Argentina and the Locomotive

August 18, 2019 – Weekly comment

On Friday afternoon I decided to skip my traditional end of week beer downtown and caught the 4;30 commuter train north.  In Evanston, about three miles from my house, the train halted due to a pedestrian fatality on the tracks.  This was between stations, likely not an accident.

In this situation, between stations on elevated tracks, no one is allowed to exit the train until an investigation is completed.  This was announced both by conductors and over the PA system.  The conductor in my car said he had never heard of such an event taking less than two hours, and added that he understood everyone had things to do on Friday night, but that our hands were tied.  Shut down.  Can’t move.  Of course, that didn’t stop the guy behind me from pestering the conductor ten minutes later asking if he could get off, saying that he, perhaps unlike others, had alternative means of transportation.  As if many people on that particular train might not be quite as resourceful.  The conductor patiently explained the situation again.  Had I been the conductor, a second investigation would have had to be opened.

I decided to read a few articles. One, on ZeroHedge, talked about the true ramifications of the plunge in Argentine assets this week as Macri lost a primary election, signaling a shift back to socialist policies.  For those that missed it, the Merval Index covered the entire year’s range in one day, falling approximately 40% on Monday.  The Argentine Peso went from 45 to 62 per USD, ending the week around 55.  A friend asked me what I thought about the implications.  I was ambivalent, saying that it’s obviously happened there before, that the economy, at about $500 billion, isn’t all that large.  I regurgitated the surface stuff.  Just the kind of thing they said about subprime loans in 2007.  However, the larger implications are likely more along the lines of what Jimmy Rogers frequently says (paraphrasing):  ‘It’s hard to know the timing, but one event, which doesn’t seem all that significant, occurs.  Followed by another. And then another.  The fraying starts at the perimeter.”   Hong Kong, Baoshang Bank, H2O fund, Argentina.  Volatility spikes. The ZeroHedge  article’s summary warning, is, “get out of illiquid securities” drawing on a Bloomberg piece by Cormac Mullen who framed the issue as, “what happens when event risk meets illiquid markets.”  It’s like a locomotive meeting a pedestrian, and the subsequent CAN’T GET OUT OF MY POSITION.

Succinctly:

Argentina is a poster child for the way investors were drawn to once-inconceivable assets by the hunt for yield. And in a world where algorithms and machine trading are replacing brokers and market makers, the inability to exit all but the most liquid positions smoothly has become an ever bigger risk – a liquidity breakdown was the biggest fear for quant investors in a JPMorgan survey in May.

Argentina was one event in an extremely important week. August of 2019 may be looked back upon as a critical month. Here are a few other thing that occurred.

  1. Argentina meltdown, downgraded to CCC by Fitch end of week
  2. Global yields plunge, with $17 T now at negative yields. US 10y -20 bps and 30y -25, sub 2%
  3. 2/10 briefly inverts.  Ten year inflation indexed note goes negative (0 real yield)
  4. Olli Rehn of the ECB governing council says big stimulus coming in Sept
  5. GE accused of accounting fraud.  DB makes new all time low.
  6. China credit numbers weak/ Hong Kong strains continue
  7. Trump…there are a lot of sub-points on Trump but I will just keep listing:
  8. …delays September tarrifs, previously announced without notice (capitulation)
  9. …allows companies to do business with Huawei
  10. …suggests that the US buy Greenland
  11. …admin late Friday announces that the US is exploring selling ultra-long dated bonds

Also worth adding, the relationship  between Japan and S Korea is deteriorating with President Moon Jae-in tweeting at the beginning of the month, “We will never again lose to Japan.”  Both Japan and S Korea removed each others preferential trade status at the start of the August.  Beijing is hosting foreign ministers next week from both countries in an effort to diffuse tensions.  India/Pakistan.  Russia’s doomsday weapon named Skyfall had a testing misfire which caused a nuclear incident.

The old “run on the banks” model, leading to a collapse in the financial architecture, has become passe.  However, the new and improved “run on the etfs” where instant liquidity is also assumed, may become a complicated twist in the market narrative.  The tsunami of buying in treasuries in August may, as much as anything, reflect the fear of illiquidity.  Of course, it’s also easy to justify on the basis of the US being a “high-yielder”, as the US share of investment grade yields is now 94% of the world.

This is a perfect week for the Kansas City Fed’s Jackson Hole Economic Symposium, ‘Challenges for Monetary Policy’ where Powell will present on Friday. From the ECB’s website, I see that Cœuré, Lane and Lautenschläger are scheduled to participate. As mentioned above, Olli Rehn, who sits on the ECB’s rate setting committee as governor of Finland’s central bank, may have preempted the theme: “When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker.”  Shock and awe. 

Speaking of shock, the late Friday announcement that the treasury was considering selling 50 and 100 yr bonds caused a sell off of long maturities.  The ultra long bond (WNU9) settled at 3:00 pm EST at 195-23, and by the electronic close at 5:00pm was 194-14 having traded below 194 in the last hour.

I can’t help thinking about what White House meetings must be like.  “Mr President, the yield curve has inverted, often a sign of impending recession which is a risk to the stock market.”  “OK Munchkin, then UN-invert it.  Sell as many 100 year bonds as you can.  That should do it.”  Mr President, the Chinese are making inroads into securing natural resources in Africa.” “ Well then let’s buy Greenland.  It’s the same size, right?”  “Um, no sir.  It just appears that way on flat maps.” “Then offer them less.  Finance it with 100 year bonds.”  

It probably isn’t the greatest idea to re-introduce the idea of imperialist powers colonizing foreign lands.  Does that send a signal to China/Taiwan? Or to Russia, that it’s open season?  Perhaps this particular plan wasn’t completely thought through.  Similarly, the pullback of September tariffs may be seen as strengthening China’s hand.  Right out of the Trump playbook, China made some encouraging statements aboout upcoming trade talks.  But, in my opinion, China has only further cemented its position, and is less likely to budge given, for example, a newly approved sale of $8 billion in F-16 fighter jets to Taiwan.    

OTHER MARKET/TRADE THOUGHTS

As I have mentioned I am long puts on HYG.  NOT A RECOMMENDATION, FOR ENTERTAINMENT PURPOSES ONLY.  The alleged GE accounting fraud outlined by Harry Markopolos got loads of press.  DB closed at a new low.  The BBB/Baa spread to treasuries has just violated a minor downtrend this week.  A twitter post from Trevor Noren, Aug 14, said  “In the 12 months ended March 31, S&P 500 firms spent 103.8% of their free cash flow on buybacks and dividends, which comes after spending 101.9% in 4Q18.  It is the first time since before the financial crisis that S&P 500 payouts have exceeded cash earned.”  Week to week change in HYG was small, from 86.25 to 86.10, with a minor break in between.  I continue to target 81.

8/9/2019 8/16/2019 4:30 EST chg
UST 2Y 162.6 147.6 149.1 -15.0
UST 5Y 156.0 141.2 142.3 -14.8
UST 10Y 173.3 153.9 155.9 -19.4
UST 30Y 224.6 199.9 203.5 -24.7
GERM 2Y -86.3 -91.1 -4.8
GERM 10Y -57.6 -68.5 -10.9
JPN 30Y 21.3 18.4 -2.9
EURO$ Z9/Z0 -45.5 -47.5 -2.0
EURO$ Z0/Z1 -2.5 -2.5 0.0
EUR 112.01 110.95 -1.06
CRUDE (1st cont) 54.37 54.81 0.44
SPX 2918.65 2888.68 -29.97
VIX 17.90 18.47 0.57

https://www.zerohedge.com/news/2019-08-16/forget-yield-curve-its-argentinas-collapse-highlights-markets-biggest-problem

https://www.defensenews.com/global/asia-pacific/2019/08/15/tension-between-south-korea-and-japan-could-hurt-us-goals-in-the-pacific-and-china-is-watching/

https://www.ecb.europa.eu/press/weekly/html/index.en.html

https://www.kansascityfed.org/publications/research/escp/symposiums/escp-2019

Posted on August 18, 2019 at 8:31 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

An interesting August

August 16, 2019

–Yields continued to plunge with tens down 5.2 bps to 1.529%.  Spike lows during the day saw tens reach 1.473% and 30’s 1.914% (ended at 1.98).  The ten year inflation-indexed note yield went negative ending at -3 bps.  New low in several near euro$ calendars, with EDU9/Z9 at -22.5 (-2.5) and EDZ9/H0 at -27.0 (-1.0).  In year spreads, EDU9/U0 posted a new low at -69.5.  EDZ9/Z0 did not make a new low close, settling at -47.5, but was -49.5 late in the day.  Bullard said the Fed could wait for September’s meeting to move.  FFV9 at 9824.5 indicates a slight lean to a 50 bp cut rather than 25 at the Sept FOMC.  Mexico cut rates yesterday first time in 5 yrs, from 8.25 to 8.0%.

–New low in GE as Harry Markopolos of Madoff fame, accused the company of fraudulent accounting. New low in Deutsche as well.

–The mid-day panic bid in treasuries felt like a ‘get me out’ moment, and prices are lower this morning as stocks rally, with an option expiration today.  Implied vol powerfully bid in rate products.  Below is a euro$ straddle comparison from one year ago, Aug 15, 2018, nearly identical DTE to yesterday:

Prices from 8/15/2018 (year ago)

EDU8 97.6425     4.75

EDZ8 97.375        15.5

EDH9 97.255       24.0

EDM9 97.155      32.5

EDU9 97.095       42.0

EDZ9 97.055        49.5

EDH0 97.05         57.25

Prices from 8/15/2019 (yesterday)

EDU9 98.035         16.0

EDZ9  98.260        36.5

EDH0  98.530       47.0

EDM0  98.650      56.5

EDU0  98.730       63.5

EDZ0   98.735       70.0

EDH1  98.795        74.0

The at-the-money December straddle is more than double the premium of a year ago, 36.5 vs 15.5.  Currently, the red euro$ pack is an average price of 98.7625, projecting a FF target one year forward of 1.0-1.25% at which we’ll stop.  If that’s the case, long red straddles currently seem like a sale.

–Powell speaks one week from today at the KC Fed’s Jackson Hole conference.  There was an article out yesterday saying that Fed officials were instructed to cease comments going forward.

–Housing starts and U Michigan Sentiment and Inflation indicators today.  The Mich 5-10 yr forward inflation indicator was 2.5% last (vs treasur /tip spread at a new low of 1.56%, 100 bps lower….   
https://spectator.us/media-blackout-fed-jay-powell/
Interesting notes on WeWork below: 

https://ftalphaville.ft.com/2019/08/14/1565783457000/WeWork-s-S-1–some-quick-observations/

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Posted on August 16, 2019 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Stocks and yields melt

August 15, 2019

–New historic low in 30 year yield closing at 2.027% and piercing 2% this morning.  2/10 yield spread inverted; I marked at positive half a bp yesterday at futures settle. The gold eurodollar pack (5th year forward) ended within 10 bps of new all time highs.  New recent low in red/gold pack spread at positive 8.5.  This spread had actually inverted last year in early December prior to the last hike. The ten year inflation index not closed at a yield of less than half a bp.  I.e. a REAL yield of zero.  Ten yr/tip marked at a new low of 1.578%. (market proxy for expected inflation). 

–I mentioned in yesterday’s title that stocks had a ‘temporary’ bid from Trump’s tariff tweet. It was more temporary than I would have thought. DJIA, SPX, NASDAQ and Russell were down about 3 pct. (RTY only down 2.85)   However Hi-yield etf HYG down less than 1 pct. Do low rates make spreads come in?  Or will lenders become circumspect as outstanding debts become a larger percentage of equity with stocks under assault? 

–Inter-meeting cut?  Probably not.  FOMC is Sept 18, just five weeks away, with potential China/US talks just preceding.  If there’s no progress in China then look for 50.  Aug/Oct settled 33.5.  Tempted to sell that and sell some ED calls.   

–Implied vol exploded in rates.  Examples, TYV atm straddle went from 1’43 Tuesday to 1’52 Wednesday (ref 131-04)., a nominal gain of 8.4%.  USZ atm straddle went from 5’52 to 6’20, about the same nominal gain except that the contract itself rallied 2 points and the 30 yr cash bond fell to a new all time low.  

–Huge selling of EDH0 9862.5/9900 c spd at 8.5 (settled 15.5 and 7.0 ref 9845.5 EDH0).  Open interest increased in both contracts, +109k in 86c to 270k, and +53k in 90c to 294k.  Somewhat interesting in light of a decline in total ED futures open interest, down 46k with most of that being in EDZ20, -33k.  A decline in futures OI on a strong rally may indicate capitulation.  How much actual hedging needs to take place is the FF target goes back to a range of 1.00 to 1.25% as reds are now indicating?  Vol in dollars also exploded, with straddles up a couple of bps.  Just consider EDH0 9900c for a second, with premium of 7 bps.  Breakeven of 83 bps for 3 month libor vs around 2.15% currently.  On the other hand, EDH0 9950c were recently bought in size for 1.0 and settled 2.0 yesterday, a quick double.

–An interesting article brought to my attention about RMD, Required Mandatory Distributions from retirement accounts once a person hits age 70.1/2.  The law, as it currently stands, requires boomer accounts to start taking withdrawals, i.e. selling stocks.  The paper I saw, linked below, indicates $10 trillion in sales over 20 years.  Not linear of course, but call it $500b per year. Something to be aware of in terms of market psychology, but the law will likely be changed, and $500b year can be absorbed easily in a strong market.


https://www.bnymellon.com/_global-assets/pdf/our-thinking/baby-boomers-and-required-minimum-distributions.pdf

Posted on August 15, 2019 at 5:15 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

A Tweet from Trump Sparks Temporary Reversal

August 14, 2019

— A tweet from Trump suspending September tariffs on additional Chinese goods sparked stocks and caused a pullback in fixed income.  At yesterday’s close SPX was up 1.5% and Nasdaq nearly 2%.  The ten year yield rose, but only 3.4 bps to 1.673%, as the brunt of selling pressure occurred up front.  The two year yield rose 8.6 bps to 1.662% and was weakest on the treasury curve.  2/10 plunged over 5 to end at just 1 bp (it’s down from 21 at the end of July).  5/30 plunged 7.8 bps to end at 57, essentially at the 38% retracement from last Sept’s low of 22 to the June/July double top of 80.     

–The eurodollar curve flattened to new recent lows as well: Reds -11.0, greens -10.875, blues -9.0 and golds -6.125.  Red/gold pack spread closed at just 9 bps, having been over 42 in mid-June.    

–Markets have recovered some of yesterday’s moves this morning, as every financial site has similar headlines referring to the deceleration in China’s industrial output and Germany’s slump in exports with GDP falling 0.1% in Q2. Obviously the protracted trade war is impacting growth. The problems in Hong Kong are ongoing, and China denied US warships request to dock in Hong Kong.  Although trade talks are on again for early September, there doesn’t seem to be much reason from China’s perspective to modify its position.    

–While the front end of the curve was thrashed, odds on forward easing prospects didn’t change all that much.  In Fed funds, the Aug/Oct spread rallied 5.25 to -29.25, but it still indicates at least a 25 bp cut in Sept.  EDZ9/EDZ0 only rose 3 bps to close at -45.0, while EDU9/EDU0 closed -61, up 5.5.

–Speaking of odds, a consulting firm said high taxes and fees make a Chicago casino not feasible.  Perhaps this is a problem that never blows up, but Illinois is searching for every bit of revenue it can find to the point of squeezing.  A decline in growth will bring pension problems to a head; low rates are already hurting.

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5/30 treasury spread
Posted on August 14, 2019 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Assassination Tango

August 13, 2019

–Only 97 years and 8 months to go.  In June 2017 Argentina famously auctioned dollar denominated 100-year bonds in size of $2.75 billion.  Last week, they traded 74. and yesterday, 54.  You wanted yield, right?  Attached is a chart of Merval index.  I guess the financial markets aren’t all that wild about socialists.  Shouldn’t Argentina try to buy these back and book a billion or so? 

–I missed this but the US Postal Service reported Q3 results last week:  a loss of nearly $2.3 billion on revenue of $17.1 billion.  Blew away UBER, which had reported a loss of $5.2 billion on revenue of $3.17 billion.  I think UBER wants to deliver stuff too.  Maybe the gov’t should just have an IPO for the USPS.  Some other global assets have negative yields too, and they seem to enjoy robust demand. :- /

–The US gov’t budget statement was released yesterday.  No surprise, but the deficit ten months into the fiscal year of $866.8 billion is more than all of last year’s.  And the US 30 year bond yield came within 2 bps of an all-time-low, closing at 2.129%.  I marked the ten year inflation-indexed note at positive 2.5 bps.  In other words, “real” yield has vanished and may turn negative.  The spread between the ten year treasury and tip is  1.614%, supposedly related to long term inflation expectations.  Today CPI is released, with an expected year-over-year Core of 2.1%.  Monthly expected +0.3 headline and +0.2 Core.  

–No inflation in grains: yesterday’s crop report sent corn down the 25 cent limit, and is lower yet this morning, having erased the entire rally from May associated with flooding and reduced planting.  Dec Corn now 3.81 having traded as high as 4.70 in June.  So gold making new highs this morning at $1535/oz (up $18), doesn’t have to do with inflation, it’s all about a lack of trust in the world order and fiat currency.

–Yields, of course, fell yesterday, sparked in part by the deteriorating situation in Hong Kong and a desperate search for safety.  This weekend I mentioned that a lot of prices were re-visiting lows from the middle of 2016.  Add to that the share price of the biggest shipping company in the world, Maersk. And add $/yen, which is nearing 105, the lows of the past year and a half.  The low from 2016 was around 100.  –The ten year yield fell 9.4 to 1.639%, with the 30y as mentioned above, falling 11.7 bps to 2.13%.  In treasuries, steepeners were exited (5/30 closed at a new recent low of 64.6, down 4 on the day).  There was a buyer of 30k TYV 138.5c for 2/64’s; I reckon that strike to be around 75 or 80 bps.  In dollars, a buyer of 90k EDV 9850c for2.5 was an exit; settled 2.75 vs 9820.  The other large trade was a seller of 75k EDH0 9862/9900cs at 8.5, which appears to be a roll down of short 9900 calls into the 9862 strike.  (settles 14.0 and 5.5 ref EDH0 9846.5).   

–The title to this note is just the first thing that popped into my head.  Assassination Tango is a 2002 movie with Robert Duvall who plays a hitman sent to Argentina to kill a general.  When his plans get delayed, he is drawn into the world of tango.  Sort of ties Argentina and Jeffry Epstein together.  

https://about.usps.com/newsroom/national-releases/2019/0809-usps-reports-third-quarter-fiscal-2019-results.htm

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AP Moller Maersk

Argentina’s stock market below

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Posted on August 13, 2019 at 5:11 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

More insurance cuts for funding issues, or slower growth?

August 12, 2019

–Yields rose a bit Friday with tens up 2.1 to 1.733% and the red euro$ pack -4.5 bps, however, those moves have been more than erased this morning as issues with China appear to be the dominant factor.  The Hong Kong situation appears to be getting worse with HK’s airport cancelling all flights due to protests.  China’s loan growth was reported at 1.06 trillion yuan, slightly lower than expected.  Money supply growth also lower than expected.  There is a ZH story citing Goldman showing that the 7 day repo in China has more than doubled recently, from around 4% to over 8%.  I am not sure how to gauge the impact, but funding tightness has a way of spreading.https://www.zerohedge.com/news/2019-08-11/chinese-banks-no-longer-trust-one-another-repo-rates-skyrocket 

–This morning EDZ9/EDZ0 prints -48 from a settle of -45.5.  As EDM’19 was nearing expiration the front spread EDM9/M0 had been below -70.  April ’20 FF (FFJ0) settled Friday at 98.65, a spread of -78 to the current FFQ9 contract. so that market is pretty certain of at least three 25 bp cuts into the first quarter.  The only one who doesn’t know we are  not in a full blown easing cycle is Powell.  There have been a lot of large euro$ option trades recently, but since I mentioned Q1, I will note that there has been consistent buying in EDH0 9950c for 1.0, 45k Friday, with March ’20 futures more than 100 bps below strike (EDH0 9841.5s).  Whether to cap risk or as a spec play, that’s an expensive wing.  

–Another spread worth noting is EDZ9 vs FFF0 which settled 32.0, 9816 vs 9849.  If funding problems accelerate, this spread will likely capture the sentiment.  I’d say that 45 is more likely than 25 at this point.

–August midcurve expire Friday.  ATM straddles 0EQ, 2EQ and 3EQ all settled 11.0 on Friday, sort of expensive with a week to go, but delivered vol probably makes them fair.  

Posted on August 12, 2019 at 5:26 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Round trip back to 2016

August 11, 2016

Weekly Comment

There were many important lows made in 2016 across markets, just before the US election of Donald Trump.  For example, pictured below is the Copper/Gold ratio, which I will return to.  It bottomed in June 2016, which, by the way was just below the 2009 crisis low. (For a better longer term chart see link at bottom).  The US ten year note hit 1.36% and the 30 year 2.10% in June/July 2016. I had thought those levels would never be seen again.  However, this week the 30y came within 5 bps of that level though it ended Friday at 2.25%.  The STOXX Europe Bank Index (SX7P) index is back at the low of 2016.  The ratio of Russell 2000 small caps to SPX is back at the low of 2016.  So are the Aussie dollar and British pound. 

At the December 14, 2016, FOMC announcement, the Fed raised the target FF rate to 0.5% to 0.75%.  It was the second move in the hiking cycle which had begun in Dec 2015.  The statement noted (like a broken record) “Inflation has increased since earlier this year but is still below the Committee’s 2% long-run objective…” “Inflation is expected to rise to 2% over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.”  That was a reasonable call at the time I suppose.  WTI Crude had plunged below $30 by January of 2016, but by December it was back over $50.  On Friday, the front contract settled $54.50.  The one-year forward contract, CLU20, settled 51.69. In the interim, it traded just north of 70, as everything levitated with the signing of the US tax package in late 2017.  In Dec 2016, SPX was around 2250 vs 2918 now.   

While the current FF target is 2.00-2.25%, forward rates are trading back to levels more consistent with 2016.  In mid July of this year, Elizabeth Warren warned “I see a precarious economy that is built on debt – both household debt and corporate debt – and is vulnerable to shocks on the horizon that could cause our economy’s shaky foundation to crumble.”  I don’t know how much that warning resonates with the electorate, but it’s likely to become more of a talking point.  In any case, rate markets globally have bought into the ‘shocks on horizon’ thesis.  Will markets generally be able to hold 2016 lows?  I don’t know how much it has to do with the election cycle and how much it has to do with Fed and global central bank policies, but rate cuts have been more aggressively priced and it’s likely the Fed acquiesces, not to Trump, but to market signals. If anything, Trump’s strident tweets will slow the process (hence the recent bias toward flattening).  I doubt that the Kansas City Fed’s Jackson Hole conference, which starts August 22, will do much to shore up confidence.

Yields took a dive this week as the currency war escalated with the yuan piercing the 7 level.  On Monday SPX fell 3%, but staged a powerful rally through Thursday, before easing back on Friday, closing nearly unchanged on the week, even as Trump warned that September’s planned talks with China could be cancelled.  The ten year yield plunged and remained lower, closing -12.4 on the week at 1.733%.  The red and green eurodollar packs rose 13.875 and 14.625 on the week to end at 98.63875 and 98.6375.  The red pack starts in September 2020.  So, over this two year forward period, the market is currently projecting a short term yield level of around 1.36%, which is more consistent with a FF target of 1-1.25%.     

Of course, it’s not just the US.  Below is a chart of 10 year yields in Japan and Germany, with the latter having seriously out-Japaned the former.  In Q2 the bund yield decisively plunged below the JBG and never looked back; the gap has opened up to 36 bps (JGB -22 bps and Bund -58 bps).

The ten year yield in Greece began 2019 around 440 bps and is now just 2.12% having briefly dipped below the US yield (now 1.73%).  The US ten year yield is correlated to the copper/gold ratio (Gundlach indicator) with copper prices projecting manufacturing strength and confidence while gold acts as safe-haven.  This ratio indicates more downside in US yields.

With a larger percentage of global yields sliding into negative territory, and gold breaking out to new highs in many currencies, and bitcoin closing the week strong around 12000, larger questions about what constitutes a stable store of value are likely to dominate the investment landscape.  It’s really the Trump era that has seen the surge in bitcoin, and certainly the relationship between currencies is in flux at this time.  As prophesied in the 4th Turning by Strauss and Howe (1997), in the Unraveling, “…people will come to the jarring realization that they have grown helplessly dependent on a teetering edifice of anonymous transactions  and paper guarantees…The era will have left the financial world arbitraged and tentacled.”  I don’t know how close we are to an “Unraveling” but the idea of 14-15 trillion in negative yielding global debt is certainly a jarring fact that rests on the idea of financial engineering as a transmission vehicle to the ‘real economy’.  Can we be confident in that?   

OTHER MARKET/TRADE THOUGHTS

The current Fed Effective has been around 2.13%, right in the middle of the Fed’s target range.  October FF settled 98.19 or 32 bps lower (covers Sept FOMC).  The Oct/Nov FF spread settled -16.5, indicating better than 50/50 odds of an ease at the Oct 30 meeting.  April 2020 FF settled 98.65, or 78 bps lower in yield than the currect EFFR.  The April contract covers 5 FOMC meetings.

From last week. “Dec Gold settled 1457.50.  Buy pullbacks close to 1440 with stop below 1414 and an objective of 1500 to 1550.”  With a high of 1522 last week this hit the objective much faster than I would have guessed, but still looks constructive. 

In 1986 the Chernobyl radiation accident occurred.   Grain prices rallied as Ukraine’s crops were threatened with contamination.  The latest Russian nuclear accident is much further north in the Arkhanglelsk region.  However, grains are a much better buy than sale. 

8/2/2019 8/9/2019 chg
UST 2Y 171.8 162.6 -9.2
UST 5Y 167.0 156.0 -11.0
UST 10Y 185.7 173.3 -12.4
UST 30Y 240.2 224.6 -15.6
GERM 2Y -78.8 -86.3 -7.5
GERM 10Y -49.5 -57.6 -8.1
JPN 30Y 32.1 21.3 -10.8
EURO$ Z9/Z0 -43.5 -45.5 -2.0
EURO$ Z0/Z1 -1.5 -2.5 -1.0
EUR 111.09 112.01 0.92
CRUDE (1st cont) 55.66 54.50 -1.16
SPX 2932.05 2918.65 -13.40
VIX 17.61 17.90 0.29

https://www.longtermtrends.net/copper-gold-ratio/

https://www.federalreserve.gov/monetarypolicy/files/monetary20161214a1.pdf

Posted on August 11, 2019 at 8:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Effectively, it might be a little tiny bit below zero

August 9, 2018

–Stocks ripped higher yesterday with SPX +1.9%.  As a result, the bid for safety eased in rate futures, with the ten year yield rising  3 bps to 1.712% and red through gold euro$ contracts falling 5 to 3 bps.  The curve was modestly flatter as front euro$ contracts were weakest on the board; EDZ9, H0 and M0 all down 5.5 on the day.  Fed fund contracts fell as well, but with a settlement of 98.195, down 3.5, (1.805%) FFV9 is still 35.5 bps lower in yield than current EFFR, nearly halfway between a cut of 25 and 50 penciled in for September.   There’s an FOMC meeting at the end of October as well, and Oct/Nov FF spread settled -16.5.   EDZ9/EDZ0 settled -47.5.

–Since yesterday’s settlements, UBER earnings revealed a loss of $5.2 billion on revenue of $3.17 billion for the quarter.  Analysts sifting through the data were able to identify ‘stock based compensation’ as one of the factors which led to ‘disappointing’ results.  “We offer a generous pay package.  In stock.”  In other news, licenses for US companies to do business with Huawei are still suspended.  China inflation data came out with PPI -0.3% yoy and CPI +2.8% with food +9.1% and the yuan set lower.  These factors are enough to cause a retrace lower in stock index futures (so far).  Let me think.  Should I swap my UBER shares for gold, bitcoin, or cans of baked beans?

–One late trade was a buyer of 7k EDU0 100.125 calls for 0.5.  From the reds back there has been a fairly robust market in 0% calls, i.e. the 100 strike, but not much in negative rate strikes.  But it looks like that might develop, and the Fed’s semantic change from ZLB to ELB (EFFECTIVE Lower Bound rather than ZERO) seems quite prescient.  The beauty there is that “Effective” can’t be defined, much like the “Neutral” rate. 

–US news today includes PPI, expected +0.2 with Core +0.1 and yoy Core +2.3%. 

Posted on August 9, 2019 at 5:12 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Rory. He’s not to be underestimated

August 8, 2019

–Amazing market action so far this week.  The thirty year bond neared its all time low yield at 2.10% having traded 2.14 (at futures settlement it was 2.19%).  The ten year note ended the day at 1.682%, down 5. bps on the day.  The two year swap spread went negative by a couple of bps, meaning that the supposedly safest security in the world had a higher yield than the two-year swap. By the way in 2008 this spread was 140 bps, and as recently as last year was above 30.   In recent cycles, the at-the-money ten year straddle would trade around 1 point with five weeks until expiration.  Yesterday, with two and a half weeks until expiry, TYU9 130.25 straddle settled 1’14.  Crude oil was crushed yesterday, settling down 2.54 at 51.09, though it has rebounded today as the Saudis vowed to stem the price decline.  Stocks took a hard early spill but fought back the rest of the day and are building on gains this morning.  Trump once again tweeted that the Fed should admit its mistake and cut rates, essentially pouring gas on the currency wars.. Chicago’s Evans got the message and said more easing may be warranted due to ‘headwinds’ since the last meeting, WHICH WAS ONLY 8 DAYS AGO. 

 –The eurodollar strip was up 7.5 to 8.25 bps from reds through golds.  The red/green pack spread declined 0.625 to settle exactly flat, i.e the four contract average in the second year forward and the third year forward settled at 98.72875, or right around 1.25%.  That level would be consistent with a Fed Fund target of 1-1.25%.  FOR TWO YEARS.  

–There was an interesting tweet by Mary Childs of the WSJ, citing an article which says that Credit rating firms are giving overly optimistic appraisals as they fight for market share.  Here’s the link. https://www.wsj.com/articles/inflated-bond-ratings-helped-spur-the-financial-crisis-theyre-back-11565194951 I didn’t bother reading it.  What difference does it make?  In a world where the economic signals from interest rates have been eradicated due to central banks, does it make sense to fret about ratings?  The Fed IS ABOUT TO BUY THIS STUFF, LOCK STOCK AND TWO SMOKING BARRELS.  Yeah, it’s hard to understand.

–The press is signaling relief this morning as the yuan setting was better than expected.  It’s still above 7.   

Posted on August 8, 2019 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

It’s a manipulated world

August 6, 2019

–The stock market carnage continued yesterday evening as the administration labeled China a currency manipulator, however, a stronger yuan setting sparked short covering and stock futures are now up on the day.  Yesterday SPX fell 3% with Nasdaq down 3.5%.  From last Monday’s high to this morning’s low, ESU fell over 250 points, from 3027 to 2775, a drop of 8.3%.  Yields, of course, continued to fall as money frantically searched for safety.  By the time of the floor close (futures settlement) the ten year yield had dropped 11.5 bps to 1.74%.  Twos and fives were down over 13 bps.  Low yields in tens and thirties in mid 2016 were 1.36% and 2.10%.  Yesterday afternoon levels were only 38 bps away in 10s and 20 away in 30s.  And that’s with auctions this week.

–Aug/Oct FF spread settled -34.5, about halfway between 25 and 50 bps.  Early in the day, Aug funds were 97.8575 offer or 2.1425.  The Fed effective this month has been 2.14% so far.  The contract settled 97.875, as buyers protected against an outside chance of an emergency cut.  It’s worth noting that Service ISM was just 53.7, lowest since 2016 when treasury yields posted their lows, as mentioned above.–Implied vol soared.  As an example, the atm EDZ9 straddle was the 9787.5 strike last week, trading around 24.0.  Yesterday, with a settlement of 9821.5 in EDZ9 the atm straddle closed at 33.5 and it’s 3/8% away at the 9825 strike!  On Friday the atm Oct US straddle settled 3’38.  Yesterday USV 160^ settled 4’06.   

–In euro$’s, near calendars made new lows.  Reds were strongest on the board: reds +20.5, greens +17.75, blues +16.125 and golds +15.375.  Should have steepened even more given that rate cuts are being aggressively moved forward. EDU9/U settled -67.0, the lowest one-yr spread.  EDZ9/Z0 settled -47.0.  

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service ISM
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Ten year yield

Posted on August 6, 2019 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options