April 23. Economic cracks widening

Good news yesterday in that yields in peripheral countries fell  (Italy -16 bps to 4.05) but bad news in that yields are also edging lower in developed countries, signaling economic malaise.  German ten yr at 1.23%, the low of the past 9 months, and US 10yr slipped below 1.70%. Indeed, data from yesterday and today points toward weakness as German PMI’s all fell below 50 (Composite output 48.8 vs 50.6 last).  China HSBC Flash PMI was also lower at 50.5, sending Shanghai Comp -2.5%. A Reuters piece notes weakening exports from Taiwan and Korea. “Exports from South Korea, another big supplier to the global tech industry, fell by 3.1 percent for the first 20 days of April from a year earlier.”
–In the US, cracks have shown in big multi-nat’ls with IBM down 12% since April 11 close, and GE down 10%, both as a result of disappointing earnings released a few days ago. CAT lowered forward guidance and as of yesterday’s open was down 20% from February’s high, but did have an impressive bounce with a big outside range and closed at the high on heavy volume.  In spite of stronger gold yesterday, copper fell and is testing new lows for the move this morning.

–In eurodollars, about 45k EDM5/EDM6 (grn/blu) traded 46.5- 47.5, said to be a buyer, spread closed unch’d at 46.5.  Open interest reveals that it’s a new position (+38k and 49k respectively).  The market continues to perceive a chance of tightening around this time frame; the spread between red and green pack is just below 31 while green to blue is 54.  I would also note that all euro$ calendar spreads are at the low end of the range and implied vols are softening, which I take as clues pointing toward lower interest rates in general.  I wouldn’t be surprised to see bunds test 1% and US tens at 160.  It’s against this backdrop that Harry Reid is reportedly trying to push through an internet sales tax code…
–Today’s news includes New home sales expected 419k and 2 yr note auction. The end of this week and next have more substantial news releases, BoJ and US Q1 GDP on Friday, FOMC and ISM next Wednesday, Employment report next Friday.

Posted on April 23, 2013 at 5:40 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply