The weekend news of the US entering the war against Iran has significantly impacted oil prices. As of now, the IG Weekend Oil CFD is trading up almost 8%, positioning WTI crude oil around $80. While this isn’t an unprecedented price for oil in recent years, it’s considerably higher than its mid-May level when it was trading below $60. If this consistent increase holds, it will likely contribute to inflationary pressures.
A slight silver lining is that energy’s weighting in the market is currently around 6.4%, a decrease from 9.2% in June 2022. However, if oil prices continue to rise and remain elevated, this weighting will increase. Therefore, falling prices offer the dual benefit of lower costs and a reduced market weight, whereas rising prices hit twice as hard.
For the most part, 10-year rates have been tracking with oil prices. Consequently, one might expect that higher oil prices would lead to higher rates, and the longer oil remains elevated (or continues to rise), the more likely it is that rates will also stay elevated (or increase further).”
Stocks, of course, have more recently been trading inversely to oil prices, reflecting what rising oil prices signify: inflation and a burden on consumers. This inverse relationship likely only began in mid-June, meaning its duration is uncertain, and it would be unwise to assume it will last indefinitely.
This situation will, of course, complicate an already intricate picture, especially with the deadline for the tariff pause approaching on July 9. According to reports, trade talks with Japan and the EU appear to be progressing slowly.
Additionally, whether intentionally or not, Howard Lutnick, when criticizing Jay Powell in an X post on Friday, reminded everyone that currently, there are no tariffs on personal computers. However, “yet” is the key word, as he stated that “Semiconductors and computer tariffs come out after the Commerce Department finishes its analysis.“
Based on CFD data, NASDAQ 100 futures are likely to open lower tonight. While not a massive drop, it’s significant as it brings the futures very close to a key support level at 21,500. A breach of this level could trigger a further decline to around 20,900, potentially even filling a gap from May 12 at 20,100.
Currently, ‘rising wedges’ are a prevalent pattern across multiple stock indexes. These are bearish technical patterns, and therefore, a downward movement, as we’ve discussed, appears to be indicated by the charts.
We are now trading post-options expiration (OpEx), which means the ‘pinning effect’ that often keeps prices anchored around certain strike prices, due to market makers’ hedging activities, will no longer be a dominant force.
This suggests that market volatility is likely to expand. With the market already in a ‘negative gamma’ state, where market makers sell into falling prices and buy into rising prices to hedge their positions, these flows will amplify the market’s existing directional momentum.
(Barcharts)
My proxies for 1-month, 2-month, 3-month, and ‘Magnificent Seven’ (Mag 7) realized correlations are all significantly higher than implied correlations, which suggests that implied correlations are likely to rise. While realized volatility is currently quite low, it wouldn’t take much to start pushing it higher, and this, in turn, will drive implied volatility higher.
With compelling reasons to decline this week, as observed this morning, the market is poised for a potential downward move. Based on current indicators, this could easily extend to a much more substantial fall