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LOW VOL EQUITY FACES HIGH RATES REALITY CHECK

ADMIN || 9th December 2025

The jump in long-term Treasury yields was weighing on equities today, halting the melt-up from November lows into the all-important December FOMC meeting on Wednesday. While anxiety around the prospect of a “hawkish cut” is taking hold, once Fed Day’s events are out of the way, there are several factors that support a return of the rally.

The stock market leadership of late has been growth and rate-sensitive sectors, with small caps, homebuilders and cyclicals driving the rebound off the November lows. These areas are the most vulnerable if the Fed leans hawkish and term premiums rise further. That’s even as investors price in a stronger earnings revisions outlook for next year on the back of better economic growth.

Under the surface, the AI trade is evolving rather than breaking. Big Tech is no longer a one-way macro factor, with the new winners skewing towards power efficiency and AI inference “dealers” over training models. Oracle earnings then later in the week feel less like a single, make-or-break AI referendum and more like another datapoint in a broader rotation within the sector.

Option positioning and volatility pricing show a risk/reward truce rather than real conviction in any sustainable move higher or lower. Dealer gamma holdings, which were deeply negative through most of November, amplifying every intraday move, have become more balanced in the past two weeks. There is positive gamma around the 6,900–6,950 area, with 7,000 the big upside magnet into year-end. The catch is that once you strip out 0DTE, the backdrop turns negative, which means the apparent stability is local and event-dependent, a worrying setup into the December FOMC.

The VIX has slid back into a much calmer mid-teen range. Research by the CBOE highlights the Nasdaq-SPX one-month implied vol spread has fallen from recent highs to a more normal level, confirming that AI-specific fear has eased even as outright hedging remains in place. Skew confirms this, which has flattened mainly because of call demand rather than a capitulation in puts as downside protection is still well bid into year-end. It’s a sign that investors are happy to run more upside risk but not yet ready to abandon crash insurance.

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