S&P 500, Bonds Gap Higher after Bessent Tapped to Run Treasury

Also, 10-year T-note, gold, crude oil and Japanese yen futures

1. S&P 500 E-mini futures (/ES): +0.49% 
2. 10-year T-note futures (/ZN): +0.43% 
3. Gold futures (/GC): -1.03% 
4. Crude oil futures (/CL): -0.27% 
5. Japanese yen futures (/6J): +0.54% 

The holiday-shortened week is starting off with a swell in positive sentiment after Scott Bessent was tapped as the next Secretary of the Treasury. Bessent’s multi-decade career as a successful macro hedge fund manager who worked alongside trading legends like George Soros and Stanley Druckenmiller speaks for itself. And markets are listening, with a wave of relief settling in today. U.S. equities are higher across the board, as are Treasuries, while the U.S. dollar is lower versus all other major currencies. Elsewhere, deflating geopolitical risk might be in the cards, as Israel, Hezbollah and Lebanon are moving closer toward a ceasefire. 

The S&P 500 (/ESZ4) may not be the leader today, but it’s quickly approaching its all-time closing high established earlier in the month. Volatility continues to slump (IVR: 16.9), with the spot VIX back below 15. Technical momentum continues to build for each of the four U.S. equity index futures. This may prove to be a frustrating environment for bears: low volume, low volatility and positive momentum are hallmark signs of a melt-up environment. 

The bond bounce back around Bessent being bestowed the keys to Treasury seems to be nothing more than relief that former Federal Reserve Governor Kevin Warsh would not. During the Global Financial Crisis, Warsh famously argued against stimulus out of fear of inflation. In hindsight, worry about inflation in the summer of 2008 was entirely misplaced. The read-through is that Warsh has a hawkish bias that would ultimately lead to higher terminal interest rates were he to become a policy official with his hands on the levers of the American economy. There are three important Treasury auctions this week: 2-year notes later today, 5-year notes tomorrow, and 7-year notes on Wednesday. 

Deflating geopolitical risk may be a reason why precious metals are suffering at the start of the week. Lower U.S. Treasury yields and a weaker U.S. dollar would otherwise seem to be a supportive environment for gold (/GCG5) and silver prices (/SIH5). A ceasefire among Israel, Hezbollah and Lebanon would take down the risk of regional war leading to an energy supply crisis, cutting down the right-tail risk posed of higher oil prices sparking another jump in inflation pressures.  

Crude oil prices (/CLF5) are trading lower today, but notably, volatility has continued to trend lower (IVR: 43.5) over the past three weeks. The 66-72 trading range that’s been carved out since the middle of October hasn’t yielded, leaving a rather undesirable set of technical circumstances. Elsewhere, natural gas prices (/NGF5) are surging again as the latest NOAA 8-14 day temperature outlook is forecasting below-average temperatures for states spanning from Maine to Florida, and Texas to Minnesota. 

The arrival of Bessent as Secretary of the Treasury has produced a weaker U.S. dollar immediately on the other side of the weekend. Traders may see the opportunity to fade strength in the British pound (/6BZ4), the euro (/6EZ4) and the Japanese yen (/6JZ4) as a result, given the trends in the majors have yet to turn. The macro calendar is saturated this week despite the holiday: the November FOMC meeting minutes due tomorrow are the highlight. 

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

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