Funding pressures looming?

July 18, 2019

–Stocks slid late yesterday, prompting a bid in rate futures.  The WSJ cited ‘Weak earnings weigh on global stocks’.  Some pointed to continued snags in US/China talks relating to Huawei, and the gen’l malaise in global trade, NFLX lost US subscribers, sending the stock down 10% (I believe market cap was around $158b) and Ray Dalio turned bearish.  Other factors include…whoa hang on a second!  Did you see SILVER?  On a moonshot!  On July 1, SIU closed $15.19 and now it’s almost a dollar higher.  

–On the rate side, early drama was associated with outright sales in EDZ9.  I believe these sales are related to both funding issues and the turn, and the idea of heavy t-bill supply which may hit after a delayed debt-ceiling deal.  In any case, sales were new as open interest jumped 104k contracts to bring EDZ9 open positions to 1.739 million, the peak on the strip.  With five months to go and uncertainty about the Fed’s strategy, 28 bps seems a tad cheap for the EDZ9 9800 straddle (settled 9798.5).  While EDU9 and EDZ9 therefore settled lower on the day (-1.0 and -0.5), all other contracts rose in a flattening curve.  Reds +4.25, greens +5.5, blues +6.375 and golds +7.0.  Tens sank 6.6 bps to 2.059%.  One other note regarding the front end: FFF0 (Jan 2020 fed funds) closed +2.5 on the day at 9830.5, so EDZ9 to FFF0 jumped 3 bps to 32.0.  This compares to EDU9/FFV9 at 18.0 and EDH0/FFJ0 at 24.0.  Beware end-of-year fireworks!  

–On an international note, Reuters had a piece highlighting China’s debt.  They’re killin’ us there too!  From the article, “China’s total corporate, household, and gov’t debt rose to 303% of GDP in Q1 2019, from 297% in the same period a year earlier” according to the IIF.  The US gov’t is doing ITS part to catch up.

–Today’s news includes  Philly Fed expected 5.0 from 0.3 last.  Jobless claims 216k and Leading Index +0.1%.–By the way, the NY Fed has several recent posts dealing with money market flows.  Here’s one (and a lot of other good stuff on the Liberty Street Economics blog).
https://libertystreeteconomics.newyorkfed.org/2019/07/from-policy-rates-to-market-ratesuntangling-the-us-dollar-funding-market.html

Posted on July 18, 2019 at 5:06 am by alexmanzara · Permalink
In: Eurodollar Options

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