All time highs in US stocks - what could go wrong?

US equity indices have worked well into the close with the S&P 500 closing at a new all-time high. A whippy intra-day tape for day traders to work within, we’ve seen the S&P 500 cash market trade 4551 to 4526, with the materials and energy space holding play back with a solid underperformance, notably energy is -1.8%.

Clients are fairly nuanced on the US equity index and while no one trader is the same in their approach and strategy, 58% of open positions are held long and largely following the grind higher in the underlying tape.

Vols are lower, with the cash VIX trading with a 14-handle. For the options heads out there, S&P500 1-month 5% out of the-money calls trade below 10%, so looking at skew the flow would be tilted towards taking advantage of that vol structure, selling puts and buying upside calls – but it is certainly not at levels to really go hard on that yet. This is a market that is holding off from applying hedges with any kind of conviction, and that may change next week when the big ballers come out with earnings. Given the levels of implied movement in these individual names, it could be a big week for single stock and index traders alike.

Needless to say, the after-market on Tuesday could get a little wild given the index weights Microsoft and Apple hold. With UPS so entwined in the supply chain thematic, this could be worth watching too.

• 25 Oct - Facebook – 5.7%
• 26 Oct - Microsoft – 2.6%, Alphabet – 4%, Twitter – 11%, VISA -2.9%, UPS - 5.3%
• 27 Oct - Boeing – 3.7%
• 28 Oct - Apple – 2.8%, Amazon – 3.8%, Caterpillar – 3.8%, Merck – 2.3%, Newmont – 2.5%

Commodities have been the focal point

With base metals really driving the show with Copper down a sizeable 3.7%, with Aluminium and Nickel lower by around 5%. NatGas is holding up well (+0.9%), while WTI crude found profit-taking trading into $80.79 before the BTD crowd moved and price is 2.3% off that low. The rally in crude helping push US stocks back higher, while front-end Treasuries have found sellers, with 2s and 5s +5bp and 6bp respectively. In the US rates markets, eurodollar futures have sold off quite aggressively in the 2024/25 contracts with around 10bp (or 0.10%) of additional hikes priced in the US through that period.

Perhaps this move in rates has been the cue for USD strength and we’ve seen inflation expectations really move up hard today (5yr breakeven rates +10bp) with US real rates lower again – it’s surprising Gold is only +0.1%, given the strongest correlation gold has in a suite of variables is with US real rates – I guess the move in the USD is proving to be a headwind and being long gold in AUD terms (XAUAUD on MT4/5) has been the better trade on the day. There is some indecision on the daily timeframe to push price through the June downtrend, which as I detailed in the Gold weekly video - should see $1812 and potentially $1833 come into play.

While the USD has found some form, the JPY has finally succumbed to short covering, a fate clients were largely positioned for. ZARJPY is -2.1%, but its AUDJPY which has caught the attention with a 1% decline. GBPJPY and EURJPY have seen the bigger flow on the day, but the fall in base metals would have weighed more on the AUD. For GBP traders, consider expectations of moves from the BoE on 4 November has eased off a touch, although we still see around 20bp of hikes priced – so there is a debate, do they go 15bp or 25bp?

On the tech front, there's been engulfing candles going off all over the shop in the JPY crosses, so that needs monitoring. After the rollover, if we see price kick lower in the likes of EURJPY, AUDJPY CADJPY et al, then it could confirm the trend in the JPY crosses is done and this could compel slower-moving JPY shorts to get in on the action too.