Image Source: Pexels

The S&P 500 finished the day up about 40 basis points. It had been higher earlier but gave back much of those gains in the final 45 minutes of trading. On the surface, today’s move higher appears to have been mostly options-related. The VIX fell sharply intraday, and it was clear that as implied volatility dropped, the market rallied. Then, as implied volatility rose into the close, the S&P 500 pulled back. It’s likely we saw another one of those typical volatility crushes that have occurred frequently since early October. These usually take place on Mondays, but given the large sell-off on November 4, that was probably the main driver of today’s trading action.

(Click on image to enlarge)

Perhaps more importantly, rates on the long end of the curve rose substantially today, with the 30-year yield climbing about 8 basis points to close at 4.74%. It appears the 30-year has broken out of a falling wedge, while the RSI has also broken out of its downtrend. Technically, this suggests the 30-year yield could move significantly higher—potentially back toward 5% in the not-too-distant future. That may come as a surprise to many, but that’s what the chart is indicating.

When you factor in the stronger-than-expected ADP report, the stronger ISM reading, and early signals from the quarterly refunding announcement suggesting the Treasury may increase coupon sizes in the coming quarters, there’s solid justification for long-end rates to rise. Additionally, based on what I heard during part of the Supreme Court hearing on tariffs today, the outcome didn’t sound favorable for President Trump. Such a result would represent a major loss of potential revenue and could require the government to increase borrowing to maintain its budget.

(Click on image to enlarge)

Overnight funding pressures have eased for now, though that could change in the coming days. The overnight repo rate fell to around 3.94%, marking the first time since the Fed cut rates that it has dropped below 4%. Tomorrow is a Treasury settlement day, which means liquidity will be drained from the system. In fact, roughly $23 billion in liquidity is expected to be pulled from the market.

Looking ahead, next week could see another $40 billion or so drained from the system, suggesting that overnight repo rates may begin to tighten again as we move toward the end of this week and into next. Based on the current schedule, next week is shaping up to be a fairly sizable settlement week, though we’ll have better clarity tomorrow.

(Click on image to enlarge)

Finally, we may soon find out whether the SoftBank (9984 JP) gamma squeeze is officially over. The stock was hit hard overnight, falling about 10% during the session. It had been down even more earlier, but what we’re still waiting to see is whether implied volatility levels begin to fall meaningfully. They did decline slightly overnight, but not enough to confirm anything yet.

We’ll have a clearer picture if the stock continues to drop while implied volatility also falls, which would signal that the gamma squeeze is unwinding. That would likely be a negative development not only for Japan but also for the broader AI trade, as it increasingly appears that this dynamic has been one of the main forces driving global markets lately in my view.

(Click on image to enlarge)

More By This Author:

Tightening Financial Conditions Emerge As Major Headwind For Risk Assets
Stocks Pause But Credit And Cash Flow Trends Signal Underlying Strain
S&P 500 Faces Strong Headwinds As Liquidity Tightens And Dispersion Unwinds