Market Poised For Pressure As Liquidity Tightens
Stocks rallied on Monday, which wasn’t much of a surprise, as noted over the weekend. Implied volatility levels were very elevated on the VIX 1-Day, and we’ve seen this play out several times in recent weeks—high levels of implied volatility collapse on Monday, fueling a rally. While the rally was a bit stronger than I expected, it still fit that pattern. At this point, implied volatility appears to have mostly reset, suggesting the market could stabilize on Tuesday, if not trade lower.
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Despite the S&P 500’s strength, the Equal Weight Index (RSP) significantly underperformed, rising just 40 basis points on the day—a much weaker showing than the overall index. Most of the gains in the S&P 500 market-cap-weighted in were driven by Broadcom (AVGO).
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Tuesday will mark the first of a few settlement dates over the next 5 to 6 trading sessions. Tomorrow is expected to see a settlement-related liquidity drain of about $14 billion, which isn’t a large amount. The larger drains will come on Friday and next Monday. More importantly, signs of strain are already emerging in the overnight funding market. Today, the average repo rate at the DTCC rose to 3.99%—just below the 4% threshold—up from 3.93% on Friday, signaling tightening funding conditions. Additionally, with the reverse repo facility seeing minimal usage today, it suggests that excess liquidity in the marketplace has largely been absorbed. That, in turn, implies we could see renewed downward pressure on stock prices as these Treasury settlements unfold over the coming sessions, starting tomorrow.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. ...
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