NFP Preview: Volatility Crush Could Propel Post-Report Move Higher
Michael Kramer | Apr 05, 2024 03:01AM ET
Stocks finished the day sharply lower yesterday, with the S&P 500 dropping by about 1.25%. The index was up yesterday by around 80 bps, only for all that to be returned starting mid-afternoon.
The reason for the reversal was blamed on rising geopolitical tension between Israel and Iran. I’m not sure that was the case, just based on the time of the headlines and the time of the market moves.
However, the move lower in equities seemed to gain momentum as the afternoon continued. The other piece is that stocks fell so sharply and quickly that the VIX 1-Day more than doubled yesterday, rising to 21.40.
This certainly does create the opportunity for a volatility crush today following the jobs report if the data from the job report is strong enough to push implied volatility up even higher.
That said, the S&P 500 closed below the 10-exponential moving average, and the 20-day moving average, and that trend line is now in the rearview mirror.
From the chart, it would appear that support at 5,150 is an important level. A break of that level could lead to a further decline to around 5,050.
The move up in oil was pretty tame, I thought, rising by around 1%. The oil price bottomed around noon but didn’t take off until 2 PM or so, well after most of the geopolitical headlines had passed, which is why I am not sure about the cause of the overall broader market sell-off. At this point, it is pretty clear that we know that the media finds the headline to fit the price action.
Gold fell late in the afternoon and gave back its gain, again not something you would expect to see if geo-political tension were the cause of things.
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10-year rates did move lower, providing that risk-off tone to things.
Still, one could also make a case that the market was responding to the more hawkish tone out of Fed officials, even those such as Chicago Fed President Austan Goolsbee, noting sideways inflation could cause the Fed not to cut.
These words come from one of the more dovish members of the committee. The odd thing is that the move in the 10-year lower came at 2:10 PM, just minutes after Goolsbee comments.
A knee-jerk reaction in 10-year rates lower following such comments would make sense since it would cause fear that the Fed would kill off growth in the process or cause a recession.
Regardless, today we get the jobs report, and the jobs report is likely to move the market. The big move higher in the VIX1D does create the potential for a big volatility crush, which could result in a very short-term rally in the equity market.
So, given what we have seen in this market over the past five months, we can wait one more day to see what happens, before making any bold predictions.
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