S&P 500: Bears Emerge as Funding Stress and Credit Risks Deepen

The S&P 500 fell by about 1% on the day, reversing the recent string of Monday rallies. Not surprisingly, the index attempted to rally in the mid-morning as volatility declined. However, the market had already opened lower, and while we saw a brief rebound around 10 a.m., those gains faded quickly, as Monday was a Treasury settlement date.

Today is also a Treasury settlement date, and we’re already seeing repo rates move back above 4% for Monday. For now, the S&P 500 continues to hold around 6,750, which remains the key sticking point. Every time the index gets there, it bounces off that level or near it, but at some point, that region is likely to break.

Given the small end-of-day surge, it wouldn’t be surprising if we gap lower today, undercut the 6,640 low, and continue to see pressure throughout the day—potentially even testing 6,600 or moving below it.

Also, we’ve seen the dispersion trade continue to unwind, with three-month implied correlations rising faster than the dispersion index on Monday, further narrowing that spread. This unwind should only grow strong after Nvidia (NASDAQ:NVDA) reports.

The average repo rate at DTC on Monday was around 4.04%, suggesting we’ll see SOFR push above 4% today as well. With another settlement date today, there’s a chance funding conditions will tighten further and those rates move even higher.

Wednesday should bring some relief since there are no settlements, and midweek typically sees a bit of easing. But by Thursday, I would expect rates to tighten again, with repo potentially pushing back toward that 4% corridor. That would also put upward pressure on usage of the Standing Repo Facility.

The CDX High Yield credit spread index also moved higher on Monday and appears to have broken a downtrend. It’s now approaching a resistance level around 342, which was last seen in mid-October.

A breakout above 342 would likely signal even wider spreads ahead, and that wouldn’t be surprising given the rise we’re already seeing in CDS spreads for companies like Oracle (NYSE:ORCL), Meta (NASDAQ:META), and CrowdStrike (NASDAQ:CRWD). We’re even seeing similar moves in names like SoftBank in Japan.

So it wouldn’t be surprising at all to see credit spreads widen more broadly across the market—and that would clearly be negative for equities overall.

The final piece of the puzzle may actually be coming from Japan, where rates are rising rapidly amid concerns over new stimulus proposals, making markets increasingly nervous. This has pushed yields sharply higher across the curve, with the 10-year rising to 1.73%—the highest level since 2008. More importantly, there appears to be room for yields to move even higher in the near term, with the next potential resistance level likely somewhere around 1.90%.

If concerns over the government’s spending plan persist and Japanese rates continue to rise while the yen weakens, it could trigger a flight to safety into the dollar. That would likely lead to a materially stronger dollar against the yen and to higher dollar funding costs. In that scenario, the Japanese yen five-year cross-currency basis swap would move lower—becoming more negative—widening the spread and making it more costly for Japanese investors to fund U.S. dollar trades.

This would obviously suck even more liquidity out of the market.

Finally, the 1966 analogue continues to track the S&P 500’s present moves. For whatever it is worth.

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