Dec 12. Tales from the Crypt(o)

–Extremely weak close in front end of Eurodollar curve in spite of a small terrorist bombing at a NYC subway.  Near contracts settled at new lows; interesting in light of Dec midcurve option expiration on Friday.   EDZ8 closed at new low settle of  9790 with 0EZ 9787.5p (1.75s) still having 353k in open interest.  Large early trade was +50k EDZ8/EDZ9 spread for 17. (Appears to be new, with OI +18k and +34k in the two contracts). Late in the day the spread was 17.5 bid; 18.0s.  This trade perhaps has added significance given the FOMC announcement Wednesday.   The Fed’s Projection materials from September show end of year FF rate at 2.1 for 2018, and 2.7 for the end of 2019, so that’s 60 bps.  In June, the projected spread was even wider: 2.1 and 2.9.  Just prior to the Sept 20 FOMC, EDZ8/9 was 18.  In June it was 22.5.  The recent high has been 25.  EDZ7/EDZ8 closed right at 50 bps.  At day’s end EDZ7 went 9840 offer, so 9837.5 puts are still in play.

–Odds for quarterly hikes after Wednesday’s have grown.  For example, Feb/April FF spread which isolates the March FOMC, closed up 1 bp at 16.5, and May/July also +1 to 12.5.  So March is around 2 in 3 and June is 50/50.

–Not much change on the longer end of the curve despite the ten year auction.  30’s are auctioned today.  PPI this morning expected +0.3 with Core +0.2.  Oil is up 28 cents as of this writing; last week’s sell off has been reversed.  Stocks were quite strong into the end of the day.  But if you really want to see powerful rallies underpinned by flawless fundamentals, take a look at RIOT and CRCW (pointed out to me by colleague RW).  The latter has soared from $3.30 to yesterday’s close of $642.00, providing it with a market cap of $8 billion.  The name of this firm is Crypto Co.  Its listed industry is “Clothing”, but of course it has transformed into a Digital Currency Trading Platform, a natural progression from printed t-shirts. (Actually, while I DID see Clothing as the industry, I am not sure what products were sold.  What i did learn from Bloomberg is that as of Q3, assets were $3.6 million with a loss of $1.5 million).

https://www.bloomberg.com/news/articles/2017-12-07/bitcoin-boom-makes-aussie-a-billionaire-for-less-than-an-hour

–I’ll leave you with a more sobering thought from Doug Noland: Household Net Worth ended September at a record 498% of GDP. This is up from the 378% Q1 2009 trough level. It also surpasses the cycle peaks of 478% back in Q1 2007 and 435% in Q4 1999.  Frothy asset prices?

Posted on December 12, 2017 at 5:00 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 11. A few notes

–(Reuters) – Chinese banks extended 1.12 trillion yuan ($169.27 billion) in net new yuan loans in November, well above analysts’ expectations and the previous month. M2 grew 9.1 in Nov, vs expected 8.9.  Outstanding yuan loans at the end of November grew 13.3 percent from a year earlier, faster than an expected 13 percent rise.

–Doesn’t appear to be much of a crackdown…

–(Bloomberg)  As for the quantitative easing that marks its 10th anniversary in the U.S. next year, Bloomberg Economics predicts net asset purchases by the main central banks will fall to a monthly $18 billion at the end of 2018, from $126 billion in September, and turn negative during the first half of 2019.

https://www.bloomberg.com/news/articles/2017-12-11/investors-told-to-brace-for-steepest-rate-hikes-since-2006

–Treasury auctions three and ten year notes today, and 30 yr bonds on Tuesday.  PPI and CPI on Tuesday and Wednesday.  FOMC announcement and press conference on Wednesday.

–Uneventful Friday except for weakness in EDZ7, which has slightly rebounded this morning to 9840.75.  The 9837.5p is still in play with one week left and 985k open

–A couple of week-over-week changes in ED straddles:  EDU19 9775 straddle, 51.5 ref 9779.5 on Dec-1, 49.5 ref 9778.0 on Dec-8.  3EU1 9762.5^ 44.0 ref 9759 in EDU21, vs Friday at  44.0 vs 9757.5.

Posted on December 11, 2017 at 4:42 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 10, 2017. A Nice Place to Visit

Rocky Valentine, a small time 1950’s gangster robbing a pawn shop is shot dead by police.  He awakens to find himself in a lavishly appointed suite where his guide, Mr Pip, is there to cater to his every desire.  Beautiful women surround Rocky as he gambles at the casino in impeccably tailored suits and never loses.  Whatever he wishes, the portly butler jots it in his notepad and it occurs.  But it all begins to wear thin. Rocky is bored by riches without effort and gambling without uncertainty.  Anxiously running his hands through his hair, he tells Mr Pip, “If I gotta stay here another day I’m gonna go nuts!  Look, I don’t belong in heaven, see?  I want to go to the other place.”  Mr Pip replies, “Heaven?  What ever gave you the idea you were in heaven, Mr Valentine?  This IS the other place.”  As Rocky futilely tries to open the apartment door, the bemused Mr Pip starts to laugh…

“A scared, angry little man who never got a break.  Now he has everything he’s ever wanted- and he’s going to have to live with it for eternity, in the Twilight Zone”  –From the 1960 episode, A Nice Place to Visit. https://www.youtube.com/watch?v=77ueTRaYTwg

When the market died in 2008/2009, the Central Banks came in to provide every comfort, and squelch every uncertainty.  Passive investing has made the lives of macro and value investors a living hell.  Stocks only rise, without even a 3% pullback. As noted in last week’s Z1 report from the Federal Reserve, Household Net Worth is at a new record $96.9T, having increased every year since 2008’s nadir of $56.2T.  Long dated interest rates are low, with the curve as flat as it’s been in a decade.  US equities are near record highs, at the high end of valuations according to many observers.  Volatility measures are low across markets.  Corporate spreads are extremely tight.  But these conditions can’t continue for eternity.

We are now entering the realm of balance sheet roll-off at the same time that new tax laws threaten to increase the deficit.  [Good piece on QT by Wolf Richter; link at bottom].  Swap spreads have rallied all year, notably since September, as the regulatory environment on banks is likely to be relaxed, and due to end of year demand for long dated assets by pension funds.  Since Sept 1, the ten year swap spread has gone from -5 to +1 (it was as low as -15 this year) and the thirty year has gone from -35 to -20.  So perhaps the extra treasury supply from QT and increased issuance can be easily absorbed. (Perhaps not).  There is also a pervasive bias (which we heard just this week from a wealth manager) that the government won’t allow long rates to increase appreciably.

Certainly, with data like Friday’s yoy Avg Hourly Earnings growth of just 2.5%, there doesn’t seem to be undue pressure on the Fed to continue tightening after this week’s upcoming hike.  The market is not reflecting a particularly aggressive Fed.  For example, in the first half, there is slightly more than one hike priced:  EDZ7 to EDM8 closed just above 30 bps and Jan’18 to July’18 Fed Fund spread closed at 28.5 (FFF8/FFN8).  Both of these spreads capture the March and June FOMCs.  Full year pricing is for two hikes: EDZ7/EDZ8 is 48.75 and Jan’18/Jan’19 FF is 46.  Spreads beyond that are very tight, with the red/green (2nd year to 3rd year on the Euro$ strip) closing at 12.375 bps, less than 1/8%.

While the Fed’s dot plot from September projects 3 hikes in 2018 to a FF target of 2.1%, and further tightening in 2019 to 2.7%, the market isn’t buying into it.  I don’t anticipate much change in projections at this week’s FOMC, though perhaps GDP for 2018 will be ratcheted up slightly from 2.1.

In terms of the flatness of the curve, I think the market has it wrong.  Two factors have recently accentuated the flatter bias.  One has been year-end pension demand for longer dated assets, and the other has been turn of the year pressure for funding.  This latter effect is clearly seen in the weakness of EDZ7 which pressed to new lows going into next Monday’s expiration.  As of Friday, there were 5 bps of convergence between EDZ7 and the 3month Libor setting, a huge difference with only a week to go.  EDZ7 settled 9840.25, and the now actively traded 9837.5 puts settled at 0.5, with 985k contracts still open.   Going into 2018, these factors will abate.  And while US wage inflation doesn’t appear to be accelerating, there are some other signs that prices may firm.  For example, Bloomberg notes that the Baltic Dry Freight index has surged 72% this year. “The United Nations’ Food & Agriculture Organization expects the world food bill to be the second-highest on record this year, driven by more expensive freight and rising demand for foodstuffs.” [link at bottom]  Note that PPI is released Tuesday, and CPI Wednesday morning, prior to the Fed announcement.  With QT and increased treasury issuance, along with the possibility of increasing prices, an inflation premium may well return to the long end in 2018.

One last small note about year-end funding.  There is a large conglomerate in China, HNA.  This company owns a 10% stake in Deutsche Bank and had bought a 25% stake in Hilton Worldwide Hotels in 2016.  According to BBG, HNA Group’s financing costs put it in the ranks of the world’s largest corporate debtors, and those financing costs are growing by the minute.  The company has been issuing short term, high interest rate debt, (8.875% for one year) though it claims those rates are simply due to ‘year-end tightness’.   According to a Dec 8 piece by BBG, HSBC will no longer pursue deals with HNA due to its huge debt load.  Beware of reverberations from China’s stricter stance on financial leverage; there’s potential spillover in global stock markets.

Bitcoin

I was going to skip any mention about bitcoin, but it’s simply impossible as futures contracts are about to be listed.  Clearing firms are understandably concerned about being involved: Friday’s range was over $3000 on one bitcoin, which would equate to a swing of $15.000 for a one lot on the CME contract.  There’s an amusing post on ZeroHedge over the weekend, saying that Bulgaria’s government now owns 213,519 bitcoins (approx. value of $3 billion) due to police seizure of an organized crime cache. [link at bottom]  The article suggests that the Bulgarian gov’t may become a natural hedger…but I would guess that other governments are salivating at the prospect of seizures as well.

One last bitcoin note/chart.  Idea lifted from theMacroTourist.com    Below is a chart of bitcoin and the Shanghai Comp.  The scales are, of course, much different.  But there was a time when China stocks were also parabolic.

 

_________________________________________________________________

12/1/2017 12/8/2017 chg
UST 2Y 177.4 179.4 2.0
UST 5Y 211.6 214.5 2.9
UST 10Y 236.2 238.1 1.9
UST 30Y 275.7 277.3 1.6
GERM 2Y -70.5 -73.9 -3.4
GERM 10Y 30.5 30.7 0.2
JPN 30Y 83.2 81.9 -1.3
EURO$ H8/H9 39.0 37.5 -1.5
EURO$ H9/H0 15.0 13.0 -2.0
EUR 118.96 117.74 -1.22
CRUDE (1st cont) 58.36 57.36 -1.00
SPX 2642.22 2651.50 9.28
VIX 11.43 9.58 -1.85

 

The Fed’s QE-Unwind is Really Happening

https://www.bloomberg.com/news/articles/2017-12-05/soaring-freight-costs-will-squeeze-traders-boost-food-prices?cmpid=BBD120517_MKT&utm_medium=email&utm_source=newsletter&utm_term=171205&utm_campaign=markets

http://www.zerohedge.com/news/2017-12-06/moment-market-broke-behavior-volatility-changed-entirely-2014

https://www.bloomberg.com/news/articles/2017-12-05/soaring-freight-costs-will-squeeze-traders-boost-food-prices?cmpid=BBD120517_MKT&utm_medium=email&utm_source=newsletter&utm_term=171205&utm_campaign=markets

http://www.zerohedge.com/news/2017-12-08/bulgaria-government-shocked-discover-it-owns-3-billion-bitcoin

https://www.bloomberg.com/news/articles/2017-12-04/hna-is-said-to-be-probed-over-reporting-of-deutsche-bank-stake

https://www.bloomberg.com/gadfly/articles/2017-08-31/hna-s-scandals-aren-t-the-problem

https://www.bloomberg.com/news/articles/2017-12-08/hsbc-is-said-to-step-up-scrutiny-of-china-s-indebted-hna-group

Posted on December 11, 2017 at 3:44 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 8. It’s a league game Smokey

–Employment report today with rate expected 4.1 and yoy Average Hourly Earnings +2.7%.  The Atlanta Fed’s wage growth tracker has been between 3.2 and 3.6% all year, last at 3.4.

–There was finally a slight steepening of the curve yesterday; likely profit taking from the lows in front of today’s data.  The ten year yield rose 4.4 bps to 237.2.  2/10 rose to 57.  Red/gold euro$ pack spread tacked on a bit over 3 bps, rising to 32.875. Red to green pack spread 12.875, green to blue 10, blue to gold 10.  Just a flat steady line.

–However, there’s a swirl of drama in the front end of the curve.  EDZ7 this morning prints 9840.75, edging ever closer to the 9837.5 strike with over 1 million in open interest.  But wait, EDZ7 could never break the strike with Libor indicating a rate 5 bps lower, could it?  So here we are, with futures indicating the libor setting should be higher, and libor rigging investigations still relatively fresh.  There are 1.6 million open in EDZ7.  As Walter from the Big Lebowski might say, “If you mark that frame an eight, you’re entering a world of pain.”

–Another trade which deserves honorable mention is the buyer Wednesday of USG 153 puts at 1’05 when USH was above 154.  Now in the money as USH slid 152-28; the puts rose to 1’46.

–In the bigger picture, if end of year pension buying is nearing an end, and inflation shows signs of acceleration due to wage growth, AND the Trump tax plan blows up the deficit, then there can only be one direction for long treasury rates going into the beginning of the year.

–Fed’s Z1 report came out yesterday.  Once again shows record household wealth.  But what was sort of interesting was the borrowing of the Federal Gov’t in Q3 $1.655.7T.  By contrast, Total business  sector borrowings were 751T and total Household including Mortgages was just 550.3T.  So the Federal Gov’t borrowed $354.3T more than the private sector.   Likely an anomaly as borrowings were probably high due to hurricane clean up.    But the rate of growth is also worth noting:  HH at 3.7%, Business 5.4% (of which the larger corporate sector was 6.4%) and Federal Govt +10.3% annual growth.  The last 2 qtrs of Federal gov’t growth were +3.6 and -2.6.  So when some analysts suggest that the new tax plan could blow up the deficit, it bears keeping in mind.

 

https://www.youtube.com/watch?v=t_TdCs9GA4w

Posted on December 8, 2017 at 5:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 7. Diversity of themes

–Long end of market remains relatively firm. Ten year yield fell 2.8 bps to 232.8; 2/10 notched a new low at 52.6. Last Friday’s spike rally associated with the Trump/Flynn news was eclipsed in USH…but no so in TYH or shorter maturities.  On the bond rally there was an opportunistic put buyer: USG7 153p bought in size of 12k, mostly at 1’05.  This put settled 1’11 ref 154-02 with 40 delta.  The ten year swap spread finally went positive this month for the first time since Q3 2015.  The 30 yr swap spread is also at its highest level since Q3 2015, closing at -20 bps (low this year was in January at -52).  At least part of the move is credited to pension fund demand for the long end before year end.  While implied vol was firmer mid-day, after the bond put buyer was done, vols generally eased into the close.

–While copper stabilized after being thrashed on Tuesday, yesterday it was oil’s turn with CLF8 down 1.70 late at 55.92. I would also note weakness in Emerging Mkt index. EEM gapped lower yesterday and closed -1.35%.  In futures the same is reflected by MESZ7.

–EUR USD cross ccy basis indicates pressure for dollar funding at year end.  EDZ7 final settlement is one week from Monday on 18-Dec and there were still 5 bps of convergence to libor as of yesterday morning.  Heavy selling in EDZ7, though open interest didn’t change much (EDZ7 9842.5s).  Red/green euro$ pack spread (2nd year to 3rd year) closed at a new low of 12.125 bps.  EDM19/EDM20 closed at just 9.5 bps; back end of dollar curve is completely flat.

–Some large and interesting option plays yesterday.  Buyer of 40k EDJ 9825/9837c 1×2 for 0.5 with 0EH 9812/9825/9837/9850 c condor for 1.0.  The April call 1×2 would suggest no Fed hike in April.  In terms of the call condor, 0EH 9812/9825 c spd settled 1.25; probably can pay that this morning and omit selling the upper call spread at 0.25.   There was also a new buyer of 50k 0EM 9850c for just over 1 bp.  One participant termed them the ‘Jerusalem calls’ as Trump stirred the mideast pot with plans to move the US embassy to Jerusalem.

–One last note concerns ECB purchases of corporate paper.  It was widely reported yesterday that Steinhoff bonds of 2025 are sitting on the books of the ECB (from par) and plunged to 60 cents in the last couple of days.  Likely of no consequence to the portfolio, but it sharpens the focus on just what Central Banks should be buying…

 

Posted on December 7, 2017 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 6. Flatlining

–Once again the curve (should we even call it that anymore?) flattened further on Tuesday.  5/10 treasury spread closed at just 20.6, it was a bit over 40 in early October.  Part of the demand for the long end may be related to (underfunded) pension buying before tax laws change.  But clearly, the flattening trend has been in place all year.

–The chart below is 5/10 treasury spread vs DXY.  Ordinarily one might think that higher short end rates would have the effect of flattening the curve while supporting the ccy.  In this case the market appears to be looking past higher short term rates.  Indeed both 2’s and 5’s posted new high yields of 182.2 and 215.0.  2/10 collapsed to 53.4, down 4 bps on the day, while red/gold euro$ pack spread closed below 30.  Green to blue pack spread  settled just 8.625 and blue to gold 8.125.  After December’s move, will the Fed continue to hike into the predictive powers of the curve flattener?

–Copper was walloped yesterday with HGH8 down over 14 cents; early October’s run to new highs has vanished.  Stocks are getting a bit more unsettled, though VIX remains subdued.  Shanghai Comp took a spill this morning though has now regained much of early losses.

–Trades yesterday included late selling of 0EZ 9787p at 2.0 ref 9791. EDZ8 now print 9792.5; open interest in the 9787p fell 55k and is down to 372k.  Continued buying EDU8 9775/9762ps for 2.0… need a hike every quarter in 2018 to make this one work.

Chart: Dollar Index DXY in green.  Treasury spread 5 to 10 yr yield in white

Posted on December 6, 2017 at 5:24 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 5, 2017. Fangs bite

-Big-cap tech was unimpressed by the Senate’s passage of the tax bill.  As can be seen on the attached chart the NYFANG index closed below November’s range. MSFT -3.8%, AMZN -2.4%, FB -2.1%.  However, interest rates still moved higher as the curve flattened to new lows.  Two and five year notes both rose 3.2 bps to new highs at 180.6 and 214.8 respectively.  Tens were up 1.7 bps; 2/10 fell 1.5 to a new low of 57.3.  5/30 new low of 62.4 and red/gold ED pack slipped 2 bps to a new low of just 31.125. Near eurodollar one-year calendar spreads made new highs, deferred spreads made new lows.  EDZ7/EDZ8 closed 53 and FFF8/FFF9 at 46.5, both more or less priced for two hikes next year.   The Fed’s dot plot projection is 2.1% for 2018, or three hikes, so perhaps -for the first time ever- the dots and actual outcome will sync up.  New projections to be released at next week’s FOMC.  Given steepness in front relative to back, the market is forecasting ‘front-loaded’ hikes that will slow future growth.

–A couple of interesting articles this morning.  FT has an opinion piece ‘Stop worrying about China’s debt’ https://www.ft.com/content/0ca50290-d82c-11e7-9504-59efdb70e12f

The author’s argument is that ‘credit risk’ in China is sovereign risk, and that the country has huge savings rates.  I guess I give a bit more credibility to the PBOC’s Zhou who warned of a potential Minsky moment in October. I would also note that China’s ten yr gov’t yield has been rising, and the Shanghai Comp falling.  During the crisis, the US shifted private debt onto the public balance sheet.  So far, that’s worked out.  China has been trying to curb rampant debt growth in the ‘private’ sector and SOEs.
–The second article is a short piece by Martin Armstrong warning that gov’ts are coming for bitcoin.  “The operators of the trading platform Coinbase were forced by court ruling to notify the IRS of the identity of over 14,000 investors who were trading $20,000 in Bitcoin. Users were affected if their trading volume had exceeded $20,000 at the beginning of 2013 by the end of 2015.”  https://www.armstrongeconomics.com/world-news/cryptocurrency/bitcoin-being-declared-a-financial-institution-beware/
–Service ISM today expected 59.0 vs 60.1 last.
Chart of NYFANG index

Posted on December 5, 2017 at 5:17 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 4. Could faster normalization kickstart VIX?

–Given the Senate passage of the tax bill and ABC’s retraction of a key part of the ‘Flynn testifying against Trump’ story, the market reaction is somewhat muted.  Eurodollar contracts made new lows but have bounced.  In late October, TYH put in a low of 123-27, this morning’s low is 123-30.  Stocks are, of course, higher and bitcoin continues its surge.  But with increased institutionalization (CME listing a bitcoin contract on Dec 18) comes increased government scrutiny and intervention.

–EDZ7/EDH8 spread prints 19, so odds of a March hike following December have ratcheted up to better than 3 in 4.  It’s not so much a function of inflation or wages at this point.  Rather, it’s whether or not the Fed has the guts to lean against rampant financial speculation in equities.  If so, then curve inversion won’t be far behind.  And it may well be that improvement in corporate tax flows, compounded into the future, justify increased valuations.  However, the task at hand for the Fed would then be to normalize more quickly.

–Interesting summary of a Jim Grant interview with Alan Fournier.  The condensed version is that ‘volatility’ has become an income generating asset class, and Fournier surmises that many pension funds and other institutional investors have no idea what kind of tiger they’re riding.  Documentary preview:  The camera scans around an investment conference of well-dressed professionals.  The voice-over says, “How could all these intelligent investors, entrusted with the pensions of millions of hard-working Americans, have bought into the schemes pedaled by slick investment banks that volatility would never rise again?”

–Final note, the VIX position of short 12 puts vs long the 15/25 c 1×2 in size of 230k has reportedly been rolled from Dec into Jan.  I need to double check this info, as the open interest levels I see don’t reflect the change yet.  What I will say though, is that Dec 25 calls had a whopping 841k open, and while most vol sellers think they will be happy to see a pop that they can sell into, if and when it actually happens, they might get cold feet on the second leg up.

Posted on December 4, 2017 at 5:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 3. Teflon Don

Donald Trump was born in 1946.  In an ironic twist of history, that was also the year that Teflon products became commercially available.  From the Chemours website, “Upon checking a frozen compressed sample of tetrafluoroethylene, he [Plunkett] and his associates discovered that the sample had polymerized spontaneously into a white, waxy solid to form polytetrafluoroethelyne (PTFE). PTFE is inert to virtually all chemicals and is considered the most slippery material in existence.”  I am not making this up, check out the Chemours link at bottom.  PTFE was sold under the Teflon trademark name.  In another of its marvelously strange properties, PTFE can be dyed several shades of orange.  OK, I am making that last part up.

This, my friends, is no coincidence.  Rep. Pat Schroeder famously took to the House floor in 1983 and said of Ronald Reagan, “He has been perfecting the Teflon-coated presidency: He sees to it that nothing sticks to him.”  I would say that Trump has taken it up a notch; not even his own crazy tweets stick.

The market drama on Friday is a case in point, with a plunge in equities as ABC “News” announced that Flynn was ready to testify against Trump regarding Russian collusion.  Since that time, ABC retracted the story, saying that President-elect (as opposed to candidate) Trump asked staff to reach out to Russia.  ABC suspended reporter Brian Ross for the erroneous story, and a top FBI agent working for Mueller’s election probe was fired for anti-Trump texts.  How to respond?  Simply throw up… throw up your hands that is, and say, ‘Trump single-handedly created $5 trillion of market cap since he was elected, there’s no reason to think we can’t get another $5 trillion next year.   Get in there and BUY.’

Apparently, Goldman doesn’t quite see it that way, noting that global market cap was $74 trillion in June and has now soared to $93 trillion.   (So actually, Trump is responsible for nearly $20T of increased mkt cap, but humbly only takes credit for the US).  Anyway, the chart is reproduced below, from Business Insider.  From the article: ‘Goldman Sachs international analyst Christian Mueller-Glissmann and his colleagues think the “bull market in everything” is about to come to an end. “The average valuation percentile across equities, bonds and credit is the highest since 1900,” they write, and it will produce two likely medium-term scenarios: “Slow pain” or “fast pain” as a correction creates a bear market.’

Now this bear market that Goldman speaks of is probably also tied into the idea that the Fed will hike four times next year.  Deutsche Bank also modified its projections, and has jumped on the 4 hike bandwagon.  However, DB’s Capital Markets Outlook says stocks could continue to rise through 2018, while bonds won’t. “We expect interest rates to continue rising at both the short end and long ends of the yield curve in the US and the Eurozone.” (link at bottom)

At the start of the year, the ten year yield was 2.45%.  In the week just passed it popped just above 2.40%, but came back to close 2.32.  In other words, NO CHANGE.  The two year started 2017 at 1.20% but has seen a steady climb in the past three months, from 1.27 on Sept 8 to 1.78 this week, ending Friday at 1.73.  The five-yr has also seen a surge since September, from the year’s low of 1.64 to a new high for the year just above 2.14, (which was also the high in March) and closed 2.04%.

In September, as yields were making their lows, concerns about North Korea were at their peak.  Since then, growth prospects related to the just-passed tax legislation seem to have been the main driver.  Since early September, SPX is up about 7%.  Some members of the Fed have been fretting about frothy asset prices, and the short end is responding with wider near term calendar spreads.  In Eurodollars, the Dec’17/Dec’18 spread closed out the week just over ½% at 51 bps.  In Fed Funds, the Jan’18/Jan’19 spread closed at 45.  Both suggest that the market is comfortable with 2 hikes next year.  However, more deferred spreads remain compressed.  The red to green pack (2nd year to 3rd year) spread is just 14 bps, and green/blue (3rd to 4th) and blue to gold (4th to 5th) are both below 10 bps.  The 5yr to 10yr treasury spread clocked a new low beneath ¼% (closed at 24.6).  So there is very little concern that inflation is going to flare up; the market has embraced the idea of a terminal rate of 2.5% or so.  The 5yr 5yr forward expected inflation rate according to the St Louis Fed website is only 199 bps, having been as high as 220 in Q1.

If the new, genetically-modified Fed DOES hike rates at a more aggressive pace in 2018, then many commentators (including some on the Fed itself) fear that the curve will invert, signaling recession.  Indeed, given that the ten year in 2017 was pretty much unchanged, a new Fed Effective of 2.4% at the end of 2018 (4 more hikes assuming that a hike in 2 weeks is a done deal) would exceed today’s ten year rate.

What no one really seems to talk about is whether an inverted curve at rates of 5.25% is the same thing as an inverted curve with rates at less than half that level.  I am not sure if the implications are similar, but clearly there will be less room to maneuver in the event of a downturn.  It’s likely that the more dominant force will be credit spreads, and there have been preliminary signals that concerns are developing in that area.  For example, sell offs in hi-yld etfs are faster and associated with higher volume than rallies.  Additionally, while stocks didn’t really change much when all was said and done on the week, VIX  did close higher.

This week features the Employment Report on Friday.   Tax bill reconciliation between the House and Senate may also cause some market wiggles.

 

 

_________________________________________________________________

11/24/2017 12/1/2017 chg
UST 2Y 175.7 177.4 1.7
UST 5Y 207.2 211.6 4.4
UST 10Y 233.8 236.2 2.4
UST 30Y 276.0 275.7 -0.3
GERM 2Y -69.6 -70.5 -0.9
GERM 10Y 36.5 30.5 -6.0
JPN 30Y 83.2 83.2 0.0
EURO$ H8/H9 35.0 39.0 4.0
EURO$ H9/H0 14.0 15.0 1.0
EUR 119.32 118.96 -0.36
CRUDE (1st cont) 58.95 58.36 -0.59
SPX 2602.42 2642.22 39.80
VIX 9.67 11.43 1.76

 

https://www.chemours.com/Teflon/en_US/products/history.html

http://www.businessinsider.com/global-market-cap-is-about-to-hit-100-trillion-2017-12

https://www.db.com/newsroom_news/2017/capital-markets-outlook-2018–deceptive-calm-coming-to-an-end-en-11728.htm

Posted on December 3, 2017 at 11:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 30. Crypto rollercoaster

–Curve steepened slightly from depressed levels as yields rose.  Tens +3.9 bps to 237.4.  Red/gold pack spread +1 bp to 34.5, but still at the low for the past decade.  Wild action in bitcoin which hit a $2000 air pocket taking it from $11k to $9k but it bounced off the low and is now near $10k.  Total size of the crypto market is about $300 billion with Bitcoin a bit over half.  As a comparison FANG stocks lost $60 billion yesterday.

–Big trade in eurodollars was put roll down, details below.  Overall vol continues to compress.  With just over two weeks to go 2EZ 9775 straddle trade 10 bps (settled there ref 9778.5 in EDZ9).

–Marvin Goodfriend nominated as Fed Governor.  Carnegie Mellon professor; from a BBG piece:

In testimony before a congressional subcommittee in March, Goodfriend spoke of “the Fed’s failure to secure the credibility of its inflation target” and the risks that created for policy and the economy.

–News today includes Personal Income and Spending, both expected +0.3, with Core yoy PCE prices expected +1.4 from 1.3 last.

Trade below was exiting higher strikes, rolling into 20 delta puts (0EM 9762p 25d ref 9786.5, 2EM 9737p 20d ref 9775 and 3EM 9725p 20d ref 9764)

-40k 0EM8 97.875/97.625 put spread with
-40k 2EM8 97.625/97.375 put spread at 14.5
-25k E3M8 97.375/97.25 put 5 x 4 at 21 sold 97.375 put (5x)

Posted on November 30, 2017 at 5:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options