This Week

The big news over the weekend continues to be the Israel Iran conflict, with more strikes back and forth since Friday. Markets in the Middle East which are open on Sunday were mostly lower although Israel’s stock market has recovered early losses. We’ll see how US equity futures react later today. The upcoming week is highlighted by a Fed rate decision on Wednesday, and a quarterly expiration on Friday. More on that in a bit, but first some catching up on stories from over the weekend:

• Israel, Iran Launch New Rounds of Strikes (WSJ)

  • Israel’s military said on Sunday it was striking dozens of targets in Iran, the third day of intensive aerial attacks aimed at the country's nuclear program and senior leadership. An Iranian missile barrage overnight triggered a partial shutdown of a Haifa oil refinery in Israel. The ebb and flow of strikes in both countries has forced residents to move between home and shelter. In Iran, the government has restricted internet access and warned against pro-Israel social-media posts.

• Traders dive into options market as geopolitical risk flares (Bloomberg)

  • Israel’s air strikes on Iran, followed by the Islamic Republic’s retaliation, rippled through markets Friday, prompting traders to pile into options for protection amid ongoing questions of long the conflict can last. As tensions ratcheted up in the days leading up to the attack, some analysts had speculated that a strike could push prices well over $100 a barrel. Traders snapped up bullish call options, a pattern that went into overdrive once Israeli planes started dropping bombs after markets opened Friday in Asia. Brent and West Texas Intermediate crude’s implied volatility soared as futures spiked as much as 14%. The panic buying of call options pushed the bullish premium to levels not seen since Russia’s invasion of Ukraine in 2022, with the retaliatory strike drawing additional bidding.

• 'It makes sense to be on hold': Why Wall Street strategists think Fed rate cuts aren't coming anytime soon (Yahoo Finance)

  • It was an encouraging week for economic data, with inflation showing signs of moderation and consumer sentiment rebounding for the first time this year. The labor market remains broadly stable, with the unemployment rate holding at a healthy 4.2%, although a recent uptick in continuing jobless claims suggests some signs of cooling. Altogether, the backdrop appears supportive of the Federal Reserve’s path toward easing. But Wall Street watchers say policymakers may need more convincing before delivering any cuts.

• Trade With China Is Becoming a One-Way Street (WSJ)

  • Trump is trying to further open up China’s market to U.S. companies as Beijing’s appetite for the rest of the world’s exports is diminishing. After the U.S. and China reached an agreement this past week to end the latest skirmish in their trade war, President Trump wrote on social media that he and Xi Jinping will “work closely together to open up China to American Trade.” “This would be a great WIN for both countries!!!” he added.

• Google Search Is Fading. The Whole Internet Is At Risk. (Barron’s) 

  • Experience a random pain in the 21st century and an internet search usually comes before a call to the doctor. Googling “chest pain,” “high fever,” or “skin rash” calls up a series of blue links followed by a frenzied trip across the web. A similar pattern plays out, minus some anxiety, for “today’s weather,” “restaurants near me,” and “high-yielding dividend stocks.”

• New Real-Estate Math: Half a Million More Sellers Than Buyers (WSJ)

  • New listings haven’t been enough to jolt the housing market out of its slumber. The inventory of homes for sale is finally rising. Buyers aren’t interested. The U.S. housing market had nearly a half million more sellers than buyers in April, the biggest such gap on record in seasonally adjusted data going back to 2013, according to an analysis by real-estate brokerage Redfin.

• Boeing trims projection for 20-year jet demand (CNBC)

  • Boeing expects global demand for air travel to increase by more than 40% by 2030, driving the need for thousands of new jetliners in the next few years, according to its 20-year demand forecast for commercial airliners released Sunday ahead of the Paris Airshow. The company expects demand for 43,600 new airliners through 2044. That is essentially the same as last year’s edition, which projected demand for 43,975 new deliveries through 2043. European rival Airbus last week revised up its own 20-year commercial demand forecast by 2% to 43,420 jets, saying the air transport industry was expected to ride out current trade tensions.

Equity volatility expectations for this week spiked on Friday, most notable in the VIX’s 30 day window, but also on short duration with SPX options pricing a 1.8% move for a 4 day week, vs last’s week’s 1.4% move for 5 days. TLT’s pricing is not anticipating much volatility for this week’s Fed Decision. Oil on the other hand is pricing a 7% move, up from last week’s 3% pricing (which was grossly underpriced given the late week move higher):

This Week’s Expected Moves:

• SPX/SPY: 1.8% (5850-6100)

  • QQQ: 2.2%

  • IWM: 2.6%

  • TLT: 1.6%

  • USO: 7%

What’s also notable into this week is the fact that the SPX closed under the important 6000 level on Friday into a week that will see a large expiration of monthly and quarterly positions, with heavy open interest on that 6000 line itself The fact that markets are closed on Thursday into Friday’s large expiration adds an odd wrinkle to the week, with Friday morning likely to see a heavier than usual delta drift adjustment. Be aware of the potential for some strange action on Friday.

This week’s economic calendar see Retail Sales on Tuesday as well as the FOMC on Wednesday. There are no expectations for a rate cut, but as always the statement and the press conference could move markets:

Economic Calendar: 

• Monday 

  • 8am - OPEC Monthly Report

  • 8:30am - NY Manufacturing

• Tuesday

  • 8:30am - Retails Sales

  • 9:15am - Industrial Production

• Wednesday

  • 8:30am - Housing Starts

  • 2pm - FOMC Rate Decision

  • 2:30pm - Powell Presser

• Thursday

  • Juneteenth Holiday

• Friday

  • 8:30am - Philly Manufacturing

Earnings season is down to seeds and stems but does see Lennar on Wednesday and Carmax on Friday as potential economic data points:

Earnings (with expected moves):

• Monday

  • After-hours: LEN 6.5%

• Tuesday

  • Pre-market: JBL 7.5%, TEN 5%

• Friday

  • Pre-market: KMX 8.5%, KR 5%

We started last week with very low implied volatility, noting in our preview that "options may be underpricing the potential for increased volatility later in the week." That proved accidentally prescient, as now heading into this week, geopolitical risks have pushed volatility expectations higher.

Where the S&P 500 is heading into Friday could be key in determining whether those elevated volatility assumptions are justified. If the index hovers near or slightly above 6000, the large options expiry could act as a gravity force, keeping markets range-bound and volatility suppressed. But if the SPX drifts lower early in the week—or reacts poorly to the FOMC midweek—the further it slips from 6000, the greater the potential for outsized moves, especially with demand for downside protection only recently starting to pick up.

We’ve got a great week of content, stay tuned and get those questions in for the shows.

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