Morning Bid: Stocks stall after VIX hits pre-COVID low

A look at the day ahead in U.S. and global markets from Mike Dolan

Global markets took a sharp intake of breath on Monday after seeing Wall St’s ‘fear gauge’ hit its lowest since before the pandemic hit late last week and as China major stock indexes continue to wane.

As U.S. markets return in earnest from the long Thanksgiving weekend, Friday’s shortened session threw up a remarkable milestone.

The VIX index of implied volatility on the S&P500 (.SPX) plunged to its lowest close since just before the COVID-19 shock unfolded in 2020 – an extreme some fear will inspire demand for options hedging and reversion back toward historic mean. It ticked back up to regain a foothold above 13 today.

But while the quirky Friday move may have been partly related to the holiday and a 30-day contract horizon falling around Christmas, evaporation of ‘vol’ is reflected elsewhere and reveals a bullish tilt into 2024 amid hopes that record flows to cash will reverse and buoy both stocks and bonds.

Even with another $148 billion of new 2-, 5- and 7-year U.S. Treasury notes up for auction on Monday and Tuesday, equivalent bond market volatility measures (.MOVE) also dropped to their lowest since September 25.

With Federal Reserve officials still holding the line that it’s way to early to talk about interest rate cuts, Treasury yields have crept back up a notch – in part awaiting this week’s PCE inflation report for October and a speech on Friday from Fed chief Jerome Powell. New home sales data is on Monday’s slate.

Ten-year Treasury yields hovered just under 4.50% first thing, about 10 basis points up from Wednesday’s intraday low.

Fed futures have pulled back to now price just 80bps of rate cuts by the end of next year – even though some banks still expect far more. Deutsche Bank on Monday said it expected a whopping 175bp of Fed rate cuts in 2024 as a mild recession there hits – leaving the policy rate at just 3.63% at yearend.

Monday’s stock opening looked to be in the red, however, with Asia and European bourses falling back. Early indications of retail around ‘Black Friday’ sales were upbeat, heaviest online and amid significant discounting.

The dollar index (.DXY) was lower despite last weeks backup in yields, with U.S. crude oil prices on the slide again ahead of OPEC+’s re-scheduled meeting on Thursday. The final day of an agreed four-day pause in the fighting in Gaza got underway amid hopes for further hostage releases.

As still-positive U.S. economic surprises indexes ebb and deeply negative euro zone equivalents improve somewhat, the surprise gap between the two blocs has fallen to its lowest since May.

But nervousness about China’s economy and the alarming underperformance of Chinese stock benchmarks (.CSI300) – now running at 21% year-to-date against MSCI’s all-country indexes (.MIWD00000PUS) – continued to jar.

Profit growth at China’s industrial firms slowed again last month, with year-on-year gains of just 2.7% missing forecasts and suggesting more policy support measures are needed to help shore the world’s second-largest economy.

Property developers (.CSI000952) plunged 2.3%, failing to sustain recent gains on hopes of government support.

Beijing police, meantime, are investigating suspected crimes committed by Zhongzhi Enterprise Group, a leading Chinese wealth manager, according to a social media post published by the Chaoyang Public Security Bureau on Saturday.

And there was also some alarm at health developments and rising respiratory illnesses, despite official assurances. A spike such illnesses is due to peak in the coming weeks but is not as high as before the COVID-19 pandemic, a World Health Organisation official said – reiterating that no new or unusual pathogens had been found in the recent cases.

But not all was in the red, even if for worrying reasons. Small cap Chinese stocks rose after the Beijing Stock Exchange de facto implemented a new policy that prevents major shareholders of companies listed on its bourse from selling stock, three sources told Reuters.

Shares of Beijing Stock Exchange (.CSI899050) jumped 11% following a record 21% gain last week.

Key developments that should provide more direction to U.S. markets later on Monday:

* U.S. Oct new home sales, Dallas Fed Nov manufacturing survey

* U.S. Treasury sells 2- and 5-year notes, 3- and 6-month bills

* European Central Bank chief Christine Lagarde speaks in European Parliament

* U.S. corporate earnings: Zscaler, Cerence, Anavex Life Sciences, UP Fintech, Ituran Location and Control, Smart Share Global

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