Stocks at new highs, because of front loaded eases?

June 21, 2019

–Rates continued to drop with tens down 2.4 bps to end just under 2% at 1.999%.  The treasury curve steepened with both 2/10 and 5/30 making slight new highs at 27.3 and 79 bps respectively.  Precious metals soared with Dec Gold up $48/oz to 1408, though there is small profit taking this morning.  New highs in stocks. Not much change in the euodollar curve with reds through golds settling +2 to +3.5.  Large bullish option trades continue, for example, a buyer of 160k EDZ9 9800/9812c spread vs 9775 put for 3.5/4.0.   The FF curve continues to suggest that easing will be front-loaded, with July/August at -33.5 while Aug/Sept is -21.5 and Nov/Jan is -12.0. 

–There’s now over $12 trillion of negative yielding government securities.  And yet, the dollar fell to its 200 day moving average yesterday and appears to have formed a longer term top.  It’s no wonder that zero-yielding precious metals are bid (although Monetary Metals does offer a yield on precious metals).  The back end of the curve really isn’t reflecting the prospect of much higher inflation, but an actual 50 bp cut in July could be the spark.  

–One trade from yesterday was a buy of 30k 0EZ 9887/9812 risk reversal covered 9850, paid 2.0 for the call (settled 1.25 vs 9849).  Bid for the calls remains strong, not a big surprise, although given absolute futures levels as compared to current libor, this sort of trade is harder to justify in my opinion.  EDZ22, blue Dec, settled 22.5 lower than red Dec, 9826.5 vs 9849.  The same 75 wide risk reversal, i.e. 9862.5/9787.5 settled 2.0 for the call, 6.5 vs 4.5 for the put.  Given my views on the possibility of curve steepening and an ‘unexpected’ rise in inflation, I’d rather sell the calls on the blues.

Posted on June 21, 2019 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

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