July 16. If the Fed stops hiking buy stocks. Right?!?!

–Nasdaq creeping to a new high this morning, currently +16 at 7409.  However, China stocks were a bit lower as data shows GDP +6.7% as expected.  WTI also moving lower.  Today’s US news includes Retail Sales, expected +0.5% and the Trump/Putin lovefest.
–New lows in the curve to wrap up the end of last week.  2/10 just under 25 bps.  Last week EDZ19/EDZ20 became the nearest one-year euro$ spread to settle negative, ending Friday at -2 bps.  Red/green pack spread also finished at a new low of -2.125. It appears as if stocks like the prospect of an end to the Fed’s tightening campaign as telegraphed by the curve, but the fact that long rates are easing means economic growth is suspect going forward.  All topics that Powell should address during tomorrow’s testimony.  Greens remain pivotal on the curve, reds +2.875, greens +3.75 and blues +3.50.  July midcurves expired between strikes; I would expect replacement buyers of red midcurve puts early in the week.
Posted on July 16, 2018 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 15. Late Cycle Behavior… What’s next?


Both Jeffrey Gundlach and Bill Gross made bullish calls on commodities earlier in the year. I think I recall Gundlach saying a rise in commodities is ‘classic late stage behavior’.  I did a quick search and found this quote from mid-January: “Commodities always rally sharply – much more sharply than they have so far – late in the business cycle as we lead into a recession.”

This week was a trying one for commodity bulls.  In no way am I trying to cast a negative light on the earlier calls, because they were absolutely correct.  The question is, if a commodity rally is ‘classic late stage’ stuff, and if commodities have now turned, what comes next?

On Wednesday, front month WTI took a dive, falling $3.73.  On the week it fell 2.79 to 71.01, yet it is still well above the lows from early June (64.00 to 65.00/bbl).  However, other commodities have absolutely plunged.  Silver fell to a new low settle Friday.  Soybeans made new lows, same with corn.  As mentioned during the week, base metals have melted, with Dr Copper down 17% from its high in June.  These moves are related to trade war concerns and strength in the USD.  There are also a slew of technical factors, the intricacies of which I don’t pretend to know.  Not only don’t I know, it seems as if some of the most sophisticated players have been caught out, as a Reuters article on energy notes: “Trading desks of oil major BP, and merchants Vitol, Gunvor and Trafigura have recorded losses in the tens of millions of dollars each as a result of the “whipsaw” move when the spread [between WTI and Brent] reached more than $11.50 a barrel in June, insiders familiar with their performance told Reuters.” I don’t think the article (link at bottom) does justice to a complex topic, but it gives a sense of underlying turmoil.  I’ve highlighted vicious rallies in near WTI calendar spreads in daily notes, and I’m sure there are other more nuanced moves between products.  Actually, spread moves have had all the nuance of a sledgehammer.  The point is that smooth, discrete moves are perhaps becoming less of a feature, (and more of a bug?)

These moves come at the same time that many (IMF, BIS, etc) are sounding the alarm on excessive global debt.  Financial bloggers anxiously scream that these debts will NEVER BE REPAID!  That’s not really the crux of the problem.  The issue is whether the debts can be serviced and rolled.  The problem is that one man’s debt is another man’s asset, and if the ‘collateral’ underlying these debts were commodities, why, then we might have reason for concern on both counts.  Especially if those debts are dollar denominated.  Thankfully though, tech stocks are the pillars of the US economy, and it’s there that we can take solace in *socially driven and beneficial for mankind* decision making, an example of which is WeWork banning meats from company events and expense reports.  It’s really no wonder that Nasdaq soared to a new high this week.  However, on Tuesday the Russell 2000 posted an outside day and closed lower, essentially leaving a double top just under 1710 (cash index) on June 21.  These highs remain intact (even with a new high in Nasdaq), and represent strong resistance.  It’s hard to buy into the scenario of robust economic growth if only a few tech names provide all the juice.

The interest rate curve is reflecting similar trepidation with respect to forward economic prospects.  On Friday, the 30-yr and ultra bond contracts had new high settlements, exceeding highs set in late May when concerns about Italy gripped the market.  Inversion on the Eurodollar curve keeps edging closer in time.  Many one-year Eurodollar calendar spreads made new recent lows, for example, EDM19/M20 settled at a new low of just 8.5.  This spread is one year forward, and more or less indicates that the Fed’s tightening campaign will be over by then.  If there’s any doubt as to timing, the next spread, EDU19/U20 is only 2 bps, and then… depression set in.  https://www.youtube.com/watch?v=GbVaisNPgh4

I mean, then inversion sets in, with EDZ19/EDZ20 at MINUS 2.  Last week was the first time this spread traded negative, and it’s the nearest one-yr inversion.  The red Eurodollar pack (2nd year forward) is at a higher yield than the green pack (3rd year) which in turn, is at a higher yield than the blue pack (4th year) 2.955%, 2.9337%, 2.9175%.  These spreads are at new lows for this cycle, and near lows of previous tightening cycles.  Until the Fed changes its tune on future gradual rate hikes, the back end of the curve is announcing that, gradually, rate hikes will choke the economy.

Doesn’t this inversion signal possible risks to financial stability?  Perhaps.  However, the semi-annual monetary report released by the Fed on Friday doesn’t really address that topic in the section entitled, Developments Related to Financial Stability.  Instead, the Fed says that risks are generally low, while noting that “valuation pressures in various asset markets remain elevated by historical standards…” and that “commercial property valuations continue to be stretched.”  The report says “Risks from abroad are moderate overall” and concludes this section with “Globally, potential downside risks to internat’l financial markets and financial stability include political uncertainty, an intensification of trade tensions, and challenges posed by rising interest rates.”  On the last point, the Eurodollar curve is sending up a flare.  On trade tensions, commodities might be sending up a flare.  And on political uncertainty, well, we can all draw our own conclusions.  This week’s Trump/Putin summit will perhaps paper over uncertainties regarding US/Russia relations.  On the other hand, the prospect of China using slow currency depreciation vs USD is another clear risk to international capital flows.

So we have a pretty good handle on possible threats, and some pockets of the interest rate markets are gently pricing these risks.  The commodity complex has been more strident.  VIX is on a summer stroll through the countryside. Implied volatility in interest rates is similarly languishing near lows.  It’s hard to lay out premium when every shock is absorbed in shorter and shorter cycles.  This is when tails should fatten.



7/6/2018 7/6/2018 chg
UST 2Y 254.1 258.2 4.1
UST 5Y 272.1 272.7 0.6
UST 10Y 282.9 282.9 0.0
UST 30Y 293.8 293.3 -0.5
GERM 2Y -65.8 -66.3 -0.5
GERM 10Y 29.2 28.0 -1.2
JPN 30Y 67.9 67.9 0.0
EURO$ Z8/Z9 32.0 31.0 -1.0
EURO$ Z9/Z0 1.0 -2.0 -3.0
EUR 117.44 116.85 -0.59
CRUDE (1st cont) 73.80 71.01 -2.79
SPX 2759.82 2801.31 41.49
VIX 13.37 12.18 -1.19



Posted on July 15, 2018 at 12:51 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 13. Implied vol crushed on US interest rates; CNY makes new low

–Vol crushed in rates yesterday on heavy straddle sales. With inflation data out of the way, and auctions having been easily absorbed, all straddles on ED curve lost 1-2 bps. In addition, publication of an interview with Powell was uneventful. Sales included 5k EDU9 9812.5^ at 44.0, 7k 0EH 9700^ at 43.5, 5k 0EM 9700^ at 53.0, etc. Same in treasuries, where US August and Sept straddles each fell 10/64’s from Wed to Thursday settles: USQ 145.5^ from 1’36 to 1’26 and USU 145 from 2’50 to 2’40. Late in the day there was a buyer of well over 100k EDH9 9800c for 1.0 (EDH9 settled 9720.5). This was a short cover buy of a trade early in the year, -EDH 9800c to buy 9750/9737ps, but the open interest sheet only shows a decline of 7300 contracts, so data is sometimes suspect on prelim sheets….
–The indiscriminate vol selling may be somewhat misguided, as this morning’s news reveals a record June Chinese trade surplus. Interestingly, the yuan is at a new low this morning 6.6979, a level not seen since last August. From RTRS: “…data showing China’s trade surplus with the United States swelled to a record in June as exports grew could further inflame tensions.” USD stronger across the curve.
–Marginal new lows yesterday in 2/10, down 1 bp to 25.9 and in 5/30 to 19.5. While front end calendar spreads remain pinned to their highs (indicating high odds of a Sept hike), the flattening further back is relentless until the Fed cries uncle. EDU8/EDZ8 spread closed at its high of 20 and was 20/20.5 during Thursday’s session. Aug/Oct FF spread traded small at 21.5 and settled 21.0; this spread isolates the Sept FOMC.
–In the big picture, the flattening curve and declining yields on long dated assets spurs gains in equities as competition from FI dwindles. Earnings expected to be solid, and now appear more than adequate against 10’s that seem to have decisively turned away from the 3% level (2.85% yesterday).
–The Fed releases its semi-annual Monetary Report to Congress this morning.

Posted on July 13, 2018 at 6:22 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 12. Commodity Carnage

–It’s been a tough month for most commodities besides oil, which did its best to catch up yesterday with Aug WTI down 3.73 yesterday to 70.38. Grains made new lows. Dec Corn was 4.25 in early June, closed at a new low yesterday near 3.53. Beans have plunged from 10.60 to 8.48 over the same time frame. Copper and other industrial metals also hit new lows yesterday. Copper is down 17% from last month’s level, from 3.31 to 2.75. Gold and silver had seen small bounces in the first few sessions of July, but went back down to the lows yesterday. Emerging markets were again under pressure, but it really all seems to be tracking China, where the yuan was set higher this morning and SHCOMP rallied.
–Yields fell yesterday in spite of the ten year auction. Ten year yield fell 2.9 bps to 2.842%. On the euro$ curve, greens were the leaders, rising 4.25 bps, while reds were up only 3.0. Reds to all deferred contracts made new lows. Red/green -1.25 to NEGATIVE 1.25 bps. Red/blue -1.125 to -3.125, and red/gold -0.875 to -0.875. Ominously, the inversion is seeping further up the curve. Yesterday was the first time I saw EDZ19/EDZ20 close underwater, at -1.0. In treasuries, 2/10 posted a new low of 26.8. This in spite of robust PPI data yesterday (yoy Core +2.8. Today brings CPI, expected 2.9 headline and 2.3 Core on a yoy basis, which would both be 0.1 higher than last month.
–The market is pricing high odds of a hike in September, but after that it’s becoming murkier by the day. 30 year auction this afternoon.

Posted on July 12, 2018 at 5:28 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 11. Trump admin pokes China while preparing for NATO/Putin

–Late yesterday, the Trump administration ratcheted up the trade war with China by threatening fresh tariffs, causing an immediate sell off in stocks.  Russell 2000, on a technical basis looks particularly vulnerable, with the index setting a slight new high early in the day (1708 cash index), creating a double top with June 21 high, had an outside day and closed lower.  Ultimate target measures to 1550-1560.
–The big trade of the day was a buy of 150k TYU8 120/122 call spread for 33 to 34 ref TYU8 120-01 to 02.  This same spread was bought 100k on June 11 for 29/30, and then on Friday’s employment data 100k TYU 121/122 call spreads were sold at 15.  Settlement was 39 and 5 for 34, versus 120-005.  Delta is 39, so this represents 58,500 contracts.  One full point in the contract is worth about 13.25 bps, so with the ten year yield at 2.871, the upper strike is about 26.5 bps away, or a yield of 2.605-2.61.  Open interest in strikes +141.5k and +165k; the 120 strike has a whopping 281k open.  Also, OI was up in all treasury futures with FV and TY both +22k.  Today the treasury auctions $22 billion tens; 150k contracts is notional $15 billion.
–There has been a decent amount of coverage of last Friday’s COT report, which reported that as of July 3, the net speculative short was a record 500k contracts, I suppose one can think of the call spread as a significant counterweight.  I would also note that the chart of base metals along with other factors, suggests that demand for industrial commodities is waning (BBG base metals index at its lowest level since Q3 last year).  In addition, while some latam currencies have bounced, India rupee, Indonesia rupiah and Thai baht are all near new lows.  (This morning USD stronger across the board).  Further, comments by Italian European Affairs Minister Paolo Savona warning that the country had to be ready for “all eventualities” on Eurozone membership was a weight on the Italian banking sector (IT8300).  In short, there are many factors suggesting that fixed income should see safe haven flows, in spite of supply considerations like today’s auction.
–New low close in red/green euro$ pack spread yesterday at 0.0; red/blue and red/gold both slightly inverted.  New low in 5/30 just below 20 bps.
–News today includes PPI expected +0.2 both headline and Core, with yoy Core +2.6%.
Posted on July 11, 2018 at 5:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 10. Copper vs Oil

Attached is chart of front copper vs front crude oil contract.  Seeing a pretty large divergence in direction on these two economically sensitive commodities.  However, I have noted in rectangles several other instances of copper declining while oil maintained a rally, and these have concluded in favor of the rising oil trend.  However, in this case, copper is making a significant new low in the face of higher oil…not sure how it resolves this time.




Posted on July 10, 2018 at 7:05 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 10. Crude oil and copper sending different signals on economic strength

–Remarkably quiet in rates even as stocks soared.  The British pound was hit after the resignation of Boris Johnson from May’s cabinet, but it’s still holding above the low set in late June.  Oil was lower early in the session but came back to close positive.  CLU8 71.98 up 41 cents…highest high has been 72.85.  Premium sales were the main theme in rate options.
–Today includes NFIB small business optimism which was 107.8 last month, the highest since 1983 when it hit 108.0  Three year note also auctioned.  Wednesday and Thursday bring inflation data, PPI then CPI along with ten and thirty year bond auctions.  While China’s stock market continues to engage in a slight rebound, note that Copper (HGU8) had a strong symapthetic bounce with SHCOMP and CNY yesterday, but has nearly completely reversed the move this morning.
–Interesting article on ZeroHedge outlines runaway pension growth in Illinois.  “In 1987, pension promises made to active workers and retirees in the state’s five state-run pension plans totaled just $18 billion. By 2016, they had ballooned to $208 billion.  

That’s a cumulative 1,067 percent increase.
Contrast that to the state’s budget (general fund revenues) which was up just 236 percent over the same time period. Or household incomes, which were up just 127 percent. Or inflation, up just 111 percent.  Promised pension benefits have blown past the ability of the state, the economy or taxpayers to pay for them.”
According to a Chicago Tribune story in May 2018, “The funding shortfall across Illinois’s five retirement systems climbed to $137 billion by last June, a jump of about $17.8 billion since 2015, after the government for years failed to made adequate contributions.”
Chart below from ZeroHedge post


Posted on July 10, 2018 at 5:24 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 9. China supporting stocks

–China seems to be having a much larger impact on global markets.  Yuan slightly stronger and Chinese stocks rebound; here’s a clip from Reuters: “China’s bourses sailed higher after its securities regulator said on Sunday it planned to ease restrictions on foreign investment in the Shanghai and Shenzhen stock markets, and told banks to significantly cut lending rates to small businesses.”  This morning US stocks are higher, and the USD weaker, rate futures slightly lower.

–On Friday there was a seller of 100k TYU 121/122c spreads at 15/64.  This is a rolldown associated with the June 11 buy of 100k 120/122cs for 29 to 30.  Open interest fell 76k in 122 c and rose 89k in 121k, so the original position has been switched to long 120/121cs which settled 29.  Yields were lower across the board by a couple of bps after Friday’s solid employment report.  Ten year yield -1.1 to 283.9.   Red euro$ pack rose 2.5 bps.
–July euro$ midcurves expire Friday, and the Fed announced it will release its semi-annual monetary report on Friday in preparation for Powell’s congressional testimony the following week.
–A couple of late trades of note, buying of way out of the money long dated puts:  EDH21 (long dated green march) 9550p 3.0 paid for 10k; they had already settled 2.75.  Also EDM20 (long dated red june) 9587p 2.0 paid 5k, settled 1.75. and 5k EDZ20 9525p for 1.5 (1.25s).
Posted on July 9, 2018 at 5:59 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 8 Weekly. Running with the bond bulls

Despite the release of FOMC minutes and Friday’s employment data, net week-over-week changes were small.  The most notable market event was inversion of the Eurodollar curve, where the red pack (2nd year forward) to gold pack (5th year forward) settled  NEGATIVE 0.5 bp on Thursday (it bounced back to +0.75 Friday).  In treasuries, 2/10 and 5/30 also posted new lows for the cycle on that day.  On the week, the 30 yr bond yield fell 5 bps to 293.8.  On a technical basis, this level is a just below the 50% retracement from December’s low of 268.8 to May’s high of 324.7.  It is also below the closing yield set at the end of May, when bonds spiked higher due to European stress associated with fears that Italy might abandon the euro.  At that time, the Italian bank index was posting a new low, and the euro was testing 1.15, also a new low for the year.  Since then, there have been small rebounds, with the euro closing 1.1744, up from 1.1683 in the previous week. On Friday the Italian government indicated plans to raise the Deficit/GDP target to around 1.4% from the current goal of 0.8%, but that news was taken in stride as a modest backslide in the context of the broader concerns about the Euro.

Five and ten year yields are still well above end of May levels, so perhaps calling for a general rally led by bonds is premature.  However, it appears as if the long end is interpreting the trade war as more of a drag on economic growth than as an inflationary catalyst.

On Friday, Ray Dalio tweeted, “Today is the first day of the war with China.”  Also note that he has recently fretted about how the economy will react when US tax stimulus fizzles in 2020.  Indeed, on the Eurodollar futures curve, the most negative section is the 2020 contracts vs the 2021 contracts.  (EDH0 thru EDZ0 average 97.025, while EDH1 thru EDZ1 average 97.050, for a spread of -2.5 bps).  Obviously the markets have taken Dalio’s concerns to heart.  I would also note that back month Eurodollar vol remains very well bid given global uncertainties.  For example EDH21 9700 straddle was 92.0 bps at the end of February with the contract settling 9702.5 on 27-Feb.  In mid-April the contract was 9699.0 and the straddle was 87.5, and just prior to the end of May it was as low as 83.0.  On Friday this straddle settled 88.75.  Either these are great sales, or the market is hinting of trouble ahead.  Interestingly there was a late buyer of 10k EDH21 9550p for 3.0 on Friday after it had already settled 2.75.

Of course, it is not only Dalio that thinks trade wars could be more negative than generally thought.  Here’s a quote from BBG on June 29:

European Central Bank President Mario Draghi warned European Union leaders that an escalating trade war between the U.S. and the world’s biggest economies may have a larger impact than policy makers and investors currently expect. …Rising tensions could erode confidence to an extent that is difficult to gauge, Draghi told the 27 heads of government from the bloc at a summit in Brussels on Friday. The complexity of intertwined global supply chains could magnify the impact on the world economy, he said, according to a person familiar with the discussion, who asked not to be named as the debate wasn’t public.

On Monday Draghi addresses the European Parliament in Brussels, and the sentiments above are likely to be expounded upon as tariffs have now been instituted.  As Lacy Hunt mentioned on a CNBC interview recently, the synchronized global growth story is now more likely to turn into a synchronized global slowdown.

Below are just a couple of charts below relating to the Euro.  The top chart plots the one year Eurodollar calendar spread EDZ8/EDZ9 vs the same in Euribor (ERZ8/ERZ9).  The euribor spread (in white) has been trending lower since February, while the Eurodollar spread (blue) has held a sideways pattern.   The second chart shows the same ERZ8/ERZ9 spread as a line chart in white, with the EURO overlaid in green.  Obviously a pretty strong correlation between these two.  This week’s euro rally is either just a relief reaction, or it may be an indication that Eurodollar spreads are going to see a bit more flattening in the nearer part of the curve as a reflection of negative consequences of trade wars.

While Draghi speaks at the start of the week, the Fed will release the Monetary Policy Report prepared for Powell’s semi-annual Congressional testimony on Friday, July 13.  Powell’s actual testimony will occur the following week on the 17th.  Nothing indicates that Powell’s Fed is deviating from a course of gradual rate hikes.  If end of the week comments DO indicate a change, then a rush to exit from flatteners will ensue.

This week also includes treasury auctions which will be interesting as the threat of Chinese sales of treasuries hangs over the market as retaliation for tariffs.




On Friday there was a sale of ~100k TYU 121/122cs at 15/64s.  On June 11, TYU 120/122cs bought for 29 to 30 in 100k.  Open interest shows a drop of 76k in 122c and rise of 89k in 121c, so the original position has now been switched to long 120/121cs. Settles: 120c 52, 121c 23 and 122c 10.  Interestingly, all treasury futures showed open interest increases on Friday’s modest rally, +16.6k TU, +21k FV, +30.5k TY and +5.8k in US.  Portends strong demand at auctions.




6/29/2018 7/6/2018 chg
UST 2Y 252.8 254.1 1.3
UST 5Y 273.3 272.1 -1.2
UST 10Y 285.3 282.9 -2.4
UST 30Y 298.8 293.8 -5.0
GERM 2Y -66.5 -65.8 0.7
GERM 10Y 30.2 29.2 -1.0
JPN 30Y 70.6 67.9 -2.7
EURO$ Z8/Z9 32.5 32.0 -0.5
EURO$ Z9/Z0 1.5 1.0 -0.5
EUR 116.83 117.44 0.61
CRUDE (1st cont) 74.15 73.80 -0.35
SPX 2718.37 2759.82 41.45
VIX 16.09 13.37 -2.72



Posted on July 9, 2018 at 5:57 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 6. Employment data

–Trade war with China becomes a reality as tariffs begin.  Employment data today with NFP expected 195k, average hourly earnings +0.3 and +2.8% yoy.  New curve lows yesterday, for example 2/10 closed at 28 bps, down just over 3 bps and lowest since 2007.  Even more stark was the inversion in red/gold eurodollar pack spread, which settled -0.5 bps, -1.375 on the day.  This is the first inverted close since March of 2000.
–While stocks rose yesterday, there are many pockets of weakness.  For example, copper continues to plunge; for a broader perspective look at DBB, the base metals etf.  XLF, the financials etf is also under pressure, beset in part by the curve’s flatness (chart below).  Dow transport index is flipping around the 200 day moving average, perhaps negatively affected by soaring energy costs.  Soybeans crushed by trade war concerns.
–Although the usual pre-employment put 1×2’s were bought on the first red yesterday (+9700/9687.5p 1×2 for 1.0), there were some long delta buys further out the curve.  For example EDU9 9725/9775c 1×2, 4 paid 30k, settled 3.5 ref 9706.0.  In treasuries, USQ 147/148c spread 12 paid for around 15k, settled 11 ref 145-16.
–FOMC minutes released in the afternoon contributed to the flattening theme, with gradual tightening still on course.  No members saw downside risks for inflation.  “…a number of participants noted it amy soon be appropriate to also modify the language that policy ‘remains accommodative’ “.

Posted on July 9, 2018 at 5:45 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options