U.S. stocks breached key support levels overnight, with the S&P 500 falling below the critical 6,725-point threshold and both it and the Nasdaq Composite losing their 50-day moving averages. The Dow Jones Industrial Average posted its worst three-day performance since April.
Marissa Gitler, a macro futures and options sales trader at JPMorgan Chase, highlighted that pressure in the repo market was the primary factor behind this month's market reversal. Despite noise around the AI narrative, liquidity constraints emerged as the core driver of the sell-off, with leveraged funds facing reduced cash accessibility exacerbating position unwinding pressure.
The U.S. government's reopening is seen as a pivotal turning point for easing repo market stress. Combined effects of the government shutdown, Treasury General Account (TGA) buildup, and quantitative tightening (QT) had previously led the Treasury to absorb substantial capital, worsening cash availability in the system. While the government restart won't fully resolve the issue, it will help alleviate liquidity pressures.
Market technicals remain at a critical juncture. JPMorgan's tactical positioning monitor shows markets haven't yet reached attractive "buy" setup conditions and are approaching index levels that could trigger systematic trader sell-offs, making technical support levels crucial.
**Repo Market Strains Hit Equities**
Gitler emphasized in her analysis that when the Secured Overnight Financing Rate (SOFR) comes under pressure, leveraged funds' risk-taking capacity declines. Concepts discussed at the November 12 New York Fed meeting showed private-sector repo rates rising above the Interest on Reserve Balances (IORB) during the current stress period, indicating reserve supply in the banking system falling short of recent aggregate demand and intensifying competition for reserves.
This situation arises because financial institutions ineligible for IORB (such as money market funds and hedge funds) bid up repo rates to attract cash. Gitler further noted that SOFR pressure likely signals leveraged funds receiving messages from counterparty banks about reduced repo availability compared to previous levels.
Leveraged funds rely on repo transactions as a key tool for obtaining cash to maintain leverage. Reduced cash accessibility forces position unwinding, dampening investment momentum. The subsequent decline in JPMorgan's beta factor index and highly concentrated AI-related stocks following intensified month-end and quarter-end funding pressures in October appears far from coincidental.
**Liquidity Gauges Show Early Relief Signs**
JPMorgan views repos as the lifeline for proper dollar money market functioning. The recent retreat of SOFR relative to the federal funds rate signals improving liquidity scarcity conditions.
Functionally, the Effective Federal Funds Rate (EFFR) represents unsecured interbank lending rates, while SOFR reflects secured rates between banks and funds. Normally, secured rates should trade below unsecured rates. Though stress persists (otherwise SOFR would trade below EFFR), SOFR's downward trajectory represents a positive dynamic.
As of last Friday, Treasury cash balances rose to $961.9 billion, up $19 billion from the previous day. With TGA releases and QT nearing its conclusion, system liquidity pressures should ease, allowing investors to refocus on investment rather than liquidity management.
**Technical Hurdles Remain**
Despite improving liquidity conditions, the risk landscape hasn't fully brightened. JPMorgan's positioning intelligence team believes markets still have room to fall before triggering attractive "buy" setups.
The bank's tactical positioning monitor currently sits at the 65th percentile with a four-week change of -0.8 standard deviations (versus the -1.5 standard deviations needed for attractive setups). Meanwhile, markets are testing or approaching levels that could trigger systematic trader sell programs.
Markets have reached index levels where further declines could trigger "mechanical" selling that pushes prices lower still. Gitler concluded that in the current environment, close monitoring of technical support levels and trigger points will prove critical.
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