The 10y and oil are tracking higher again, effectively undoing the minor beneficial effect of Trump's very active tweeting yesterday.
This comes as Iran says that Tehran has no interest in striking a deal with Trump.
On the other hand, reading between the lines, we have Iran set to meet China. We also know that Xi is set to come and see Trump next week. Perhaps those meetings will be conducive for China striking a deal with the US.
Into this weeks' FOMC, we have the 3 month bond yields sharply higher, suggesting that the Fed will hike and needs to hike.
https://preview.redd.it/pipz086ieoph1.png?width=1400&format=png&auto=webp&s=e1152ecfd3c11c6820d718ba9d8c40ba7290b830
This is very similar to the analog I have been sharing with the 2 year. We know hikes are coming, more like than not not just 1.
This week, rate hikes are now priced at above 90%. While there is still some speculation amongst retail as to whether the Fed will hike or not, the chances are very likely in my mind that they will and that the market has forced the Fed's hand here, which is a view similar to what Goldman says.
Whether or not Warsh would want to, we have to remember that whilst Warsh is the Chair of the Fed his vote is equal to other members' votes. Most of the committee is the same personnel as under Powell. Under Powell, we saw that the Fed absolutely did NOT want to spook markets and when the market priced an outcome at above 60% into the meeting, the vote always went that way.
I expect that even if Warsh votes no, the committee as a whole will vote yes. This might be what is needed to reaffirm Fed credibility and to get long end yields down.
Into the meeting, we see that put buying is increasing on HYG.
https://preview.redd.it/idjzrswieoph1.png?width=1400&format=png&auto=webp&s=56290c27997562bd97e17c76a155fe29cba691b0
This signals hawkish expectations into the event.
I think the dot plot probably will be hawkish like the last, but Warsh can stem the hawkishness in his conference.
Overall, the market does not bet against a dump, but bets that if there is a dump, it gets bought back sharply on Thursday into EOW.
The positions favour a vol down, index supported path once Wednesday is behind us, so that is what I am looking for.
Vix tear structure is still in contango, but the front end is rising, especially compared to the dotted line that shows 2 days ago.
We are notably higher on the front end.
https://preview.redd.it/5uqb65gkeoph1.png?width=1400&format=png&auto=webp&s=d5e6cab8875a6c43817d0fcf96f747f1be3b8f7f
This tells us that The market basically is pricing increasing risk on the near term.
Part of that was the weekend events regarding the Ai narrative. Remember that AI is critical to the US economic growth. If we did see a meaningful slowdown in AI spend and development, which we won’t, but if we did, that would have detrimental effects on the US economy.
Then secondarily, part of it is normal pricing into the FOMC.
I don't believe in technical analysis on VIX, but if I did, you'd see a clearly resistive trendline:
https://preview.redd.it/hxgadb3leoph1.png?width=1360&format=png&auto=webp&s=51a10c30f736cc2be83018255a5d4fa88f534819
More, we see that the market is suppressing vix with volatility selling, masking th overall threat of the 10Y being so elevated etc.
Key levels from positioning. 19, 20.
https://preview.redd.it/201vg0rleoph1.png?width=1400&format=png&auto=webp&s=4e5b0338fdec154319cdf79ddc712e17b66f1ab4
I think that after the FOMC, we may get an initial vix spike, but a lot of the event risk will come out after the FOMC, which will help.
Looking at the overall index, US500 continues to trade within this bull flag.
https://preview.redd.it/zarqhgdmeoph1.png?width=1250&format=png&auto=webp&s=7d7a9504701a9a0e2297272a935fd67f11871979
I mentioned we were getting close to the bottom of that flag in premarket, and the 1 SD low of the range for today which was at 7575, and we have seen a bounce on cue.
With NDX, we trade above 29k, and within the flag that's building there also.
https://preview.redd.it/m48cdz2neoph1.png?width=1400&format=png&auto=webp&s=3dab763e6eaaf4004ad7a67dad8012a77148dd3d
IT has been a game of hot potato between sectors, but the more lasting beneficial price action continues to be in software. In the AI hardware trade, interest has been temporary and fleeting, but fundamentals continue to support the fact that this sector should see a recovery over time. But for now, near term expectations and longer term expectations of the sector continue to remain disconnected.
I draw the parallel to NBIS last year where it traded down 50%, before exploding higher in 2026. The whole AI trade is a beach ball under water, but until the 10Y comes down, it will remain a difficult trade. The FOMC could help, and even if the dot plot is hawkish, we have to recognise this is against expectations of 3 rate hikes over the next 2 quarters. So a lot of hawkishness has already been priced. However, we do need to see Iran resolve to really see interest return.
New lows are at peak levels:
https://preview.redd.it/vai9clxneoph1.png?width=1240&format=png&auto=webp&s=5c7a28bbffb9d6abd0439f9e25a0e2c8019c2089
Typically preceding rallies higher, but we have to see with FOMC. The worst case outcome In my opinion is a surprise hold, which contrary to many expectations online, would lead to an explosion in the 10Y and likely a negative reaction in the market.
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