The S&P 500 experienced a significant rise of approximately 1.5% on November 10, 2023, driven by a sharp decline in implied volatility levels. The VIX, which measures market volatility, opened at around 9 after dropping from 16.9 and ultimately closed at 11.2. This marked a notable shift in market sentiment, suggesting the recent rally may face challenges in sustaining momentum.
As observed in previous trends, the drop in implied volatility often correlates with a rally in the stock market. The VIX’s decline was further accentuated by news indicating a likely end to the government shutdown. Following this, the market typically stalls after strong gains on Mondays when volatility spikes on the preceding Friday. This pattern has emerged repeatedly in recent months, showing how options positioning can influence market movements more than fundamental factors.
Upcoming Treasury Settlements and Market Dynamics
Despite the S&P 500’s positive performance, the bond market remained closed due to a bank holiday, resulting in no Treasury settlements on that day. However, the situation will change on Wednesday, when approximately $14 billion in Treasuries are scheduled for settlement. Additional settlements are set for $23 billion on November 13, $26.7 billion on November 17, and another $14 billion on November 18. If the typical settlement pattern holds, there could be an extra $20 billion settling on November 19. Altogether, this represents nearly $100 billion in settlements over the coming week, a significant figure that may strain market liquidity, reminiscent of the previous month’s settlement volumes.
Amidst this activity, the average repo rate at the Depository Trust & Clearing Corporation (DTCC) increased to 3.99% from 3.97% on Friday. This uptick is expected to push the Secured Overnight Financing Rate (SOFR) higher. Treasury transaction volume also saw a decline to $40.3 billion, which could have provided some additional liquidity to the equity market, although significant changes are anticipated leading into Wednesday.
Despite the S&P 500’s upward movement, skepticism persists regarding the sustainability of this rally. A single stock can significantly influence market performance, as evidenced by Nvidia’s (NASDAQ: NVDA) market capitalization surge of nearly $300 billion on Monday, seemingly without justification. The company’s one-week implied volatility rose sharply to 53.9% from 44.5%, with projections suggesting it could approach 100% in the near term. This volatility may indicate that further fluctuations are on the horizon, keeping investors on alert.
In summary, while the S&P 500’s recent gains reflect a favorable market response to declining volatility, upcoming Treasury settlements and stock-specific movements will likely play crucial roles in determining the market’s trajectory in the coming days.
