Daily Brief for January 6, 2022

Daily commentary for market and investment insights

What Happened in the Markets?

Futures prices for major equity indexes were down in response to some bold commentary from the Federal Reserve.

The measure of U.S. service providers pulled back in December after soaring to a record in November, reflecting more moderate growth in business activity and orders.

Source: Bloomberg

Technology stocks are likely to continue to fall in value at the opening bell after investors became concerned that interest-rate hikes could hurt the sector.

Higher interest rates may make stocks, especially those with high growth, less attractive due to the squeezed valuation of earnings of present values.

The notion that the Fed’s balance sheet will be reduced at an accelerated pace when the Fed starts hiking rates is based on the idea that the Fed will reverse its QE program and sell off the assets it acquired through that program. Bonds also fell, though less drastically than earlier in the week, as the heavy selling occurred earlier.

The Federal Reserve’s latest meeting minutes sparked a sell-off in US stocks, with the S&P 500 closing down nearly 2 percent on Wednesday while the technology-heavy Nasdaq Composite was 3.3 percent lower. Short-dated US government bonds also sold off, with the two-year yield at 0.82.

The Fed’s meeting and Friday’s jobs report are likely to be the primary focus of Thursday’s trading session.

The availability of accessible monetary approaches pushed parties out of the risk curve, which led to increased risk-taking and instability in the markets.

The reduction of liquidity from the market can lead to a domino effect of hedging and deleveraging, leading to the fluctuation in all markets.

CME Liquidity Tool - Book Depth - Jan 06, 2022
Source: CME

Volatility continued to squeeze Wednesday, while the counterparty to the trade took on more exposure to a positive delta. Continued volatility reduction would bolster any price rise and push the markets higher.

After the Federal Open Market Committee minutes release, investors sold call options and bought downside put options, as the demand for puts increased. The demand for protection overlapped with a boost in volatility; all else equal, when volatility rises, the demand for protection (and thus the price of protection) also increases.

SPY Total Gamma 20220106
Source: BrightHedge

Disclosure: This article expresses my own views, and I wrote the article by myself. I am not receiving compensation for it. I have no business relationship with any company whose security is mentioned in this article.

Sources: FT.com, Bloomberg, MarketWatch, CME

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The investment information, comments and recommendations contained herein are not subject to investment advice. The comments and recommendations contained herein are based on personal views. These views may not fit your financial situation and your risk and return preferences. For this reason, based only on the information contained herein, investment decisions may not have the appropriate outcome.