Can the S&P 500 Reclaim Its Record With the 10-Year Yield at 5.21 Percent and Brent Above USD 108?

Key Highlights

• The S&P 500 fell 0.77 percent to 7,683.69 on September 28 after President Trump rejected an Iranian peace proposal, leaving the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) tracking a benchmark almost unchanged from its August 31 close of 7,686.14.
• The 10-year Treasury Yield rose 5 basis points to about 5.21 percent, its highest level since mid-2007, after climbing 23 basis points over the prior three sessions.
• Brent crude jumped about 4.1 percent to USD 108.59 a barrel, and only health care, consumer staples and energy finished higher as more than 65 percent of US issues declined.
• August PCE Inflation data on September 30 and the September jobs report on October 2 will help decide whether yields calm enough for a retest of the August 13 record close.

Oil Shock Erases Most of Last Week's Gain

Monday's decline unwound most of the 1.21 percent weekly advance that carried the S&P 500 to 7,743.41 on September 25. The trigger was geopolitical: President Trump rejected Iran's offer, made at the UN General Assembly, to reopen the Strait of Hormuz within seven days in exchange for released frozen funds, sanctions relief and an end to the US naval blockade, although he said talks could continue. West Texas Intermediate rose about 4.2 percent to USD 96.31. Kyle Rodda of Capital.com said geopolitical risk would define the start of the trading week after the stall in diplomacy. Selling was broad. Only 125 S&P 500 holdings advanced, while communication services fell 1.56 percent, consumer discretionary 1.43 percent, financials 1.14 percent and industrials 1.00 percent. For holders of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), the session showed how quickly an energy spike now feeds into Equity risk appetite.

Yields Near 19-Year Highs Set the Ceiling

The Bond Market remains the binding constraint. Federal Reserve data show the 10-year closing at 5.17 percent on September 25, up from 4.96 percent on September 22, after first breaking above 5 percent on September 15. The Fed lifted its target range to 3.75 percent to 4.00 percent on September 16, and the CME FedWatch Tool put the probability of another 25 basis point hike at the October 28 meeting at 72.5 percent as of September 28. Investors using the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) to express views on duration now face the same data calendar as equity traders.

Volatility Stays Cheap as the Record Remains Within Reach

The Cboe Volatility index rose about 8 percent to roughly 16.1, yet Cboe noted the gauge was hovering near its one-year low of 14.9 even as rates volatility approached a one-year high. S&P 500 one-month skew traded near the 5th percentile as investors rotated out of hedges and into upside calls. That positioning matters because the index came within 0.4 percent of its August 13 record close on September 21 and remains about 12 percent higher for the year. Cheap protection alongside rising yields leaves the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) exposed to a sharp repricing if the bond selloff deepens. The Bureau of Economic Analysis releases August PCE data on September 30, and the Bureau of Labor Statistics publishes payrolls on October 2.

Where Things Stand

Not yet, and probably not without help from the bond market. The S&P 500 sits close enough to its August 13 record that a strong session could change the tone, but Monday showed the index struggling to absorb a 5.21 percent 10-year yield and USD 108 Brent at the same time. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is effectively flat for September, which frames this week as a test of rates rather than earnings. A cool core PCE print and a moderate payrolls number would ease pressure on yields. A hot reading on either, or a further breakdown in US and Iran talks, would likely keep the record out of reach into October.