New high in HH Net Worth

Sept 20, 2019

–A skim of morning headlines underscores continued official/gov’t responses to sluggish conditions: China cut rates as expected.  India cut taxes by $20 billion, sparking a 5% jump in SENSEX.  Saudi Arabia strongly advising wealthy families to invest in Aramco IPO (can’t put it in a new “Vision” fund if it’s recycled back into oil, which means that new cash injections into WeWork will be strangled).  In terms of global growth, the OECD downgraded its forecast to 2.9%.

–Slow action Thursday with yields drifting lower by 1-2 bps.  Tens fell 1.4 to 1.772%.  EDZ9/EDZ0 remains the lowest one-year ED calendar at -49.0.  Implied vol seeped out with ED straddles down 0.5 to 2.0.  Fed effective for Wednesday was 2.25%, but a settle of 9812 in FFV9 suggests the Fed is getting the repo squeeze under control.  (9812 is 1.88%, exactly 25 bps below the Fed effective setting in the first two weeks of Sept, 2.13%). 

–One somewhat interesting note is that blue atm straddles are now settling at or slightly above greens.  Example: 2EH 9850^ 40.5s ref 9856 in EDH22, and 3EH 9850^ 41.0 vs 9849. (the red 0EH 9850^ settled 41.5 vs 9856.0).  Does this modest relative bid in blues indicate the possibility of curve steepening ahead? Or is it just a paring back of green longs…

–April FF, FFJ0 at 9853.5 is 41.5 bps higher than FFV9 with 4 FOMC meetings between the two, so the market has pared back the idea of continued easing.  FFJ0 probably worth a buy on a pullback, I would look at buying some deferred ED calendars against it.  –Fed’s Z.1 report out today. a data set which typically is trumpeted as showing a new high in Household Net Worth.  It will probably be the same this time due to an increase in home prices; equities were essentially flat in Q2.  My headline beats them to it.

Posted on September 20, 2019 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Fed steadies the market

Sept 19, 2019

-Fairly subdued FOMC day. The Fed cut 25 as expected and trimmed IOER, but neglected to institute QE.  The NY Fed announced a $75b repo operation the third day in a row for this morning to satisfy funding requirements.  The euro$ curve flattened, with EDZ9, H0 and M0 all closing down 0.5, while EDZ0 back rose 0.5 to 2.5.  October FF settled 9811, but quickly traded down to 9810 after settlement, a signal that funding issues linger.  I had calculated a final settle of 9796 for FFU9 on an ease, but it stubbornly remains 3 bps lower at 9793.  The market wants QE and buybacks.  Powell referred to “organic” balance sheet growth, but that’s not satisfactory.  It’s possible that QE could be re-started before the next FOMC if quarter-end is sloppy.  MSFT obliged on the buyback part with a program of $40 billion.  FDX plunged 13%, supporting the narrative of slower global trade and growth, yet UPS and EXPD remain close to recent highs. 

–Implied vol eased.  EDZ9 9800 straddle eased to 22.5 from 24.5 on Tuesday and EDH0 9825^ from 36.5 to 34.5.  Late buyer of 20k EDZ9 9825/9837/9850/9862 c condor for 0.75.    Nov FF settled 9822, so the market still sees odds for another ease at the end of October at around 40% (assuming a new Fed Effective of 1.88%).  

–Today’s news includes Philly Fed expected 10.5 vs last at 16.8.  Jobless Claims, Leading Indicators and Existing Home sales, expected 5.38m, round out the data.  October treasury options expire Friday. 

Posted on September 19, 2019 at 5:07 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Fed day

Sept 18, 2019

See the man with the stage fright
Just standin’ up there to give it all his might
And he got caught in the spotlight
But when we get to the end
He wants to start all over again
-The Band

–The repo surge of the last couple of days has brightened the spotlight on today’s FOMC meeting and announcement.  A cut of 25 bps is expected.  Because of the turmoil in money markets it’s likely forward guidance will be more dovish than otherwise.  Another tweak in IOER is likely.  The first priority is to make sure the system has liquidity.  Monday’s Fed effective rate (EFFR) was 2.25% as compared to an average of exactly 2.13% for the first 15 days of September.  Yesterday’s o/n repo was reportedly over 7% early yesterday morning, before the Fed stepped in with its first repo operation in many years.  The NY Fed subsequently announced another $75b repo for this morning, but yesterday’s Fed eff is likely to be above 225 bps.  Sept FF (FFU9) settled -1.5 yesterday at 97.925 or 2.075%.  Using perhaps dubious assumptions, I calculate final settle of 97.86 on no ease or 97.96 with today’s expected ease.  

–It’s clear that given the amount of treasuries and agencies in existence, we’re no longer in an “ample reserves” regime.  While the repo surge of the last couple of days caught markets and the Fed by surprise, it wasn’t completely un-anticipated that this time would come.  Lorie Logan, SVP of the Fed’s NY desk gave a speech about this exact topic in April (excerpt below): 
https://www.newyorkfed.org/newsevents/speeches/2019/log190417

At some point, [NOW!] the FOMC will decide that the system has reached a level of reserves consistent with efficient and effective implementation.

Once this determination has been made by the FOMC, the Desk will need to conduct outright purchases of Treasury securities to supply reserves in order to offset the general decline in reserves from trend growth in non-reserve liabilities and ensure that reserves remain ample.21 In this regard, these purchases will have the same purpose as they did prior to the financial crisis—expanding the size of the SOMA portfolio to accommodate growth in currency and other liabilities. However, the size of these purchases will likely be larger in nominal terms because the growth of non-reserve liabilities is larger.


–The point is, the Fed has NOT lost control of money markets, though the last two days have been a challenge.  A more pernicious problem is lower liquidity in general. and it’s likely, in my opinion, to become a more persistent issue.  Also, year end demand for funds may be much harder to gauge.

–Yesterday, the spread between EDZ9 and FFF0 fell 3.5 bps to 38.0, reversing a bit of the recent spike.  It’s an indication that the Fed will get things back under control.  Call spread buying across interest rate futures appeared to be prevalent, with the red pack settling +3.625 and greens +3.875.  The five year note fell 3.9 to 1.663% and tens 3.5 bps to 1.808%.  On a Fed cut, if the new Fed effective comes in at 187 to 188, it will still be higher than the ten year yield.

Posted on September 18, 2019 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Oil and repo

Sept 17, 2019

–Two surges yesterday: WTI crude up 15% in the aftermath of drone attacks on Saudi oil infrastructure, and the overnight repo rate soared to 3.68%, a jump of 140 bps.  The latter was reportedly due to a corporate tax date, as companies withdraw funds from the banking system to make payments, and due to upcoming treasury supply.  The most immediate reflection in futures was a decline in FFV9 to 9809 where it settled, down 1.5 on the day. The October 3-month serial eurodollar contract settled 9785, down 2.5 and traded 9782 overnight.    1-month SOFR contracts fell the most with Sept and Oct -3.5 bps to 9786 and 9800.5 respectively.  An article on BBG noted that there were issues with the secured funding markets; the question is whether this is a temporary blip or something likely to fester.  With the Fed expected to cut by 25 tomorrow (and perhaps provide another tweak to IOER), at its low, EDV9 was 3.5 bps below yesterday’s settle in EDU9 (9785.49).   Of course, EDV covers the turn, but since Dec 31 is a Tuesday, the turn is short.

–FFV9 to FFJ0, a period which encompasses 4 FOMC meetings, declined 7.5 bps to -44.0 (9809 and 9853.5).  So, ignoring near-term funding issues, I suppose the market is still projecting nearly 2 eases over that time frame.

–Stocks essentially ignored the news going into Friday’s quarterly option expiration.  SPX fell just over 9 points, 30 bps.  Did they unleash the plunge protection team with stocks near all time highs?  Are they easing with unemployment near all time lows?  Might as well use the strategic petroleum reserve to tamp down the price of oil as well.

Posted on September 17, 2019 at 5:20 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

All Prices Will Be Met

Sept 15, 2019

Weekly Comment

The reach for yield in August was astounding, culminating in the Sept 1 tariff implementation, followed on September 4, by the sub-50 print in Manufacturing ISM of 49.1.  Yields hit their lows in the beginning of September, with 5’s down to 1.32%, 10’s to 1.46% and 30’s to 1.95%.  The total protonic bond market reversal seen so far in the month of September has been just as dramatic.  Fives rose 43 bps to 1.75%, 10’s 44 bps to 1.896% and 30’s 42 bps to 2.37%.  Moves in the German bond market were similar, with the schatz yield surging to -71 bp from -93 bps and 10-y bunds from -71 to -45 bps.

This Wednesday of course, we’ll get the FOMC announcement followed by a press conference.  The last meeting was on July 31, where the Fed began the process of lowering the FF target and kicked off August’s rally.  As the chart below shows, the five year treasury yield at 1.75% is almost exactly back to the same level as it was at the July FOMC (denoted by the horizontal line).  Longer dated yields have fallen a bit shorter of a full retrace as the curve flattened.  For example, 5/30 on July 31 was 68, peaked on Aug 1 at 76, and is now 62. 

US 5y treasury yield

At the Fed’s quarterly Summary of Economic Projections in June, Core PCE prices were forecast at 2.0% in March for both the end of 2019 and end of 2020.  These projections were dropped to 1.8% and 1.9% in June.  The Fed Funds Median projection was much more volatile.  For the end of 2019, the forecast was 2.4%, both in March and June.  But for year-end 2020, the projection in March was for a rate increase to 2.6%, while in June it was for a rate decrease to 2.1%.  In hindsight we know the schedule for an ease was moved aggressively forward, from the end of 2020 to July 31, 2019 as the FF midpoint target was dropped to 2.125% from 2.375% at the last FOMC.  SEP is only released on quarterly meetings; there will be no dot plot or tables of forecasts at this FOMC.

The Fed’s problems have mostly come as the result of risks to global growth due to trade tariffs, but the slowdown in global manufacturing was already occurring.  This has led to subdued price pressures which the Fed and other central banks remain fixated on.  However, the latest price data released last week in the US suggest that such concerns could be overblown as Core PPI yoy was 2.3% and Core CPI yoy was 2.4%.   U of M’s current inflation expectations index was 2.8%, though the 5 year horizon was only 2.3%.  In any case, inflation might go in the “be careful of what you wish for” category because the drone attacks on Saudi processing plants over the weekend threaten to cause a jolt in the price of oil.  Coincidentally, on Friday I ran the chart below, which shows SPX and the rolling price of the first WTI Crude contract.  On the CME website a price limit of 7% is indicated on the front CL contract.  That indicates a move of $3.84 off the October contract settle of 54.85.  That is, 58.69.  I suspect the market will be at least $10 higher than that. 

The gap which opened up since the end of last year is something I thought would likely begin to close, though I imagined a scenario of oil continuing to ease lower with stocks correcting a bit more rapidly.  With Saudi supplies questionable in the near term, crude is expected to gap higher and stocks, I would assume, ease lower.

In any case, I wouldn’t be surprised if, during the press conference, Powell said something like, “While geopolitical and trade risks to growth remain tilted to the downside, inflation data appears to moving closer to our symmetric target.”  This sort of a non-dovish meeting outcome would likely not sit well with the bond market.  Clearly, the easing steps taken by the ECB last week (10 bp cut and €20 billion per month in QE) didn’t stem the recent rate rise. 

However, a change in market sentiment is not only affecting the direction of rates, but is also apparent in liquidity conditions across markets.  Tad Rivelle, CIO of TCW, presciently summarized this change in a note released Sept 5, nearly pegging the exact low in yields.

https://www.tcw.com/en/Insights/Economics/09-05-19_Trading_Secrets

Key lines: But, “free money” not only makes loans cheap, it also erodes the capacity of lenders to ask for such reasonable terms as traditional loan covenants and basic financial disclosure.

Hence, not only have the debt markets ballooned in size, but the growth has come disproportionately from those segments of the debt market where financial disclosure is poor.

Importantly, this isn’t only the case in leveraged loans and corporate bonds.  It is also apparent in IPOs.  Recent issues like UBER and LYFT have been pasted, and the much anticipated WeWork IPO is now supposedly sporting a potential value of just 1/3rd the level of its last funding round at $15 billion vs $47 billion. Additionally, the depth in futures markets has dwindled significantly; perhaps not too surprising given delivered price volatility. 

Almost certainly after this FOMC there will be articles written questioning the credibility of the Fed.  I don’t know how many articles I have seen  over the years somberly concluding that the Fed had lost its way and thus, the market’s confidence.  I am sure I have been guilty of writing along those lines on past occasions.  However, what appears to be different now is a more widespread, and growing, perception that negative rates are doing more harm than good and have led to global overcapacity.  I.e. maybe it’s not a lack of final demand, maybe there are just too many widgets being produced.

OTHER MARKET/TRADE THOUGHTS

I had mentioned during the week that if accounts needed a specific hedge against the Fed holding rates steady at this week’s FOMC, consider FFV9 9806.25 puts (which had been sold at 1.0 early in the week) or FFV9 9800 puts which I thought might even trade 0.5.  While I personally am 99% sure of a 25 bp cut, I can understand spending a little insurance money in this environment.  As it turned out, the 9806.25 p traded 10k on Friday, 1.5 to 2.0, and settled 2.0 ref FFV9 9810.5.  There is no open interest in FF options aside from these puts and a tiny bit in Oct 9800 and 9787.5p.  Fed Fund options ONLY trade for the binary FOMC event.  What is amazing is that FFV9 traded to 9810.5, having been as high as 9824.5 settle on 15-Aug.  I think 2.0 is too high to pay for the 9806.25p, but selling at 9810.5 is arguably a worse risk/reward than simple long puts.

Dec’19 eurodollars have broken hard with everything else and settled 9794.5, down 18 on the week and 31.5 from the high settle on Aug 15.  The spread to the expiring EDU9 contract is only -9.25 bps.  EDZ9 to FFF0 settled at a new high of 38.5 bps.  Two factors are at play: the risk that the Fed signals that this week’s ease is the last one, and the risk that year-end funding pressures are accentuated. 

While I thought the ten year cash yield would test just over 2% in the near term, the attacks on Saudi oil infrastructure can change the picture in a hurry.  With just 5 trading days to go, the Oct TY atm straddle (128.5^ vs 128-18.5) settled 59/64’s.  That’s amazing given that atm TY straddles have recently traded that level with 5 WEEKS to go.  A bid for the safety of US treasuries is only a drone attack away…

9/6/2019 9/13/2019 chg
UST 2Y 152.6 180.0 27.4
UST 5Y 141.8 174.9 33.1
UST 10Y 155.0 189.6 34.6
UST 30Y 202.1 237.0 34.9
GERM 2Y -87.0 -70.7 16.3
GERM 10Y -63.8 -44.9 18.9
JPN 30Y 20.9 33.5 12.6
EURO$ Z9/Z0 -59.0 -40.5 18.5
EURO$ Z0/Z1 -8.0 -6.5 1.5
EUR 110.31 111.57 1.26
CRUDE (1st cont) 56.52 54.85 -1.67
SPX 2978.71 3007.39 28.68
VIX 15.00 13.74 -1.26
Posted on September 15, 2019 at 1:22 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

August up, September down

Sept 13, 2019

–Yields marched higher yesterday with tens +5.7 bps to 1.789%.  Reds were weakest on the euro$ strip, closing -7.75.  Core yoy CPI was stronger than expected +2.4% coming on the heels of yesterday’s +2.3 Core PPI.  The ECB announced a 10 bp cut and €20B month QE.  US stocks rallied and are within shouting distance of all time highs.  The US budget deficit was $200 billion for August (a bit better than last year) but the fiscal ytd amount rose to $1.07 trillion (you might not want to call it overt fiscal stimulus, but that’s exactly what it is, and Trump wants to finance it at ZERO%).  Although these bits of information don’t appear to justify an ease at next week’s FOMC, a 25 bp cut is completely priced.  It’s now getting murkier after that.   From a low of -85 bps earlier in September, EDU9/EDU0 spread closed at a new high yesterday of -56.75.  EDZ9/EDZ0 settled -63 on 4-Sept and also closed at a new high yesterday of -42.5.   So these spreads indicate a couple of eases over a year.  In the near term, FF calendars have also rallied.  For example, Nov/Jan which isolates the December FOMC closed at a new high of -11, less than 50/50 odds of an ease at that particular meeting.  

–In terms of near ED pricing, EDU9/EDZ9 settled at a new high of -13.75.  At first glance, that would seem to indicate only about 50/50 odds of an ease in Q4.  However, it is more suggestive of being position driven as there’s been heavy liquidation of EDZ9 calls.  As mentioned in the weekend write-up, Dec contracts are also the subject of year-end pressures, clearly reflected in EDZ9 vs FFF0 which had been trading around 34 but is now pressing new highs at  37.5.  EDZ9/EDH0 settled -26.5 while EDH0/EDM0 settled at just -10, a new recent high. It’s tempting to conclude that EDZ9 is trading a bit “cheap” here.  After all, the three month FF spread Oct/Jan is -26.0, suggesting certainty of one ease at either the Oct or Dec FOMC, while EDU9/EDZ9 is -13.75.  I am not going to take that “cheap” bait at this juncture, though I could certainly see buying some cheap call structures on EDZ9. Limit the downside risk.  

–Some prices for context (yesterday’s settles)
EDU9 9787.25            FFV9 9812.5

EDZ9 9801.0               FFF0 9838.5

EDH0 9827.5
EDM0 9837.5
EDU0 9844.0

EDZ0 9843.5  

–Today brings Retail Sales expected +0.2%.  Also, U of Michigan expectations, which includes a long term inflation survey, last at 2.6%.  The long end of the treasury curve, of which buyers couldn’t get enough of last month, has turned decidedly finicky in September.  Government supply, corporate supply, higher inflation readings, and central bank stimulus throughout the world, (Vietnam today) have conspired some to change their opinion about the relative attractiveness of 30 year US yields at 2%.  Add in renewed discussion of 50 and 100 yr paper by Mnuchin…  Keep those plates spinning.  30’s ended at 2.26% yesterday.

Posted on September 13, 2019 at 5:05 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Uncertainty

Sept 11, 2019

–What a difference a week makes.  Last Wednesday, Sept 4, EDU20 settled 9881.0, a new high. Yesterday it settled 9853 and traded 9850 this morning, a drop of over 30 bps.  The red pack led weakness yesterday, falling 10.375 bps with greens -8.75, blues -7.5 and golds -6.625.  Red/gold pack spread posted a new recent low of 7.375 bps.  Moves across markets were suggestive of squeezing through the exit doors.  There’s much discussion of momentum vs value, with the former being crushed to the benefit of the latter.  ZH had a note saying that the ‘most shorted stocks’ performed best yesterday. 

–Sept midcurves have consistently priced cheap relative to actual movement, and expire Friday.  0EU9 9850 straddle settled 10.5 yesterday which now seems rather expensive.  TYV 130 straddle settled 60 with just ten days to go.  Not long ago, atm straddle in tens was trading just under a point (around the current level) with five weeks until expiry.  

–US treasury auctions of 10s today and 30s tomorrow, but corporate bond issuance has also heated up, and there’s a heavy slate of IPOs on tap.  Interest markets appear to have shifted trend from ‘buy dips’ to ‘sell rallies’.  Often there’s a rally coming out of the third leg of the refunding, but if there is, it will likely be used to pare back duration.  

–Today’s news includes PPI expected 0.0 with Core +0.2.  YOY Core expected 2.2.  CPI tomorrow, along with the ECB.  

–9/11 anniversary.  I vividly remember being on the CME trading floor, there was almost a lull after the first plane hit, as there was some speculation of an accident.  But when the second hit, one direct line blinked and I instantly grabbed it, with no order other than BUY! which I did as the room erupted and every phone lit up.  We left early that day; trying to confirm unmatched tickets before we left.  My desk crossed the river and went to breakfast where we watched tv’s in a daze.  Peak uncertainty on all levels.  

Posted on September 11, 2019 at 5:37 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Borrow while you can

Sept 10, 2019

–Rates rose yesterday with the euro$ strip from reds through golds -7 to 7.5 bps.  Implieds a bit softer on the pullback.  Sept midcurves expires Friday with atm Short Sept and Green Sept 9862.5 and 9875 straddles settling 9.5 and 9.0 respectively.  Inflation data Wed and Thursday, with Retail Sales Friday; ECB also on Thursday.

–Huge jump in Consumer Credit of $23.3 billion, with $10 billion of that in Revolving (to new high).  Corporate bond issuance is also exploding, with $75 billion of investment grade issued last week and a large slate expected this week, as rates are at new lows.  I’m not sure what is driving consumer credit, but in the corporate world, they’re cramming in as much as possible before the refi window shuts.  However, Moody’s downgraded Ford to junk yesterday (no change by Fitch and S&P) while Softbank is urging WeWork to table its IPO due to withering criticism of the company’s model.  There are signs that allocation of capital may become more discerning.  

–Slight risk-off tone this morning with stocks lower and China reporting factory gate deflation with PPI -0.8% yoy.  Today’s US news includes NFIB small business confidence and the 3 year note auction.  

Posted on September 10, 2019 at 5:01 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Year end butterflies

Sept 7, 2019 – Weekly

Short note this weekend as I am out of town.

Commentary below isn’t really macro, but rather concerns some specifics on the Euro$ curve, notably weakness in all December contracts.  Below, I have simply taken last prices from Bloomberg during the day Friday and created 3-month butterfly prices. i.e. +1 /-2 /+1 for consecutive contracts.  I have highlighted in red the three month flies where the middle leg is the DECEMBER contract.  What is instantly apparent is that these  flies are the only ones with POSITIVE values.  Sept/Dec calendars are much higher than Dec/March calendars.  Specifically, EDU9/Z9 -21 and EDZ9/H0 -33.5.  EDU0/Z0 -1.5 and EDZ0/H1 -9.0.  EDU1/Z1 +3.0, and EDZ1/H2 0.0.  EDU2/Z2 2.5 and EDZ2/H3 1.0.  

PX_LAST 3 MO FLIES
ED1 CME Comdty U9 97.9000 0.125
ED2 CME Comdty Z9 98.1100 -0.185
ED3 CME Comdty H0 98.4450 -0.055
ED4 CME Comdty M0 98.5950 -0.080
ED5 CME Comdty U0 98.6900 0.075
ED6 CME Comdty Z0 98.7050 -0.075
ED7 CME Comdty H1 98.7950 -0.010
ED8 CME Comdty M1 98.8100 -0.035
ED9 CME Comdty U1 98.8150 0.030
ED10 CME Comdty Z1 98.7850 -0.020
ED11 CME Comdty H2 98.7850 0.005
ED12 CME Comdty M2 98.7650 -0.010
ED13 CME Comdty U2 98.7500 0.015
ED14 CME Comdty Z2 98.7250 -0.005
ED15 CME Comdty H3 98.7150 -0.005
ED16 CME Comdty M3 98.7000

Before the turn of the century and Y2K, trading the “turn” was a pretty big deal.  Funding issues could arise going into year end, and money desks actively hedged this risk.  In futures markets, this pressure was manifested by relative weakness in December euro$ contracts, as they cover the three month period from mid-December to mid-March.  When Y2K occurred, the fear was that code that had only used the last two digits of the century would foul banking, transportation, and all sorts of other services, with no distinction between 1901 and 2001 for example.  Imagine if you called UBER and instead a horse drawn carriage arrived. [There’s a good book with that premise, Time and Again, by Jack Finney].

In any case, the Fed stepped in and guaranteed year-end liquidity to quell impending signs of panic.   Since then, the kink with December contracts abated.  Until the last couple of years.  In the old days, a standard trade was to sell Dec/March three month spreads or sell the Dec LED, which was selling the one-month Dec ‘libor’ contract (no longer in existence) and buy the Dec 3-month contract, because the turn was more concentrated in the one-month period.  Now these pressures are apparent again, and I have to believe it is due to possible funding issues for dollar-based loans globally.    

The other aspect of December contracts which may draw extra appeal for hedges/specs is the Fed’s infamous ‘dot-plot’ which forecasts end of year rates.  In any case, open interest in December contracts exceeds that of other contracts by a healthy margin.  For example, as of close Thursday, EDU9 had OI of 1.355m and EDZ9 1.915m.  In the reds, EDU0 1.107m and EDZ0 1.184m.  Does it really matter?  Well, clearly some participants shy away from strategies that are long December contracts.  By extension, perhaps vols should be a bit higher on December contracts than otherwise. 

In a broader sense, does this weakness in December contracts reflect – to just a small extent – a feeling that funding could ‘get away’ from the central bank?  Clearly, the Fed can always provide dollar liquidity.  But in a global financial world where the US seems to be turning a bit more isolationist, will the Fed be as willing?  Just a thought.

The other parallel thought concerns WeWork, whose potential IPO came under heavy scrutiny this week as its value was more than halved from $47 billion at its last funding round, to $20 billion in the prospective IPO.  Like the banking system, this company is based on a ‘borrow short, lend long’ model, where the company takes long-term commercial leases, carves them up, and sub-leases short term.  Vulnerable to ‘funding crises’.   

OTHER MARKET/TRADE THOUGHTS

With just a week and a half until the FOMC. The market is comfortably pricing a cut of 25 bps.  Oct Fed Funds settled 9813.5.  On a cut of 25, FFV9 should ultimately settle at 9812-12.5.  With three month libor setting in the area of 2.11 to 2.13%, EDU9 should expire around 9788, and Friday’s settle was 9790.75. Forward spreads indicate the Fed will guide to lower future rates (or will be dragged along for the ride). 

8/30/2019 9/6/2019 chg
UST 2Y 150.2 152.6 2.4
UST 5Y 138.5 141.8 3.3
UST 10Y 150.3 155.0 4.7
UST 30Y 196.8 202.1 5.3
GERM 2Y -92.7 -87.0 5.7
GERM 10Y -70.0 -63.8 6.2
JPN 30Y 14.6 20.9 6.3
EURO$ Z9/Z0 -60.0 -59.0 1.0
EURO$ Z0/Z1 -9.5 -8.0 1.5
EUR 109.91 110.31 0.40
CRUDE (1st cont) 55.10 56.52 1.42
SPX 2926.46 2978.71 52.25
VIX 18.98 15.00 -3.98
Posted on September 7, 2019 at 6:23 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Real value

Sept 6, 2019 Thursday

–After Wednesday’s settles at new highs in many euro$ contracts, fixed income took a tumble yesterday with the ten year jumping 11 bps to 1.565%.  In euro$’s, reds led the move falling 12.5, greens -12.375, blues -11.75 and golds -11.25.  Long liquidation was sparked by renewed enthusiasm for US/China talks scheduled in October, a stronger than expected ADP at 195k, and robust Service ISM at 56.4.  Reduced odds of a hard Brexit also factored into the mix. 

–This morning brings the employment report, with NFP expected 160-170k and yoy Average Earnings 3.1 to 3.2% from 3.2 last.  Powell speaks mid-day at 12:30.  Rate futures are pressing slightly lower this morning.  Trump’s tweeting about strong jobs is perhaps skewing expectations higher for NFP. 

–We’re now just a week from Sept midcurve option expiry, and a week and a half from the FOMC.  The market is comfortably priced for a cut of 25 bps with FFV9 falling 4.5 yesterday to 98.15.  While EDU22 fell 12 bps yesterday, settling exactly at the 9875 strike, 3EU 9875 straddle settled 11.5, perhaps a bit under-valued considering loose prices.  Implied vol eased across the curve.  It’s fairly certain that Powell will follow script and echo Williams by sticking to mandates and outlining geopolitical risks. (Followed by a tweeting flurry by Trump).  

–Blackrock’s Rick Rieder posted a blog yesterday, https://www.blackrockblog.com/2019/09/05/monetary-policy-endgame/  which was quite interesting: “…the solution is to hold an asset that maintains its real value – an asset that cannot be printed.  We would include stocks (dividend yields are set on payout ratios, companies have some degree of pricing power, and shares outstanding are limited in number)….”  He also references gold.  Ray Dalio has mentioned some of the same ideas, but the overarching theme with both Rieder and Dalio is that Central Banks are becoming impotent and may resort to more drastic efforts to debase currencies and generate inflation.  Powerful stuff.  Especially so given the context of isolated (?) recent events.  For example, WSJ reports that Autonomy lost $1 billion on Argentina – a country which seems to have little problem accomplishing ccy debasement.  Also, WeWork is considering an IPO valuing the company at just $20 B, even though its last funding round suggested a $47 B valuation.  Obviously this is causing stress at Softbank. “Hold an asset that maintains its real value.”  Not always easy…

Posted on September 6, 2019 at 5:08 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options