After the "surprise" of the new crown mutant strain Omicron (Omikeron) to the global market, will it be a temporary shock, or will it trigger a chain reaction?
The key is to see the next three days, the change of this key data.
On November 26, panic caused by the new variant virus, Omicron, "raided" the global market.
Eurozone Stock 50 futures fell nearly 4 percent, while Britain's FTSE 100 futures fell 3.37 percent. France's CAC40 extended its intraday decline to 4 percent, its biggest drop since October.
In terms of U.S. stock futures, S&P 500 futures fell 1.87%, Dow futures fell 2.35%, and NASDAQ stock index futures fell 1.15%.
International oil prices also fell rapidly, with WTI crude oil futures extending their decline to 6% at $73.69 per barrel.
Ostensibly, this is due to the new variant virus Omicron (Omicron) that has triggered a wave of risk aversion in the global market.
However, from the perspective of the deep market, there is a deep crisis in which a large amount of money rushes into the futures market, and the arbitrage space of the US Treasury bond basis is "broken".
This mechanism has been talked about many times in the core courses and micro-classes of Hong College.
Because the futures market is more liquid, it can be traded through margin and has a strong leverage effect. Although the interest rate "basis" between Treasury futures and the spot market is small, it is still possible to profit from it by adding leverage.
Currently, there are nearly $600 billion in hedge funds in U.S. financial markets that specialize in this type of trading. "Grasshoppers are small but also meat", which is also a helpless move in the flooded US financial market.
However, with the panic caused by the new variant virus Omicron, a large amount of money has poured into the futures market at once, resulting in a sharp narrowing of the treasury bond basis arbitrage space.
This will cause these hedge funds that are engaged in treasury bond basis arbitrage to suffer large losses.
These hedge funds then "unleverage" and hit other funds in the U.S. Treasury market. At present, lying on the CURVE of the US Treasury bond, the amount of money for arbitrage operations is more than one trillion US dollars.
Once the arbitrage of "treasury bond basis" arbitrage occurs and "leverage is solved", it may be defeated like a mountain, and various funds will envelop each other, triggering a chain reaction.
This is the core reason why there were four circuit breakers in the US stock market last year.
Today, the scene of that year seems to be repeating itself. Judging from market operations and indicators, this is very similar to the turmoil in the US financial markets in March last year, and we need to watch closely!
At the same time as the new virus mutation emerges, the Fed is preparing to accelerate its contraction of bond purchases, and it is likely to raise interest rates early.
Under the influence of these two forces, will there be a chain reaction in the entire market? Will something happen to the people who carry out the basis arbitrage of the national debt?
At present, the first 1% repo trading rate (1% SOFR) in the US repo market has fallen into negative value, although it has not been further explored, but it means that someone has quietly carried out "de-leveraging" operations.
If the 1% SOFR continued to be abnormal and clearly negative in the first few days of this week, then it means that this time the gang engaged in US Treasury bond basis arbitrage has another accident.
That would be an early warning sign. The chain reaction has the potential to be further transmitted to the surface of the market.
If not, it means that this stock market cut is likely to be just a psychological shock, and it will not affect the depths of the market for the time being, especially for the treasury bond trading market in which hedge funds are deeply involved.
Then this plunge is isolated, and the market will rebound quickly.
So this will be our first observation point of the week, a key indicator.
Whether the US Treasury basis market will go wrong, it will definitely be reflected in the 1% SOFR indicator.
Song Hongbing said that if you understand the structure of the Federal Reserve and the US financial market, especially after clarifying the principle behind it, you can roughly deduce the context of the whole problem. You'll know where to find problems and from which data to observe market movements.
Then, on the basis of continuous data tracking, we naturally develop the ability to analyze and make keen judgments about the international financial markets.