Summary
- The Fed’s hawkish pivot and rising volatility have significantly impacted the S&P 500 and Nasdaq, highlighting the inevitable increase in market volatility.
- Equity financing costs have surged, with BTIC S&P 500 Total Return Futures trading 200 bps above the Fed Funds rate, indicating broader liquidity pressures.
- Increased leverage through the repo market has driven up financing costs, with FINRA margin balances rising over 9% in November despite the Fed’s balance sheet contraction.
- High financing costs and returning volatility may lead to a deleveraging event, similar to those seen in 2022 and late 2018, as demand for leverage declines.
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The Fed’s hawkish pivot sent stocks into a tailspin on Wednesday, but the warning signs had been in place for weeks. Low realized volatility and strains in liquidity had been slowly taking their toll across risk assets
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