Nov 16. England center stage, but a rate cut by China could provide a shake-up

–Little net change in US rates yesterday despite some fairly large flows.  Tens fell less than half a bp to 311.6.  Eurodollar strip was weak in front but held gains in back, with the blue pack (4th year) closing +1.625, strongest part of the curve.  Going into November euro$ (and midcurve option) settlement, EDZ8 came under heavy selling pressure which appears to have been long liquidation.  EDZ8 settled -1.5 at 9724.5, which caused new lows in EDZ8/Z9 at 39.5 and EDZ8/EDH9 at 12.5.  This selling is likely related to pressure from credit concerns like GE and from end of year funding issues.  Note EDZ8/9 was 60 in October, so that spread has declined over 20 bps in a month and a half.  On a side note, brexit issues have caused the same trade action in short sterling, where Z8/Z9 has fallen from 40 in early Oct to a new low of 18.5 yesterday.
–Large flows included a sale of over 100k TYF 121c at 5, OI +121k, 4s vs 118-19.5 in TYH.  Buy of >50k TYF 119.5c 19-21 was an exit with OI -55k, 16s.  Sale of TYZ 119c saw OI barely change at 190k.
In dollars, 3EU 9800c 4.0 paid 70k, new.  0EZ 9700c sold at 3.5, new +40k OI.  And 2EH 9662p bought 5.5 50k, new, settled 6.0 ref 9689.  On balance, trades favored the downside from relatively high futures levels.
–Reuters reports that China is considering a cut in its benchmark 1-yr lending rate which hasn’t been cut since Oct 2015 and now stands at 4.35%.  This would likely help Chinese shares, but may cause a break in yuan through 7, which might add to global deflationary concerns.  Another Reuters piece echoes yesterday’s theme of downplaying the chance for progress at the Xi/Trump meeting in 2 weeks at the G20.  China’s written response on trade issues said unlikely to provide any break-throughs.
https://www.reuters.com/article/us-china-economy-rates/weak-credit-growth-raises-odds-of-first-china-rate-cut-in-years-idUSKCN1NL0XX
https://www.reuters.com/article/us-usa-trade-china-exclusive/exclusive-china-offer-unlikely-to-spur-major-trade-breakthrough-senior-u-s-official-idUSKCN1NK2UA
–November midcurves expire today with 2EX 9687.5^ 4.0 settle vs 9686.5 and 3EX 9687.5^ 4.5 vs 9690.  Light news today with Industrial Production expected +0.2%.  Drama surrounding May’s chance of survival is likely the biggest story.
–The IMF has added to the chorus warning about leveraged loans and weak covenants.  New highs for the year yesterday in both IG and HY 5-yr CDS.
Posted on November 16, 2018 at 5:10 am by alexmanzara · Permalink
In: Eurodollar Options

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