside.
Additionally, Nvidia remains at risk of more downside, as implied volatility levels reset post-Mega Cap earnings season. The VIX and implied volatility dispersion trade could lead to further market volatility.
The gamma squeeze in the IWM is over, and small caps may underperform due to widening credit spreads. The USD/JPY is under pressure, potentially dropping further if the 10-year rate continues to decline.
Overall, the current market conditions indicate a giant trade reset, with implications for equity markets, implied volatility, and currency pairs. Investors should monitor key indicators such as the yield curve, equity prices, and implied volatility to make informed decisions about their investments.