Msft, Aapl, Googl, Amzn

January 13, 2020

–Yields fell and implied vol was hammered Friday in the wake of Friday’s payroll data which was slightly weaker than expected with NFP 145k and yoy earnings at 2.9% vs 3.1% expected.  The ten year yield dropped to 1.821%, down 3.4 bps.  The curve flattened with twos down only 0.6 bp to 1.568%.  Euro$ curve flatter as well: reds +1.25, greens +2.375, blues +2.875 and golds +3.625.

–While stocks had a late day pullback, those losses have been erased this morning. VIX ended Friday at 12.6, with additional pressure likely today.  In treasuries, with two weeks to go, TYG 129 straddle settled 0’43 and with six weeks, TYH 129 straddle settled just 1’14.  New recent lows for vol.  

–Iran admitted it shot down the Ukraine passenger jet in error.  Internal protests in Iran have ensued, perhaps suggesting a lull in military activity.

–There’s an interesting piece on ZH quoting Morgan Stanley’s equity strategist Michael Wilson.  He notes an unprecedented condition in which the top 5 companies make up 18% of the total market cap!  I would add that total US stock market cap to GDP is at a record 154%, and the top 4 companies by market cap, AAPL, MSFT, Alphabet and AMZN, are 20% of GDP.  Pretty amazing numbers, which Wilson attributes in part to extraordinary liquidity provided by the world’s central banks. If one uses Google instead of Alphabet, the symbol letters of the largest stocks can be reconfigured to spell MAGA.  Pure coincidence, right? 

–More of that CB liquidity will be forthcoming this week, as the Fed gets the market over the Jan 15th hump: gov’t auction settlement and tax date.  The US/China Phase 1 signing is also scheduled to take place on Wednesday.  CPI and PPI on Tuesday and Wednesday.  GBP hit this morning, approaching late December low as GDP reported weakest since 2012.

Posted on January 13, 2020 at 5:33 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Fed pumps, vol dumps

January 12, 2020 – Weekly comment

Starting this week with a chart on volatility.  The white line (right hand scale) is TY vol and the green line (left hand scale) is VIX.  The high in VIX (>35) occurred at the end of 2018, as stocks were crumbling after the Fed’s final December 2018 hike.  The next high coincided with the TY high in August of 2019, when US/China talks were tense and the 2/10 spread inverted with treasury yields plunging to new lows, (30 year reached a record low below 2%).  TY vol remained elevated with the mid-Sept repo scare, from 5 to 5.5.

White TY Vol / Green VIX

The end of 2019 and start of 2020 features vol at the low end of the ranges.  This, when the world was supposedly close to the start of WW3 with the US eliminating Irani General Soleimani.  Barely a blip in what are sometimes considered ‘fear’ measures.  As Louis Winthorpe III says in Trading Places, “Fear? That’s the other guy’s problem.” No matter how much the US deficit explodes the market remains convinced that the Fed will supply liquidity.  Indeed, in the last FOMC minutes release, it was suggested that the Fed move out to buying short dated coupons if there were no longer enough t-bills available for purchase.  By implication, if we buy all of THOSE, then we’ll just keep monetizing further out the curve.

It’s in this environment that I again highlight the following trade: Buying EDM0 9837.5 puts and Selling 0EM 9837.5 puts paying mostly 1.0 to 1.25.  Settlements Friday were as follow; EDM0 9834.0, EDM1 9848.5 so the EDM0/M1 calendar -14.5.
The 9837.5p in EDM0 settled 10.25 with -0.57d.  0EM0 9837.5p settled 8.50 with -0.36d.  Spread of 1.75.  If the market remained right here at expiration five months from now, the trade is a winner:  EDM0 puts would be 3.5 in the money while 0EM 9837.5 puts would be out of the money.  When considering a possible roll to the current MARCH levels, the trade looks even better, with EDH0 9827.5 (10 itm) and EDH1 9849.  In fact, why not just buy the 9837/9825 put spread in EDM0 to sell the 0EM puts?  That’s exactly how some have entered the trade. 

To give a sense of size, on Jan 2 open interest in EDM0 9837.5p was 219k and on Friday 297k.  0EM puts went from 31k to 93k.  So it’s safe to say that this idea has been expressed at least 60k.  By the way, EDM0 9825 puts rose from 565k on Jan 2 to 724k on Friday.  The ‘pit’ (market makers) are said to be long over a million of the 9825 put strike; the sum of March, June and Sept is 1.67 million (520k, 724k and 425k) mostly due to the 9812.5/9825/9837.5 put butterfly strips that had been bought in huge size.

But let’s just take a closer look at the one-year futures calendar spread.  The EDM0/0EM 9837.5 put spread is dependent on EDM0/EDM1 remaining inverted, and as mentioned above it’s now -14.5. 

Below I have posted a couple of charts.  The top is a rolling ED 2nd to 6th quarterly one-year spread, which is currently EDM0/M1. The red shaded portion in the lower panel is when that spread and other near one-yr calendars inverted.  This was the market saying the Fed had made a mistake with the December hike and would have to ease.  At that time the FF target was 2.25 to 2.50%, and it’s now 1.50 to 1.75%, so clearly the signal was correct.

It’s also worth taking a look at this chart in the context of the SPX (below).  When ED calendars inverted, SPX was nearing its 20 pct drawdown at the end of 2018.  At the time, not only was the Fed raising the FF target, it was also draining $50 billion/month from the balance sheet.  One year later, in Q319, the Fed began aggressively increasing its balance sheet and in October announced the $60 billion per month t-bill buying program.  Stocks responded in predictable fashion, exploding to new highs.  SPX is now about 10% higher than it was at its high in Sept 2018, prior to the Q4 sell-off. In Sept 2018, the 2nd to 6th one-year eurodollar calendar was PLUS 30 to 35. 

In summary, the Fed eased three times in 2019.  It has massively increased the balance sheet.  Economic data remains firm.  The Federal Gov’t ran a deficit of $980 billion.  Fed officials are saying policy is in a good place.  Some measures of inflation are firming.  The markets are shrugging off geopolitical concerns.  Stocks are at all-time highs. The Phase I trade deal is set to be signed this week, along with an agreement to start semi-annual talks between US/China to resolve disputes. Is this really the time to enter trades predicated on ED one-year calendar spreads remaining inverted?  

SPX (ED spreads invert Q4 2018)

This week brings CPI on Tuesday, with Core yoy expected 2.3%.  PPI is Wednesday with Core yoy 1.3%.  Retail Sales and Philly Fed on Thursday, Industrial Production on Friday.  The most important day may well be January 15, when the Phase I agreement is scheduled to be signed.  It’s also a tax day and settlement of last week’s auctions, so once again the Fed will be pumping hard to avoid any semblance of a repo spike.

OTHER MARKET/TRADE THOUGHTS

An article in the Wall Street Journal detailed how the Swiss Embassy in Tehran provided a secure, private, conduit for diplomacy to de-escalate the US/Iran confrontation even as public rhetoric suggested the exact opposite.  That’s not to say that we’re immune to geopolitical mistakes, but it’s a reminder that behind-the–scenes conversations are always taking place, (even in matters of monetary policy). 

As noted above and during the week, there is a heavy weight on vol and on the front 9825 strike in particular.  EDH0 9825 put settled 2.25 vs EDH0 9827.5.  EDM0 9825p settled 2.25 as well, vs 9833.5 and EDU0 9825p settled (and traded) 3.0 vs 9840.5.  In just the past couple of sessions, EDU0 9825p lost ¼ of its value vs the same futures price; it had traded 4.0 and settled 3.75 on Wednesday vs 9840/40.5.   The market perceives zero chance of the Fed snugging policy; these puts are a cheap buy just in case the market is wrong.  Eight months for the Sept puts for 3 bps while EDH puts are still 2.25? 

There are myriad warnings about stocks being too high, and several Fed officials have openly worried about contributing to imbalances, notably Kaplan.  I will just mention a couple of snippets taken from news outlets and twitter.  Goldman’s Kostin says S&P valuation is stretched historically, trading at 90th percentile.  Market cap to GDP is at an all-time-high.  John Authers (BBG) notes that S&P 500 has hit record after record while NIPA earnings have flatlined.  @TeddyVallee tweets “Past 2 years SPX companies spent $114 on buybacks for every $100 in capex.  Prior 19 years were $60 per $100 of capex.”  While I prefer downside plays in rate futures, an unexpected slide in stocks from high levels could occur at any time.  I would note that Crossborder Capital, using data back to 1969, says the current episode is the Fed’s greatest liquidity boost EVER on a 12 month rate of change.

1/3/2020 1/10/2020 chg
UST 2Y 152.3 156.8 4.5
UST 5Y 158.8 163.3 4.5
UST 10Y 179.1 182.1 3.0
UST 30Y 225.2 228.2 3.0
GERM 2Y -61.9 -60.0 1.9
GERM 10Y -27.8 -19.9 7.9
JPN 30Y 41.1 43.6 2.5
EURO$ H0/H1 -25.5 -21.5 4.0
EURO$ H1/H2 3.0 3.0 0.0
EUR 111.60 111.22 -0.38
CRUDE (1st cont) 63.05 59.04 -4.01
SPX 3234.85 3265.35 30.50
VIX 14.02 12.56 -1.46

https://www.zerohedge.com/geopolitical/id-see-them-call-me-how-trump-used-encrypted-swiss-fax-machine-defuse-iran-crisis

Posted on January 12, 2020 at 8:15 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Payroll Friday

January 10, 2020

–Stock futures at new highs this morning.  Treasuries mixed with the curve slightly flatter.  Yields fell yesterday despite the 30 year auction; the ten year fell 1.7 bps to 1.855%.  

–Today brings the Employment report with NFP expected 160k from 266 last.  YOY earnings expected +3.1%, same as last.  Atlanta Fed’s median wage growth tracker was 3.7% last (from November) just a bit under the high last year of 3.9%. https://www.frbatlanta.org/chcs/wage-growth-tracker

–One interesting trade getting play is +EDM0 9837p (settled 10.25 vs 9834.0 in EDM0) vs -0EM 9837p (settled 9.0 vs 9848.5 in EDM1).  Paid 1.  Clearly if the market settled here the trade would make a few bps, as front puts are in the money.  However, if expectations were to shift to a much less probable chance for easing, EDM0/EDM1 could move from its current level of -14.5 closer to flat.  Given the relentless march higher in equities, I would think that’s a non-trivial risk.  

–Below is a chart indicating continuing claims.   Fairly dramatic spike since Q4 drew the attention of some analysts.  Worth keeping an eye on as a contrary signal in otherwise glowing reports of the labor market.

Posted on January 10, 2020 at 5:10 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

All Clear

January 9, 2020

–Markets had violent reversals from Monday evening’s panic related to Iran’s impotent missile response.  Stocks ended at all time highs.  WTI crude posted a huge range and closed below 60, nearly 10% off the high print.  Yields finished higher on the day with tens +4.7 bps at 1.872%.  On the euro$ strip reds through golds closed -5 to -6 bps.  Trump promised that Iran will never possess nuclear weapons and increased sanctions, but otherwise de-escalated the rhetoric.

–China announced that Vice Premier Liu will come to the US next week for Phase 1 signing.  While that’s another bullish sign for equities and global trade, the Baltic Dry Freight index is telling another story at 773, near the low of last year and nearly 70% lower than the high posted in early September.  The prime example of market froth has to be Tesla, which has soared over 20% since the end of December and now boasts a market cap greater than GM and Ford combined.

–EDH0 settled yesterday at 9827.0 and 9825 puts settled 2.25.  EDM0 settled 9833.5 and 9825p settled 2.75, while EDU0 settled 9840.0 and 9825p at 3.75.  Forward futures prices still reflect a bias toward easing even as the Fed signals it’s on hold and trade tensions are potentially easing.  The 9825 strikes have been crushed due to the large previous buyer of 9837/9825/9812 put fly strips, but given curve roll, the forward puts offer very cheap downside protection.  It appears as if EDU puts have 1.5 bps of decay over 6 months in a liquidity-infused, potentially inflationary environment.  

–Yesterday’s ten year auction tailed, coming in at 1.869 from a pre-auction 1.852.  There was a new buyer of about 15k TYH 128/127 put spread yesterday before the auction for 13 to 14, settled 15 vs 128-245.   Thirty year bond auction today.

Posted on January 9, 2020 at 5:01 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Got your six

Jan 8, 2019

–Iran lobbed missiles at US forces in Iraq, seriously escalating tensions.  Equity futures plunged to new lows but came nearly all the way back, tens and bonds exploded higher but have also given back much of their early gains.  ESH now 46 points off the low of 3181.00.  Gold (GCG0) surged to 1613 but now has come back to 1584, still up around $10/oz.  Oil jumped to 65.65 but is now nearly unchanged, off almost $3 from the high.  The market continues to dismiss longer term risks.  For example, Lisa Abramowicz of BBG tweeted yesterday: “US junk bonds are yielding about the least since 2014 relative to the S&P 500’s earnings yield.”

–In August 1990 Iraq invaded Kuwait.  On January 16, 1991, Desert Storm commenced with the US and allies pounding Iraq.  There had been large risk-off positioning pre-Desert Storm, but with the first missiles in January, t-bills and shorter treasuries sold off hard; the risk-off trade was instantly over.  I recall trying to sell TED spreads into a non-existent bid!  The geopolitical landscape is much different now, and becoming more insular.  I will also mention that Fed funds were around 6.25 to 6.5% in 1991, and yes, on their way down to the then-historic low of 3% in late 1992 thru 1993.  But the current concept of the Fed having our back was not in the lexicon back then.  At that time it was Gen’l Norman Schwarzkopf who had our backs…


–New buyer yesterday (adding) EDZ0 9862/9887/9900 call tree for flat, bought the 9862c, 20k.  Settled -0.25.  This trade is short with delta -4.   Takes advantage of skew; with EDZ0 9848, the 9900c settled 5.5 and the 9800p less than half as much at 2.25. 

–Interesting note again in Almost Daily Grant’s saying that some lenders are balking at funding Softbank’s plan to rescue WeWork, asking for collateral in AliBaba to participate.  Like other large tech, BABA is right at its highs, but the implication to me is that, when/if things turn, that’s how good assets are dragged into forced sales, right along with the junk.–If requiring the safety of a 1.8% yield, US treasury auctions tens today.  

Posted on January 8, 2020 at 5:49 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

call the repo man

January 7, 2020

–Once again, overnight moves on Monday morning were faded with stocks grinding back to end positive on the day (and higher yet this morning).  Gold was able to hang on to gains, with GCG0 closing +16.4 at 1568.80.  The Suleimani situation is ‘contained’.  Rate futures were quiet.  Ten year yield rose 2.3 bps to end at 1.811%.   5/30 edged up 1.2 bp to 67.5 with auctions beginning today, starting with $38b 3 year notes.  This week’s auctions of 3, 10, and 30 year paper raising nearly $33b in new money according to TBAC. 

–Econ data in the US includes Trade expected -43.7b, Durables expected -2.0% and ISM Services expected 54.5 from 53.9.  Japan’s Service ISM released this morning fell to a contractionary 49.4 from 50.3 last.  

–Grant’s daily missive (ADG) featured a note on the US auto industry.  “According to data from FRB of NY, the percentage of auto loans considered seriously delinquent (i.e. 90 days past due) stood at 4.71% in Q3, up from 4.27% a year ago and the highest reading since 2011.”  Total auto loans outstanding are $1.32T, and 31.5% of new loans are 7 years in length, up from 10% a decade ago.  This, with an apr on newly financed vehicles at 5.4% in December.  Better call the repo man. 

 –Speaking of which, former NY FRB head William Dudley wrote an op-ed endorsing the idea of creating a standing repo facility, “open to a broad set of counterparties confined to Treasury and agency mortgage-backed securities collateral.  Such a facility would effectively cap repo rates.”  Can we slightly broaden the acceptable collateral to securitized auto loans?  Because…that’d help. 

Posted on January 7, 2020 at 5:06 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Saftey bid, but near term easing not likely

January 6, 2020

–Well at least the China deal is progressing along smoothly, right?  This morning Feb Gold traded 1580, up $100/oz from mid-December.  WTI crude (CLG0) is 63.80 with a high of 64.72, having started December around 56.  Rate futures are only slightly bid, facing auctions of 3s, 10s and 30’s this week.  On the euro$ curve, last reds to first greens should probably be outperformers on the upside given mideast turmoil.  Friday’s FOMC minutes suggested a possible upside tweak to IOER which prompted selling pressure on near contracts (FFG0 settled -1.5 while FFG1 settled +7.0), and the minutes further noted that as the Fed buys all the available t-bills, it might have to extend its purchases to short dated coupons.  Finally, the minutes noted that buying will continue until  morale improves or at least through the April tax date. 

–It’s not clear that the mideast cauldron should lead to lower libor settings; perhaps the opposite as the Fed tries to hold the line on its ‘policy is in a good place’ stance.  EDH0 settled unch’d at 9827 as the IOER adjustment was mentioned, having traded 29.5 early in the session.  EDH0/EDH1 closed -8 at -25.5, and FFF0/FFF1 settled -24.75, both indicating a bias for one more Fed cut over this year.  At futures settle I marked tens down 9 bps at 1.788%.  The curve flattened with 2/10 down  over 4 bps to 26.5, having ended 2019 at the year’s high of 35.2.

–With international tensions taking center stage, economic data is probably less important, but it’s worth a note that Mfg ISM released Friday was only 47.2, the lowest since 2009.  Markit PMI today, Service ISM tomorrow and Payrolls on Friday.  

–Jan euro$ midcurves expire Friday.  0EH 9850^ settled 8.5 vs EDH21 9852.5 and 2EH 9850^ settled 10.0 vs EDH22 9849.5.

Posted on January 6, 2020 at 5:10 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Optical Accuracy

January 5, 2020 – Weekly Comment

I read a paper this week: ‘On the Optical Accuracy of the Salvator Mundi’.  The paper is by a few computer scientists and concerns whether Leonardo accurately depicted the properties of the translucent orb in the painting in “an optically faithful manner”.  The scientists ran a series of computer simulations to determine the size of the orb, its thickness, whether it is hollow glass or solid calcite, what the light source was, and whether the folds of the robe behind it are faithfully depicted according to light refraction.  The authors note that an 1883 publication of Leonardo’s scientific notes and drawings show that he “…had an understanding of light refraction, glass and crystal materials and diffused, direct and reflected light, the relative position of reflections on a round body…” etc.  Sort of boils down to, “Do you think Leonardo knew what he was doing?’

https://arxiv.org/abs/1912.03416

What this paper did for me personally was remind me of a joke, which I slightly modify here.

Three guys die in an accident and are standing before St Peter at the Pearly Gates.  St Peter inquires of the first, “What’s your IQ?”  He responds, around 175.  “Great!  We can discuss Quantum Mechanics and experiments regarding the wave-particle duality of light.”  St Peter asks the same question of the next man who answers about 125.  “Ah, we can converse about experiments done on the Salvator Mundi and the qualities of light diffusion through a hollow orb.”  “And what’s your IQ?” he asks of the last man.  Around 75.  “How’d your SPOO puts do today?”

In spite of the Thursday evening US strike that killed Iran’s top general Qassem Soleimani, SPX closed down only 70 bps on Friday and was barely changed on the week.  VIX shot up… to 14.  The response in the oil market was also fairly muted.  CLG0 ended at 63.05, above the level from mid-Sept ’19 when Saudi oil installations were attacked, but significantly below the high posted in Oct 2018 (76.90) when Khashoggi was killed and Powell re-affirmed the Fed’s tightening program with QT ratcheting up to $50 billion per month.  Which led to a rapid drop in oil to $45/bbl by year end.  

Of course, monetary policy and liquidity considerations are now of paramount importance in the pricing of financial assets, and in this respect Friday’s release of the Dec 11 FOMC minutes bears comment.  First, as an aside, the minutes discussed results of the “Fed Listens” initiative.  Here are a couple of quotes regarding inflation:

Event participants were asked about monetary policymakers’ concerns regarding overall inflation running persistently below 2 percent; they noted that the Federal Reserve could better communicate its reasons for these concerns.

Regarding inflation, participants recognized that segments of the public generally do not regard the fact that aggregate inflation is running modestly below the Committee’s 2 percent goal as a problem.

Seems like the Fed’s hearing isn’t too good.  I might conclude that the public is NOT CONCERNED about a shortfall of a few tenths in the Fed’s preferred measure of inflation, and is much more anxious about rises in the basic cost of living.  However, SF Fed’s Mary Daly suggested over the weekend that the Fed needs a new policy framework to address persistently low inflation.  Bernanke, in his weekend address to the American Economics Ass’n, said the Fed still has plenty of power to fight a future downturn, falling back on QE and strong forward guidance.  Regarding the QE part, in the minutes the FOMC directs the Desk to continue the purchase of $60B/month T-bills at least into Q2 2020, “to maintain over time ample reserve balances at or above the level that prevailed in early September 2019.”  But another operational note suggests QE “monetization mission creep”:

The manager discussed two operational considerations around policy implementation. The first involved the risk that future Treasury bill purchases could have a larger effect on liquidity in the Treasury bill market in light of expected seasonal declines in bill issuance and the Federal Reserve’s growing ownership share of outstanding bills. If this risk were to materialize, the Federal Reserve could consider expanding the universe of securities purchased for reserve management purposes to include coupon-bearing Treasury securities with a short time to maturity.   

I thought QE and forward guidance were to be used in the event of a DOWNTURN.  Well perhaps Friday’s release of Mfg ISM fits the bill.  At 47.2 it was the lowest reading since 2009. 

My note last week was titled ‘Possible Removal of Liquidity Insurance’.  I thought the Fed would be keen to withdraw some of the extraordinary liquidity injected to cover year-end.  The minutes touch on this:

The manager also discussed expectations to gradually transition away from active repo operations next year as T-bill purchases supply a larger base of reserves. The calendar of repo operations starting in mid-January could reflect a gradual reduction in active repo operations. The manager indicated that some repos might be needed at least through April, when tax payments will sharply reduce reserve levels.

So the Fed wants to reduce market dependence on constant large repo ops, but is already sweating the April tax date.  The directive to keep buying bills to maintain ample reserves above early Sept 2019 shows just how searing a scar the mid-Sept repo spike caused.  However, there is one other important passage that DOES suggest the Fed’s discomfort with endless liquidity: 

As reserves remain ample, the manager noted that it may become appropriate at some point to implement a technical adjustment to the IOER rate and the offered rate on overnight reverse repurchase (ON RRP) agreements. Should conditions warrant this adjustment, the IOER rate could move closer to the middle of the target range for the federal funds rate, and the ON RRP rate could be realigned with the bottom of the target range.

This excerpt had an immediate effect on the market.  Feb20 Fed Funds (FFG0) closed down 1.5 bps on the day at 9842.5 or 1.575% while  FFG21 closed +7.0 on the day at 9871.5 or 1.285%. An eight and a half bp swing in the one-year calendar! One Fed official after another has emphasized that current policy rates are in the right place, but this possible tweak in IOER (potentially priced for the Jan meeting) along with increased international uncertainty, conspired to cause profit taking in long curve trades.  Trump has adopted Bernanke’s forward guidance dictum to inform Iran that any response will be met with specific and goal-oriented measures by the US.  However, Reuters reports that Iran’s army chief said the US “lacks the courage for military confrontation.” The geopolitical situation has translated once again into a bid for longer dated treasuries. The 2/10 spread closed Dec 31 at the high of the year, 35.2.  On Friday it fell 4.3 to 26.5.

There have been several twitter posts now about how the extraordinary liquidity supplied in 1999 to get the world through Y2K coincided with a huge rally in Nasdaq, while the subsequent withdrawal resulted in an instant decline in Nasdaq at the start of the year 2000, with the implication being that the same pattern might play out in 2020.  The issue is that even though some Fed members are worried about future dislocations…

A few participants raised the concern that keeping interest rates low over a long period might encourage excessive risk-taking, which could exacerbate imbalances in the financial sector. primarily in response to a somewhat higher projected path for equity prices.

…the overwhelming theme of the minutes is to avoid a repeat of the Sept repo squeeze at any cost.   

I’ll end with a chart of SPX priced in gold.  This is where our 75 IQ guy sidles past St Peter and mutters, “But I’m also long gold.”     

 

Last week I ended my note with “It seems as if gold might be the safest harbor no matter what happens in the beginning of 2020.”  GCG0 rose $34 last week. 

This week brings auctions of $38b 3-yrs, $24b 10’s and $16b 30’s starting on Tuesday.  Safe haven supply.  The employment report is Friday with NFP expected 162k from 266k last. 

OTHER MARKET/TRADE THOUGHTS

The combination of the turn being in the rearview mirror and the US statement to Iran’s leadership led to a rally in near contracts.  EDF0 rallied as high as 9820 before coming back to settle 9818.75 post-minutes.  EDH0 traded to 9829.5 but settled 27.0.  If IOER is moved up by 5 bps to 1.60%, this might suggest forward lib/ois in the mid-teens. On Friday, EDH0 9825 straddle was bought for 8.5 having been trading at 7.5 early in the week.  EDM0 9825^ settled 16.0 versus 9835.0 in EDM0, and the 9837.5^ settled 18.0.  

With the flight-to-quality rally in treasuries I would expect some high gamma put buys before NFP, with a likely candidate being Green Jan puts which expire Friday.  2EF0 9837.5p settled 1.0 ref 9849.5 in EDH22, while 9850 puts settled 5.25.  In tens, Jan week-2 TY (TY2F0) 129p settled 11 vs 129-12+. 

I would assume that Iran responds at the margin by not directly attacking US installations, but rather targeting soft targets of allies in the hopes of creating divisiveness while avoiding further military incursions by US forces.  This will likely underpin a bid in five year treasuries.   5/30 remained buoyant at 66.3 by week’s end.  I would expect 5/30 to test last year’s high of 80 this month. 

12/27/2019 1/3/2020 chg
UST 2Y 158.5 152.3 -6.2
UST 5Y 167.6 158.8 -8.8
UST 10Y 187.2 178.8 -8.4
UST 30Y 231.0 225.1 -5.9
GERM 2Y -63.0 -61.9 1.1
GERM 10Y -25.6 -27.8 -2.2
JPN 30Y 43.2 41.1 -2.1
EURO$ H0/H1 -19.5 -25.5 -6.0
EURO$ H1/H2 4.0 3.0 -1.0
EUR 111.76 111.60 -0.16
CRUDE (1st cont) 61.72 63.05 1.33
SPX 3240.02 3234.85 -5.17
VIX 13.42 14.02 0.60
Posted on January 5, 2020 at 4:51 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Rapid Response

January 3, 2020

–That escalated quickly.  After assaults on the US Embassy in Iraq, on Wednesday “Iran’s Supreme Leader Ayatollah Ali Khamenei….said Washington ‘can’t do anything'”. Yesterday a US strike killed top Iranian General Qassem Soleimani at the Baghdad airport, along with an Iraqi military leader whose group is supported by Iran.  Flows into safe havens immediately ensued as the markets now wait to see the severity of responses.  Feb WTI (CLG) currently +229 at 6342, a new high.  ESH is down over 35 at 3223, more than erasing yesterday’s giddy rally.  Feb Gold has jumped $21/oz to 1549.  ZeroHedge has a piece saying that yesterday’s 2.4% surge in AAPL to a new high added $31 billion in market cap, which is greater than the market cap of 300 S&P 500 companies.  That is, AAPL tacked on an e-Bay yesterday, or an HP Inc, or the combined value of Nasdaq and Citrix.  Seems a bit frothy.https://www.zerohedge.com/markets/aapls-market-cap-increase-today-was-bigger-entire-market-cap-300-sp500-companies

–While the ten year future is up only 1/2 point to just above 129-00, the green euro$ pack is +7.  You want safe havens?  New slug of treasury supply next week with 3, 10 and 30 year auctions.  With three weeks to go, the Feb TY 128.5 at-the-money straddle settled just under 1 point at 62/64’s.  Seems low given uncertainty over the mideast.  I would suspect that Friday afternoons will now return to being ‘risk-off’ on the threat of weekend fireworks.

–Tuesday’s EFFR was 1.55%.  The Fed’s herculean efforts to prevent a panic paid off, but that liquidity now has to be drained.  EDH0 traded as high at 9829.0, suggesting libor/ois of just 16 bps.  FFJ0 traded to 9847.  No real reason for odds of a Fed ease to increase at this point.   

Posted on January 3, 2020 at 4:58 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Steeper end to 2019. More to come?

January 2, 2020

–China cut reserve ratios for large banks by 50 bps to 12.5% yesterday, giving a jolt to equities to kick off the new year.  Protesters have apparently pulled back from the US Embassy in Iraq, though that situation could easily flare up again.

–Friday featured slightly higher yields in a session where the big trade concerned liquidation of long TYG 129 calls.  When all said and done, TYG 129/130c spread declined 84k in both strikes (the calls settled 17 and 5, so cs 12s vs 128-135).  TYH0 lost 30.5k in open positions, a bit more than would be indicated by the exit of the 21 delta call spread.  The ten year yield at the early floor close was 1.907%, up 1.4 bps on the day.  New highs posted once again in many curve measures.  2/10 ended 2019 at its high of 35.2 bps. +2.6 on the day.  Reg/gold euro$ pack spread settled 33.0, +2.125 bps, and 5/30 at 69.5, +2.7 on the day.  One somewhat interesting note: the back end of the euro$ curve  (and sterling and euribor for that matter) is where the steepness is.  For example, EDH21/EDH22 (red/grn March) is 5.5 bps, but EDH22/EDH23 closed at a new high of 12.0.  In sterling, L H22/H3 is 8 bps, and in euribor H22/H23 is 15.5 (ERH21/H22 is 12.0).   

–Lows so far this morning in USH and WNH are 155-05 and 180-13, holding early November lows so far, of around 155-00 and 180-00.  

–One other trade of note Friday was a new lottery ticket buyer of 30k 0EG 9887/9937cs for 1.0, ref EDH21 9844.0s. Keeping with the steepening theme, buying short maturities, selling long.    

Posted on January 2, 2020 at 5:08 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options