Market Wrap for OANDA:SPX500USD by GammaLab

The SPX closed 0.5 percent lower on Wednesday after some wild swings, caused by a record inflation print of 9.1 percent (last 8.6%) for the month of June.

Initially the index dropped all the way to 3750 after the release, but was able to recover after the typically “well informed” Wall Street Journal took away some of the “100 basis points angst”.

Rate hike odds only eased temporarily and Fed Funds Futures continued their initial drop (see chart below), but the SPX didn’t really get that memo and did not revisit its intraday lows.

In a perplexing move the Fed Fund Futures curve now startet to price in a rate trend reversal in April, which could mean that 1) inflation declines miraculously in 9 months without crashing the economy (not happening), or 2) inflation comes back as the economy slides into a recession (more likely).

Theoretically there is also a third scenario that could play out and which is extremely hard (if not impossible) to price in by financial markets, and which is not on the radar (yet): Stagflation.

One of the reasons the VIX is relatively low despite the relentless slide is, that inflation risk is relatively easy to hedge away in a growing economy via commodities , while in a recession bonds come into play to provide a safe haven.

What could act as a hedge in a stagflationary set up though? Is this when we finally see the VIX coming alive again?

We will certainly find out soon enough, as the possible inflection point is only months away..

Put volume was highest at 3400 and 3500 and also overall put volume spiked to the highest level of the month.

Key levels to watch tomorrow are 3800 and 3700 (the main gamma strike).

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