August 17, 2018. Philly Fed omen?

–Philly Fed index was a pretty big miss at 11.9 versus expected 22, especially when benefits from tax legislation are supposed to be coursing through the economy.  Could be an outlier, but this decline appears similar to 2015, which encompassed the last energy and emerging market rout.  Recall that hi-yield was crushed at that time, but holding well now.  While stocks and oil and metals bounced yesterday, trends in emerging markets remain dodgy, and the Italy bank index (IT8300) is making a new recent low today.  For a broader look at european financials, EUFN is an etf which has been in decline all year, though it had a modest bounce yesterday after having made a new ytd low Wednesday.
–Yields in the US rose as stocks powered ahead, with WMT surging 9%.  Nasdaq shed almost all early gains and is slightly lower this morning.  Yield on tens closed +2 bps to 287.1.  Red, green and blue euro$ contracts down 3 to 3.5 bps.  Long dated treasuries remain well bid, and will likely close out the week on new highs.
–Sort of an interesting comment by Sara Eisen of CNBC late yesterday, who said the strong dollar is becoming a problem for corporate America.  I believe she said that dollar strength was one of the biggest complaints in conference calls, ahead of concerns about tariffs.  –U of Michigan data today on inflation expectations.
Posted on August 17, 2018 at 5:12 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

August 16. Asia lower, but bouncing elsewhere

–Yields pushed lower yesterday on a ‘risk-off’ theme sparked by emerging market concerns (but we’re seeing ‘turnaround Thursday’ so far this morning).  US tens fell 4 bps to 2.85%.  While Turkey’s currency bounced, the broader issue of EM USD-denominated loans is leading to stress.  Is it tariifs, or is it the gradual withdrawal of dollar liquidity being engineered by the Fed?  In any case, Asian markets continue to press lower, with SHCOMP, Hang Seng and Kospi at new lows.  The Shanghai Comp is down nearly 25% from the high in January; it’s hard to imagine the sort of angst that would grip the US if SPX were to fall 25% in the next six months.  How about DOW 19000 instead of DOW 25000?  Tencent hammered today on slowing profits; a dent in tech.

–News that US-China trade talks are gearing up again is a modest plus.  This story by Reuters notes new restrictions announced by the PBOC “aimed at tightening offshore yuan liquidity and making shorting the Chinese currency more expensive”
–On the dollar curve, reds through golds ended +4.5 to +5 bps.  No sense of panic as stocks dipped.  Though straddles edged 0.5 bps higher, flows were mostly to the downside.  For example, a new buyer of 40k 0EZ 9687/9662ps for 5.0 (settled there ref 9705.5).  In the category of upside disaster protection, a buyer of 25k 2EU 9687/9725 rr, paid 1 for the call.
–Today’s news includes Philly Fed expected 22 from 25.7.
Posted on August 16, 2018 at 5:25 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

August 15. It’s not just the Turkish lira

–Yields edged slightly higher Tuesday with tens +1.6 bps to 289.1.  Several large option trades (noted below). Back month euro$ spreads (reds to more deferred) compressed further.  For example, EDU9/EDU0 was sold at 3.0 and settled 2.5, right at its previous low.  It’s worth noting as well that back month euribor calendars also fell  Red/grn ER pack spread closed just above 30 bps, only 3.5 bps above the spike low associated with Italian turmoil at the end of May. (ED red/green is -1.0). The green/blue pack spread actually made a new low at 32.25 vs 33 at end of May; forward hiking expectations are edging down. EUR made a new low. EURCHF tumbled, having been as high as 1.20 in April but 1.1280 late Tuesday.  Stresses related to the Turkish lira and other EM fx are seeping through the markets.  Notable this morning is a plunge to new lows in copper (down over 21% from the high in June, now 2.61), as CNY continues to depreciate, now over 6.9.  FT says Hong Kong had to defend its dollar for the first time since May.
–Interesting article on BBG this morning, saying the Fed may end its balance sheet taper sooner than the market expects.
Both India’s central bank head, Urjit Patel, and Indonesia’s Perry Wajiyo, had called on the Fed to halt the taper in early June. (FX charts attached).  It’s not just the Turkish lira, fx strains are evident across the world, and a weaker dollar would help alleviate some of those pressures.
–However, on the domestic front, the NFIB shows continued strength posting a near record high of 107.9, with only one higher reading of 108 back in June 1983.  Here’s a quote from the site:“Small business owners have never been so optimistic for so long, helping to power the second longest expansion in history… “Despite challenges in finding qualified workers to fill a record number of job openings, they’re taking advantage of this economy and pursuing growth.”  Does the Fed focus on the US and continue on a hiking course?
–Large trades included a buy of >50k EDZ8 9750/9762 c 1×2 for 0.5. Settled 0.5 vs 9738.0.  2EZ 9675/9650ps was sold 100k at 3.75.  Settled 3.75, appears to be rolling a short to a higher strike.
Posted on August 15, 2018 at 5:11 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Aug 14. Safe haven swissy

Chart shows SPX in blue, DAX in yellow and EURCHF white.  Fairly close track between DAX and EURCHF; SPX on its own currently….
EURCHF weakness a sign of stress?

Posted on August 14, 2018 at 1:02 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

August 14. A roar or a whisper

–A couple of headlines this morning:
Reuters: Shares regain footing as lira roars out of rout
WSJ: Global stocks rise as lira stages small rally
I’ll go with option number two, a tentative suspension of lira selling took immediate pressure off. But it’s also worth noting that the Argentine peso made a new low yesterday and Brazil is making a push for new lows as well. Also, more analysts are suggesting impending capital controls in Turkey.
–Rates edged higher in the US yesterday with the eurodollar strip mostly down 2 and tens +1.6 to 287.5. Large trades were primarily covered put buys on EDZ20 contract, covering shorts. Open interest in 2EV 9675p fell 25k on a buy of 2.5’s covered 9705.5. 2EZ put open interest declined a total 112k, with a buy of 2EZ 9675p for 6.0 also covered 9705.5. large buy as well in 2EZ 9650p, 2.0 paid vs a futures cover in EDZ9. New shorts were more modest, with buys in 0EX and 0EZ 9700/9687/9675 put flies on a strip, paying 4, (2.0 on each). On the upside, there was a buyer of EDZ8 9750/9762p 1×2 for 0.5. Libor/ois spreads continue to compress, with EDZ8/FFF9 at a new low of 29.5.
–NFIB released small business optimism this morning, at 107.9, staying right near the high and indicating a robust domestic outlook.  China’s investment growth reported at a record low.

Posted on August 14, 2018 at 5:27 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

August 13. Get ready for containment strategies

–Turkish lira made a new low but US market taking it in stride.  TRY fell to 7 but rebounded slightly; last around 6.9.  China yuan also at  a new low, 6.88.  Well at least those two are at parity.  South African Rand plunged 10%.  Time to get out some duct tape and Krazy glue and try to repair this thing.
–In spite of Friday’s massive call spread exit in TYU, the ten year yield dropped 7.4 bps to 2.86%.  The sales were TYU 120/121 and 120/122 call spreads.  Open interest in the 120c fell 106k, 121c -44k and 122c -23k.  At the end of the day, 120c settled 35 (ref 120-12) right around the initial premium paid for the 120/122cs.  While these call spreads were exited, there was obviously new positioning in futures, as TY open interest went up 101k.   Fear is to the upside, and on the dollar curve, reds to greens and greens to blues (2nd to 3rd year and 3rd to 4th) are still slightly inverted.
–As mentioned over the weekend, EDZ8/FFF9 settled just 30 bps, right at the low end of the range.  Quite odd given stress in the european banking system related to Turkey, with new lows in a couple of the names mentioned in news reports on Friday (UniCredit and BBVA).  The Fed effective has been solidly anchored at 1.91 bps, and FFV8 settled at 97.865 or 2.135 bps, up only 1 on the day on Friday.  The spread between the fed effective and FFV of 22.5 bps indicates near market certainty that the Fed won’t be shaken from plans to hike in September.

–And don’t forget Venezuela, which is now at risk of losing Citgo:




Posted on August 13, 2018 at 5:11 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

August 12. The North Anatolian Fault

The old Chicago Mercantile Exchange trading floor between Monroe and Madison Streets on the east bank of the Chicago river is somewhat of an architectural marvel.  The three storey, 36000 square foot (3345 square meter) space was designed to be devoid of structural pillars that would impede eyesight across the pits, and so it was suspended between two towers.

However, as engineering feats go, it’s a mere trifle in comparison to Hagia Sophia in Istanbul.  Originally commissioned by the Byzantine Emperor Justinian as an Eastern Orthodox cathedral, it was completed in the year 537.  At the time, it was the world’s largest building, capped by a massive dome that required completely new building techniques.  The architects were Greek geometers Anthemius of Tralles and Isadore of Miletus.  The main building is square, with soaring arches on each side.  Because of the immense spans of these arches, huge supporting pillars are on the outside, containing the lateral forces.  It is 269 feet long and 240 feet wide or over 64,000 square feet.  The dome rises 182 feet.

The architects were aware that earthquakes were prevalent in this area, and it is thought the design accounted for this fact.  The building used new materials, including a mortar composed of crushed brick, lime and sand, which was more tensile.  The bricks in the dome were fired at lower temperatures than ordinary brick and were thus less dense and lighter in weight.  The building is near the North Anatolian Fault (comparable to the San Andreas Fault), and while the dome collapsed in an earthquake in 558, it was re-built and has miraculously withstood many quakes since that time including the 1999 Izmit disaster (7.6).  One could easily spend all day watching documentaries and reading articles on this fascinating building, but I have only added a couple of links at the bottom.

Hagia Sophia means Holy Wisdom, in ironically short supply across our modern world.

The markets were shaken this week by a metaphorical earthquake which collapsed the Turkish lira (down nearly 14% on Friday alone, and down 41% ytd).  Like the computer generated models that simulate earthquake effects on Hagia Sophia, modern central bankers create ‘stress tests’ for the financial system.  However, the ECB expressed concern about some banks’ exposure to Turkey and shortly thereafter Trump decided to ramp up the pressure by increasing tariffs.

The last period of market angst was in late May, as the Italian political situation caused some to question whether Italy would stay in the euro.   Many markets are testing key areas right around stress levels that obtained at that time.  The euro actually slid below the level of late May which was around 1.15, now 1.14.  The US ten year treasury note which ended Friday at 2.86% (at futures settlement) is holding just above the low yield in late May which was 2.78%.  The German bund which traded 26 bps on May 29 was yielding 31.7 on Friday.  The spread between Italy and German 10’s got just above 290 in late May.  Friday’s level of 268.5 is the highest it has been since early June.  The JPM emerging market currency index (FXJPEMCS) is testing lows last seen in early 2016, after the energy rout of 2015.

Overall, equity markets have shown utter disregard.  While some European bank stocks were hard hit on Friday, including the Italian bank stock index which is around the low of late May, US markets are well above levels from that period.  VIX had a slight tremble, moving up 1.52 on the week from 11.64 to 13.16.  The eurostoxx index was down 1.94% Friday, around the low in May but well above the low of the year in March.

In spite of long dated treasury auctions in the past week, the curve flattened, with the 2y note -4.5 bps and tens -8.6.  Tens also easily absorbed a large exit of TY call spreads Thursday and Friday, with over 200k TYU8 120 calls sold (120/122 call spreads and 120/121 call spreads).  The 120 call started the week with nearly 330k open and ended with just 135k.  September treasury options expire one week from Friday; TYU settled 120-12.

Recently, every time a large event is perceived to rattle markets, follow-through is limited, forcing break-out players to exit positions.  Currently, many markets are in critical areas which could lead to violent moves.  The dollar index made a new high for the year (will it continue?).  The euro has a head and shoulder formation, closing below the 50% retrace from the late low in 2016 (1.0341) to the tax-plan high earlier this year of 1.2555. Friday’s close targets the 105 area.  In terms of yield, the ten year treasury is right at the support of a gently sloping uptrend from April.  A close below 2.84 would initially target around 2.70.  While vol firmed slightly in rates at the end of the week, premium is still quite cheap.  That is, if we see break-out moves.  The jury is still out.  The light volume, low liquidity, holiday month of August can still provide excitement.  We’ll see if it holds together or crumbles.

Domestic news this week includes Retail Sales and Industrial Production on Wednesday.  TIC flows also late Wednesday with focus on Japan and China treasury holdings. Philly Fed on Thursday.  Of course, the geopolitical drama with US, Turkey, Russia, China and Iran is likely to overshadow all else.

EURUSD below








Posted on August 12, 2018 at 11:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Aug 10. Freefallin’

–The Turkish Lira is in freefall this morning (TRY 6.26 high), and yuan is also weaker at 6.85.  USD stronger across the board with DXY breaking out to new highs for the year.  US equities had a weak close and are currently under pressure with ESU -15 at 2838.75.  It looks to be a “risk-off” end to the week with european banks also getting slammed, for example the Italian bank index (IT8300) is down 2.1% this morning, at the bottom end of the past two month range.
–Big trade yesterday was an exit sale of 120k TYU 120/122 call spread at 12 to 11.  Settled at 11, ref 119-23.  Open interest fell by 95.4k and 84.5k.  There’s more left in this trade, as the 120 calls, (which are at the money this morning) still have 241k open.  Sept treasury options expire two weeks from today.  There was little in the way of concession for this week’s huge refunding; all selling is absorbed with a bid to follow.
–Relentless bid in EDU8 with a settle of 9761 yesterday, just 6.6 bps below the settlement of EDM18, but with a 25 bp hike fully expected.  Oct Fed funds are cemented at 9785.5 or 2.145%, with the Fed effective 1.91%. Previously, the market would have had some concerns about funding pressures, given bank weakness associated with TRY, and vulnerability in other emerging mkt fx.  In the current environment, the central banks ‘have our backs’.  Right? (crickets).  All the same, EDU8 9762.5p at 3.25 bps and EDU8 9750 puts which traded small at 0.25 yesterday seem to be on the cheap side. [THIS IS NOT A RECOMMENDATION-but I sure wouldn’t sell these puts].
–August midcurves expire today.  Yesterday I mentioned 3EQ 9700 straddle which was 3.0/3.5 ref 9699.5.  Settled 3.5, but futures this morning are 9704.0 with a full day ahead.
–CPI expected +0.2 with 2.9 yoy.  Core yoy expected 2.3%
–Below is a chart which indicates divergence between oil and emerging mkt currencies.  Stronger USD should act as a weight on all commodities…
–Interesting article on the promise of block-chain, not just in terms of crypto-ccy, but in terms of paperwork simplification.  Maersk, the shipping giant, has created a block-chain platform for shipping documents.
Posted on August 10, 2018 at 5:26 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Aug 9. The Cadillac of minivans

–New low in Russian ruble due to freshly imposed US sanctions, and the Turkish lira also continues to plunge to new lows. Strongmen of Venezuela and Turkey borrowing pages from the same playbook with plunging fx and action-movie coup attempts.  Rate trading remains lethargic in the US, with yields steady to lower yesterday.  Crude oil a large mover, plunging 2.23 to settle 66.94, testing the low from mid-July; looks to target 65 or lower.

–It’s probably here that I should include the Frankie C crossword story from the ED option pit.  Faced with the clue, Coup d’_ _ _ _ he dutifully filled in VILL, a nod to the classic Cadillac model, taking artistic license by dropping the “E”.
–US stocks hold firm, though this article (citing work from the Leuthold Group) indicates lofty valuation with respect to S&P 500 price to sales ratio.
–In option trading, there was a large exit of EDZ8 9737/9762c spread, 50k sold at 3.5.  On July 18 there was a buyer of this call spread 2x vs 2EZ 9737c 1x for 0.5.  Yesterday as the call spread was sold at 3.5, the 2EZ calls were trading 4.0, so the original package priced at a value of 3.0.  After the front call spread, 2EZ 9712/9737c 1×3 was sold at -3.0; buying back the short leg of the original package.
–News today includes Jobless Claims 220k, PPI expected +0.2 and +2.8 Core yoy.  Thirty year auction caps the auctions, following a solid 10 year yesterday.
Posted on August 10, 2018 at 5:22 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Aug 8. Herd mentality

–Rates trading continues to underwhelm, with tens rebounding 3.9 bps to 2.973.  Ten year auction today, followed by 30’s tomorrow.  Near eurodollar calendar spreads remain well bid. with EDU8/EDU9 closing at its high of 60 bps.  EDU8/EDZ8 edged to a new high settle of 25.5.  Decent amount of trade in December midcurves, for example, 20k 2EZ 9687/9675/9662 put tree bought for a small credit (sold pieces).  Settled -0.5 (14.0, 9.0, 5.5 vs 9693.0; 9 call delta).  Back end of dollar curve completely flat.  Red and blue packs (2nd and 4th year) settled at identical prices: 96.94625.
–Warnings continue, this one from Pimco’s Dan Ivascyn: “Now the major central banks are trying to step away from the accommodation that they have provided to the markets for many years, and their influence is being quickly replaced by that of politics.” [huh?]  “For both equity and fixed income investors, we think this means lower returns and, unfortunately, higher volatility.”
Except that we aren’t seeing much in the way of volatility.  On CNBC yesterday Goldman’s Kostin said something like $750 billion in share buybacks have already been authorized this year.  Another later guest (I missed his name, from Centerstone) said the number of names on the NYSE has been declining, down by about half in recent years, due to M&A, firms going private etc, while the opposite is true in Europe and Asia.  I suppose Tesla’s announcement yesterday is indicative…  There was a clip out yesterday that the PBOC is telling banks to avoid ‘herd behavior’ with respect to the yuan.  In the US, buybacks coupled with low rates are herding people into equities.
–Consumer credit data surprised by being weak, up only $10.2b vs expected $15b, but revolving credit actually FELL.  Likely just payback from previous strong month.  But could it partially be due to banks starting to tighten credit standards?  Attached chart shows banks modestly tighter on personal loans and credit cards.
–One last note, posted yesterday (thanks AOK) “Making the rounds on Chinese social media. Apple alone would account for 1/6 of total Chinese stock market value.  But then, Shanghai alone would account for 1/6 total US housing stock (@ WeiDuCNA)  [of course, population of Shanghai is ~25 million]
The % of Domestic Banks Tightening Standards on Consumer loans and Credit Cards
Posted on August 8, 2018 at 5:29 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options