TSX jumps amid Fed rate cut hopes, ongoing U.S. government shutdown
- Monitor SOFR closely today, as elevated repo rates suggest it may move above the Fed’s upper target range.
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Prepare for potential equity reversal if the end-of-day move was due to JPM collar hedging effects.
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Watch the S&P 500 Dispersion Index, as historically high readings have preceded negative market signals.
The S&P 500 Dispersion Index is now at its highest level since the tariff tantrum. It could go higher, but historically, readings at these levels have not been a good sign.
In terms of the stock market, the JPM collar often distorts the trading day, and there isn’t much that can be done to avoid it. While I can’t prove it, I suspect the end-of-day move we saw in the index was tied to that collar or related hedging activity. Trying to analyze it for deeper meaning, in my view, is a waste of time. If it were collar-related, the gains should be given back fairly quickly.
The decline in liquidity was evident on Tuesday, as shown by the rise in the average repo rate, which surged to 4.31%—6 basis points above the Fed’s target range of 4.00% to 4.25%. This likely means that SOFR will be very elevated today and could also move above the 4.25% level.
This is why volumes in the reverse repo facility fell on Tuesday. It suggests that excess liquidity in the marketplace may be gone. If ample liquidity were still present, the overnight funding rate would likely have traded closer to the lower bound of the Fed’s target (4%), and reverse repo volumes would have been much higher.