Dec 10, 2018. Broken Windows


–Goldman rescinded its forecast for a March hike.  A cursory glance at the Fed Funds futures curve tells you the same thing, as Feb/April FF spread which had been trading above 12.5 a couple of weeks ago, settled at just 6 on Friday.  The Bank of France cut economic growth forecasts for the 4th quarter, due to rioting.  Pretty clear by just turning on the tv, unless you subscribe to the ‘broken window’ theory of growth (disputed by Bastiat in 1850 / That which we see and that which we do not see).  We’re in a time where you CAN see with your own eyes.  On Friday, EDZ8/EDH9 spread inverted to -1.0.  It doesn’t look right in a hiking cycle, but there it is.  All near eurodollar calendar spreads were crushed to new lows.  EDZ9/EDZ0 settled at a new low of minus 12 bps, now more negative than EDZ8/EDZ9 which settled at positive 10 (the high point and low point on the curve in terms of one-year calendars).  One might almost say that the market is now placing higher odds of forward easing rather than forward tightening.  Hints of a change in the balance sheet reduction schedule are likely to occur at next week’s FOMC press conference.
–Option vols have also firmed.  The greens have been the star performers to the upside, with the green pack up just over 22 bps on the week (friday to friday).  The atm 2EM straddle went from  46.5 on Nov 23, down to 41.0 in Nov 30 (both 9700 strike) while the 9725^ settled 43.0 on Friday.  At the end of November it appeared as if nothing could happen from an option perspective, now it’s as if there’s uncertainty in every corner of the globe.
Posted on December 10, 2018 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 9, 2018. Overkill

I watched a fascinating documentary last week on bodies that had been excavated from peat bogs in Ireland and Denmark from the Iron Age (2000 BC).  These bogs preserve the tissue and it remains pliable thousands of years later.  This show specifically dealt with Cashel Man, found in a bog near Cashel in County Laois, Ireland.  The forensic science is astounding, but to cut to the chase, many of these bog bodies appear to have been ritualistic killings of kings due to conditions having gone badly under their reigns.  The program refers to ‘triple killing’, noting bodies that have had throats cut, been stabbed by sword through the heart, and axed in the head. In short, ‘overkill’.


“The killings tend to be excessive,”  Kelly, said “in that more is done to the bodies than would be required to bring about their deaths. Bog bodies may have their throats cut, been stabbed in the heart and have other cut marks. However, it is absolutely not torture, but a form of ritual sacrifice.”  “By using a range of methods to kill the victim, the ancient Irish sacrificed to the goddess in all her forms. This manner of death is peculiar to the ritual killing of kings. It means that a king was being decommissioned.”


When Trump was elected in November 2016, the Corporate BBB option-adjusted spread to treasuries was 179 bps.  It was already in a rapid decline from the energy inspired surge in late 2015, which peaked in February 2016.  In the two years that Trump has been in office the spread never exceeded the election-day level of 175 bps – until this week.  I sent the image below on Tuesday as the spread was just about to make new highs for Trump’s reign.  On Thursday the St Louis Fed marked the spread at 191 bps, and it was obviously higher on Friday.


In late November of 2016, the two-year treasury was around 110 bps and the five-year was around 180 bps.  As of Friday both the 2 and 5 yr were around 270 bps.  Even with the decline in rates seen this week, the record level of corporate debt to GDP means that a crunch of sorts is coming for companies that need to roll debts, especially those that cleverly borrowed in order to buy back shares.


Of course, it’s not just companies that need to borrow.  The Federal Gov’t has become voracious, and this week will auction 3, 10 and 30 year paper in the amount of $78 billion, which will raise $54 billion in new cash.  ‘Crowding out’ of the corporate sector may become a real concern.  Although still relatively low in recent history, FT notes “The US distress ratio [for US junk] – defined as…’the number of distressed credits divided by the total number of speculative-grade issues’ – rose to 7.2% as of Nov 15, up from 5.6% as of mid-October.  S&P cautions that a rising ratio suggests an increased need for capital and signals that defaults could rise.”


Last week the Fed released the Z.1 report for Q3.  None of the borrowing ratios by sector look particularly worrisome, although business borrowing slowed appreciably in Q3 from Q2 from a rate of 6.94% to 3.87%.  The deterioration is longer term in nature and concerns borrowing by the Fed’l Gov’t.  I used to think of Households, Business and Fed’l Gov’t as having comprised about 1/3rd each of total non-financial domestic debt.  Pre-crisis in 2006 the amounts outstanding were $13.3T for HH (43% of total), $9.0T for business (29%) and $5.8T for the Fed’l Gov’t (19%).  By 2015 it was $14.2T HH (31%), $12.8 business (28%) and $15.2T for the Fed’l Gov’t (36%).  Sure, the Federal Government had to expand to heal the damage and the HH sector was either shut out or self-disciplined with respect to borrowing. The latest figures for Q3 2018 show HH at $15.5T (30% of total), business at 15.0T (29%) and the Fed’l Gov’t $17.8T (35%).  Although the economy has ‘recovered’ and the Fed has withdrawn stimulus, growth is still being heavily supported by the Fed’l Gov’t, which is one reason that fiscal programs enacted earlier in the year were forecast by some as a “sugar-high” temporary boost to growth.


On the week, whatever positive feelings came out of the G20 meeting quickly evaporated, with SPX down 4.6%. On Tuesday the NFIB small business optimism data is released, which has been closely correlated to the Russell, which was down 5.5% this week for a new low close on the year.  We’ll see if NFIB follows suit.  Treasury yields plummeted with a decline of 15 bps in the 5y to 2.69% and 16 bps in tens to 2.845%.  The German bund ended at 25 bps, below important support at 30/31.  China’s ten year also finished at a new low of 3.31%.


The Eurodollar curve saw a massive re-pricing.  The one-year spread between the 3rd and 7th quarterly contracts inverted after having been as high as +42 in February.  This is now June’19/June’20 which settled -3.5 (9716 and 9719.5).  Some forecasters had been predicting recession in late 2019 and the euro$ curve generally had been on the same page, with EDZ19/EDZ20 hovering between +5 and -2 since summer.  However this spread, Z19/Z20, plunged to a new low of -12 on Friday, and the inversion of nearer spreads like EDM9/EDM0 puts the timetable for recession much closer.  What a difference a week makes.  EDZ19 was up 12 bps on the week on huge volume, while the middle 2 greens, EDH21 and EDM21 were up a whopping 22.5 bps (strongest part of the curve).  No matter how the ‘dots’ come out at next week’s Dec 19 Fed meeting, the ED curve is currently looking at a terminal rate of around 2.5%.  In Fed Funds, the Jan’19/Jan’20 spread went from 31 to 19.5 on the week…over/under on the prospects of just one hike over next year.  EDZ19 has the most open interest of any contract on the board, but 49K were liquidated on this week’s rally, from just over 2 million to 1.954m.    On the other hand, EDZ20 rose in OI from 1.189m to 1.246m.  Note that midcurve December options expire Friday so there will be quite a bit more adjustment this week.  On Friday Nov 30, 2EZ 9700 straddle settled 10.5 with a settlement right on strike at 9700 in EDZ0.  With just 5 trading days until expiry, 2EZ 9725^ settled 10.0 vs 9721.5 (and needless to say, the 9700 straddle doubled).


The other powerful move was inversion in the very front part of the ED curve, with EDZ18/EDH19 closing at negative 1.  Partially this is due to year-end funding concerns, as libor/ois widens.  The December Eurodollar to January’19 FF spread closed at a new high of 43 bps.  EDZ8/EDH9 was as high as +15 in early November.  A nice trade that occurred to play the inversion was a buyer of EDZ/EDF 9725 call calendar for 1.0.  Settled 2.25 on Friday, 0.5 in Dec and 2.75 in January.


The interest rate market is sending SOS flares for relief from the Fed’s austerity campaign, and stocks are now also begging for help, but problems are geopolitical rather than simply financial.  In some cases there are regulatory issues.  For example, DB closed at a new low.  GS closed at a new low, off a third from the year’s high.  In fact, in the past month, the market cap of GS declined by the same amount as the total current market cap of DB (about $18B).  XLF, the financial etf, closed at a new low, down 17% from the high of the year.  Tensions with China went from a brief sigh of relief on Monday to a white-knuckle grip with the arrest of Huawei Technologies CFO.  The rioting in France seems to be expanding outward.  Conditions under the leadership of Trump, Macron and May are deteriorating.  Are markets warning of a glancing blow without lasting damage, or are we marching down to the bog for ritual overkill? CNBC commentators will obviously echo the Black Knight, “Tis but a scratch”.  On the other hand, with problems piling up globally, we might close out the year with, “Alright, we’ll call it a draw.”  Which would be a bloodbath, a combination of under-statement, and over-kill.


Besides the auctions, this week includes inflation data, PPI Tuesday and CPI Wednesday.  Retail Sales on Friday.



Feb/April FF spread settled 6.0, down another 5.0 on the week and effectively taking down the odds of a March hike to 1 in 4.  May/July settled 4.5, down 1.5.  Fed fund spreads have chopped odds of further hikes, but in the front end, funding libor/ois is front and center with EDZ8/EDH9 INVERTED at minus 1.0, down 6.25 on the week, and EDZ8/FFF9 at 43.0.


11/30/2018 12/7/2018 chg
UST 2Y 280.9 271.1 -9.8
UST 5Y 284.1 268.9 -15.2
UST 10Y 301.0 284.5 -16.5
UST 30Y 330.9 314.0 -16.9
GERM 2Y -59.6 -59.9 -0.3
GERM 10Y 31.3 24.9 -6.4
JPN 30Y 80.0 80.6 0.6
EURO$ Z8/Z9 22.8 10.0 -12.8
EURO$ Z9/Z0 -2.5 -12.0 -9.5
EUR 113.20 113.87 0.67
CRUDE (1st cont) 50.93 52.61 1.68
SPX 2760.17 2633.08 -127.09
VIX 18.07 23.23 5.16

Posted on December 9, 2018 at 5:44 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 5. You’re drunk camel. Go home.

–Monday I noted a disconnect between the flattening curve and stock rally, saying that declining yields in the back end of the curve signified an economic deep freeze.  Overstated perhaps, but yesterday the exuberance following the US/China confab evaporated and SPX fell 3.2%.  Russell and DJ Transports were down 4.4%.  FedEx fell 6.3%.  Goldman and DB continue to make new lows, with the former at the holiday special of 33% off the price in March. The curve however, continued to flatten.  They’re chalking it up to ‘risk-parity’ programs….does that mean EVERYTHING is now risky and a surge into the front end no longer applies?
–All front one-year euro$ calendars made new lows. with EDH9/EDH0 down to 14.5 bps, almost a coin toss as to whether there’s even ONE hike between Q1 2019 and 2020.  Red to greens (2nd to 3rd year) slipped deeper into quicksand, with the pack spread closing -6.0, down 1 on the day.  New lows in both red/gold (2nd to 5th) and 2/10 treasury spread at -5.625 and +11 bps.  The financial press is at a fever pitch over a slight inversion of 2/5 treasury spread, but the euro$ curve has been sending a steady (if not strident) signal of future economic malaise for months.  Like many I was ignoring it, but the bounces have been fairly lifeless (except in 5/30, which also dropped 6 bps to 37.6).
–Consider this:  there has been constant accumulation of Blue Sept 9800c, yesterday from 4.0 to 5.0.  Underlying contract on 3EU calls is EDU22, which settled 9709.5, so 90.5 out of the money with expiry on  9/13/19.  37k new buys yesterday, brings OI to 237k.  Settlement price, 4.75.  Would you rather own those, or EDU9 9737.5 call, which expire at the same time and settled at the exact same premium of 4.75?  Underlying is EDU9 which settled 9702.5, so this call is 35 out of the money.  Off the lows in early Nov, EDU9 is up ~22 while EDU2 is up ~35. [this is a rhetorical question, NOT A RECOMMENDATION]
–Below is a long term chart of red/gold.  It had already (unlike 2/10) made a new low relative to the 2004/2006 hiking cycle.  But yesterday it appears to be following the infamous vomiting camel formation.
Posted on December 5, 2018 at 7:45 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

DEC 4. EDZ9 starts and ends the year with action

–Interesting price action.  Stocks rallied as if the economic malaise associated with a trade war had lifted, while the back end of the eurodollar curve flattened to new lows as if an economic deep freeze is right around the corner.  Two charts below: the top is 2/10 which cratered by 5 bps yesterday (as of the 2 pm close it was down 4.2 to 15.9, the chart below shows 14.9).  Below that is the first red to the first green on a rolling basis.  Currently this is EDZ9/EDZ0 which further inverted to a new low of -5.0, down another 2.5 on the day.  I’ve taken these charts back to 2004 to cover the last hiking cycle of 2004-06.  The lowest low in ED5/ED9 at that time was -12.5 (so we’re 7.5 away) and in 2/10 the low was around -20.
–Tens fell in yield 2 bps yesterday to 2.99%, but we were another 2 lower going into the 5pm electronic close.  This morning rate futures are holding gains and stocks are softening, as warm feelings about the China/US deal dissipate (A RTRS headline says US wants immediate action from China).
–Other notes, the French gov’t is suspending the ‘eco-fuel’ tax that put the energy in protests (but those still probably aren’t over).  And Weidmann says the ECB shouldn’t waste any time in ‘normalizing’.  This, as the German bund sinks below its support at 30 bps, and DB reverses yesterday’s gain.  Normal.
–A LOT of talk yesterday about weakness in EDZ9 contract in particular and all December contracts in general.  EDZ9 contract is once again the cheapest on the board.  (Example, from 6m flies: H9/U9/H0 is 9.5, M9/Z9/M0 is 15.0 and U9/H0/U0 is 8.5).  The contract with max open interest is EDZ9 at 2.035m.  EDZ8 has 1.561m and Z0 1.224m.  Yesterday there was an absolute crush of EDZ9/Z0 which closed at a new low of  -5 as indicated above.  Open interest was up in both contracts, +32k and +34k so positions appear new as we slide into an illiquid time of year.
–At the start of this year, on Jan 5, the big EDZ9 open interest was kicked off with a monster sale of 125k Z8/9/0 flies at 14.5 to 15.0, then an extreme level.  It has never really subsided. Z8/Z9/Z0 yesterday closed at 29.5.  I re-post a note below the charts that I wrote in late Jan.  More to say on this later, but for now it feels like something could ‘break’ on the ED curve.

I wrote this note on Jan 19, 2018, at the start of the year:

On Jan 2, 2018, Aggregate Open Interest in Euro$’s was 12,745,080.   On Friday, it was 14,187,223, so that’s an increase of 11%.  Obviously, as yields have risen, the demand for hedging has increased substantially.  A particularly large change has been in EDZ19 contract.  As shown on the chart below, open interest in that contract alone has surged from around 1m at the end of the year, to over 1.5 million now.  This accounts for over 1/3 of the total rise in open interest.

On 5-January, about 125k EDZ8/Z9/Z0 butterflies were sold at 15 to 14.5.  That was obviously a new position, a sale against the high settle of 16.5 in the fly (16.5 settle on 4-Jan).  Since that time there has been heavy trade in many ED one-year calendar spreads, but especially in EDZ18/EDZ19.  I had heard speculation that the butterfly short was covering the front spread (buying back EDZ8/9), but given the open interest increase, it appears more likely that there are several large players on opposite sides of the market.  In one of my old technical analysis classes, I was taught that the increase in open interest in a given contract was viewed as “tinder” for the next big move; i.e. someone loses the battle and needs to exit.  From the recent rise in rates, it appears that the shorts have the upper hand.

Posted on December 4, 2018 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Dec 3. Party on Garth

–Markets have embraced detente between US and China, with rallies in stocks, oil, gold.  Both sides can claim progress as a ‘growth win’.  USD slightly weaker but a move to higher rates underpins the greenback.
–Brainard speaks today on Treasury Market Structure at 10:30.  Possible clues about ongoing QT.
–New lows in all near ED calendars on Friday with EDZ8/Z9 at 22.75 as EDZ8 continues to see pressure.  New low print this morning at 9718.75.  The market continues to price the December FOMC for a hike, but March is now perhaps under 50% depending on IOER, with Feb/April FF having closed at 11 bps.
–There’s underlying hope that an end to Fed tightening coupled with an easing of trade tensions will right the ship of global growth.  However, the red to green eurodollar pack spread remains negative, at -3.0 on Friday, signifying steady to lower rates in  2021.  This spread hasn’t been above +1 bp since the middle of summer.  The dollar curve is NOT ready to jump on the growth and inflation bandwagon.  Red, green, blue and gold ED packs are all within 4 bps of 97.00 or 3%.  No matter what the Fed dots project, the euro$ curve is forecasting a terminal FF rate of around 2 5/8 to 2 3/4%.  As of the September FOMC, the 2020 dot plot showed 6 (majority) at 3.625% and 12 between 3.125% and 3.625%.  The ED curve will not buy into it.
–Powell was scheduled to speak Wednesday but stocks and rates are closed.  Employment data on Friday.

Posted on December 3, 2018 at 5:12 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options


They got a name for the winners in the world
I want a name when I lose
They call Alabama the Crimson Tide
Call me Deacon Blues  
–Steely Dan, Deacon Blues


I couldn’t decide whether to go with ‘Roll Tide’ or ‘Winning’, popularized by Charlie Sheen, for the title to this note.  Had to go with the decisively positive Roll Tide after the amazing come-from-behind win over Georgia on Saturday featuring the redemption of Bama quarterback Jalen Hurts.  This is collegiate sport as religion.  A scan of the stands after big plays captures the range of almost every human emotion of the fans: giddy elation, devastating deflation, nervous hopefulness.


This was a week of winning for Trump. First, the Fed’s Powell changed the narrative for future hikes, saying that the fed funds rate was near the lower end of the neutral range, in what some perceived as capitulation to Trump’s demand for an end to hikes.  Then, he called a 90-day truce with China’s Xi on imposing further tariffs in January.  Perhaps it’s a kick the can down the road victory, but for now it’s certainly a positive.  China agreed to buy more US agricultural products, surely a boost for grains.


This should be a week of hopefulness and elation for stocks, and clearly the strong close to the week is a reflection of the mood.  The funeral of former President Bush will focus national attention on the positive aspects of US.  While it’s unclear whether the huge drop in oil prices will ultimately be a boost for the US economy, Trump claimed the decline as another win, both for himself and for the average SUV American.  Winning, as defined by a lower cost of inputs for American businesses to gain global market share, and households, to support employment and consumption.


In comparison to news images of Paris rioting, it’s hard to argue that things are anything but relatively positive in the US.  Fifty years ago major US cities experienced rioting, looting and arson after the murder of Martin Luther King Jr.  That was during the Chicago rule of the original Mayor Richard Daley, and the response in April of 1968 was somewhat different than it is today:


“I have conferred with the superintendent of police this morning and I gave him the following instructions…. I said to him very emphatically and very definitely that an order be issued by him immediately and under his signature to shoot to kill any arsonist or anyone with a Molotov cocktail in his hand… because they are potential murderers…  Above all, the crime of arson is to me the most hideous and worst crime of any and should be dealt with in this fashion.”


Trump may not always be politically correct, but it could be worse.  In any case, while there are positives for risk assets, there are also changes in financial conditions that have yet to completely work their way through the system.  The rise in rates will continue to bite corporates trying to roll over significant debt.  The Fed’s balance sheet reduction is not being tweaked (for now).  Inflation, which can roughly be thought of as business pricing power, is trending slightly lower, according to market measures like the breakeven between the ten year treasury and inflation-indexed note (now below 2% after having been above that level all year).  Actually, as shown by the FOMC minutes, the Fed in November was already considering a change in language regarding “further gradual increases” in rates, by dropping the word “further” which would, according to Bloomberg, “ signal that multiple quarterly rate hikes are no longer a given.”


So we have an improvement in terms of forward Fed tightening prospects, possible relief regarding fears of an escalation in trade wars, lower energy input prices.  The Core PCE price index year-over-year was slightly lower than expected at 1.8%.  The employment report this Friday will probably show solid payrolls (200k) with average hourly earnings growth of 3-3.1%.  This latter data, if on the high side, could temper enthusiasm of those that think the hiking cycle is drawing to a close.


In terms of market structure, there are issues related to libor/ois that are reverberating.  New high this week in EDZ8/FFF9 spread at 40.25 bps.  Deutsche Bank (NYSE listing) closed at a new low of 9.16.  The German ten year bund is hovering just above critical support at a mere 30 bps; slowing EZ growth and continued concerns about financial system vulnerabilities are driving a bid to safety.   In the US, Goldman made a new low on Friday.  GE has no bounce, closing at 7.50, which is nearly half its level of just 1.5 months ago.  On the Eurodollar curve, near calendar spreads all closed the week at new lows, with EDZ8/EDZ9 at just 22.75 bps (-5.75), and EDH9/EDH0 at just 17.0 (-4.5).  Part of this is due to funding concerns related to libor/ois, but some is definitely due to a perceived economic slowdown on the horizon as the tax cuts and other government stimulus measures wane in effect.  New low as well in EDZ9/EDZ0 to -2.5, meaning that the slowdown horizon is moving closer, rather the receding.  In Fed Funds, January ‘19 to Jan ‘20 spread is still holding above ¼% at 31 bps, but after the March FOMC, the FF April’19/April’20 spread is just 19 bps, signifying less than one hike over that time frame.


While interest rates declined over the week, except for the 30 year bond which was unchanged at 3.31%, there was not a corresponding bid for implied volatility.  That’s one of the largest changes; the market is withdrawing odds of a ‘crisis’ rally which could lead to easing.  This market is pricing a slow glide deceleration.  Consider the week over week crush in midcurve straddles which lost 5-5.5 bps:


9700 straddles 11/23/2018 fut price 11/30/2018 fut price bp chng
0EH 32.0 9694.0 26.5 9698.5 -5.5
0EM 44.5 9695.0 39.0 9700.0 -5.5
2EH 33.5 9697.5 28.5 9702.0 -5.0
2EM 46.5 9698.5 41.0 9703.5 -5.5
3EH 32.0 9697.5 27.0 9703.0 -5.0
3EM 44.0 9696.5 39.0 9702.5 -5.0


Stock investors long for the return to financial engineering and loose conditions that support buybacks and increased earnings per share.  The Fed had leaned against the wind to take the froth out.  Now there’s nervous hopefulness for risk assets, though some measures like VIX remain stubbornly high at 18.  A slowdown in Fed tightening doesn’t mean it all goes back to the way it was.


The Fed calendar has Brainard speaking Monday on Treasury Market Structure.  Should be interesting as it relates to QT and treasury market supply under the regime of large deficits.


Powell was scheduled to testify to Congress on the Economic Outlook on Wednesday, however, the national day of mourning for Bush may change that.




“Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months.” – Dr. Irving Fisher, Professor of Economics at Yale University, one of the most important US economists of his day, speaking on October 17, 1929, a few weeks before the Great Crash.


“There’s really no reason to think that this cycle can’t continue for quite some time, effectively indefinitely,” -Fed Chair Jerome Powell On October 3, 2018.



Feb/April FF spread settled 11.0, down another 1.0 on the week.  May/July settled 6.0, also down 1.0.  Spreads have pared back Fed hike odds for the past several weeks.  EDZ8/EDH9 settled at just 5.25 (down 2.25 on the week).

Trade flows have favored Fed *pause* or *skip* ideas.  For example both EDH and EDM 9712/9725/9737 c fly 1x3x2 were bought for 0.75 and -0.5, settled 1.0 and -0.25.  The change in skew is reflected by a few trades.  On Nov 21 there was a buyer of 60k EDU9 9725/9750c 1×2 for -0.5 (took credit by selling 2), that now settled 1.25 for the one leg.  EDM9 9725/9737c 1×2 was bought for -0.5 after Powell, settled -0.25.

When the market perceives the end of hikes, the curve steepens.  5/30 closed just under 47 bps which is testing a downward sloping trendline.  Watch for possible breakout in terms of Fed perceptions.  Given low 30-yr bond vol it’s still worth selling FV puts and buying US puts.  Call for pricing.




11/23/2018 11/30/2018 chg
UST 2Y 281.6 280.9 -0.7
UST 5Y 287.8 284.1 -3.7
UST 10Y 305.2 301.0 -4.2
UST 30Y 330.8 330.9 0.1
GERM 2Y -58.3 -59.6 -1.3
GERM 10Y 34.0 31.3 -2.7
JPN 30Y 82.1 80.0 -2.1
EURO$ Z8/Z9 28.5 22.8 -5.8
EURO$ Z9/Z0 -1.0 -2.5 -1.5
EUR 113.39 113.20 -0.19
CRUDE (1st cont) 50.42 50.93 0.51
SPX 2632.56 2760.17 127.61
VIX 21.52 18.07 -3.45

Posted on December 2, 2018 at 12:30 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 29. Well played

–The optics are that Trump bullied Powell into changing his stance on forward tightening.  It can easily be argued that Trump DID change Powell’s mind, by damaging values of other markets.  Was it the Fed’s tightening or Trump’s trade policies that caused a big stock sell -off?  Was it tighter US monetary policy that knee-capped oil?  Or was it Trump’s sanctions?  If it’s a game, one could say that Powell played it this way: “OK. I’ll indicate a change in trajectory on hikes.  We’ll get a short lived rally in stocks.  Vulnerabilities in corporate balance sheets remain and Trump will do something again to undercut investor confidence.  Then I can say, ‘It wasn’t the Fed.  We stopped hiking.'”  On the other hand Trump might think Powell is trying to outmaneuver him. ‘He thinks I’ll blow it with China and the world will blame me for the ensuing stock sell-off.  So I’ll cut a deal with China and look like the genius I am.’
–In any case, Powell’s ‘far from neutral’ comment on Oct 3 occurred when SPX was 2930 and WTI crude oil was $76/bbl.  Not too surprising that he’d flip to a ‘just under neutral’ epiphany with SPX having traded down to 2630. Oil this morning is below $50/bbl.  Clarida floated the data-dependence shift, and new home sales were down nearly 9%.
–The change in tone yesterday was a curve steepener.  5/30 treasury spread posted a new high of 47.6.  The five year yield fell 2.2 bps and 30y bonds rose 2 bps.  Ten year was down 0.5 in yield to 3.05% at futures close, but tests 3% this morning.  On the eurodollar curve, reds were the strongest performers, with EDH0 and EDM0 up 5 bps.  By comparison, the golds (5th year) were +2.875.  All near ED calendar spread closed at new lows.  EDZ8/EDZ9 dropped 4 to close at exactly one-quarter pct. EDH19/H20 also down 4 to 17.5.  However, there wasn’t a mad scramble for calls.  Vol declined as perception of easier financial conditions alleviates pressures.
–Issues remain.  DB is close to new lows again as headlines abound with new investigations into dealings.  The US sailed the Taiwan Straits, testing the core one-China resolve.  It’s not all about trade.
SPX with Powell’s change of heart
Posted on November 29, 2018 at 5:13 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Powell flip. It’s amazing what a loss in equity portfolios does for perceptions of “neutral”

Chart below is SPX.  When Powell said in an interview on October 3 that the Fed was a long way from neutral, stocks were near the highs.  The front WTI Crude Oil contract was over $76/bbl.  Now CLF is under $51/bbl.  Large declines in both of these markets caused the Fed to re-think it, and we’re now “just below neutral”.

Posted on November 28, 2018 at 3:27 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 28. Powell – we can monitor financial stability as he speaks

–The event of the day will be Powell’s 12:00pm speech to the Economic Club of NY on ‘monitoring financial stability’.  When Dudley was the head of the NY Fed, financial conditions and stability were almost seen as a third mandate for the Fed, now perhaps less important as Powell frequently refers to ‘staying in our lane’ with respect to Congressional mandates, employment and inflation.  Clarida’s comments yesterday were measured and had a slightly more bearish tilt than I expected, though yields ended marginally lower on the day.  Ten year fell 1.4 bps to 3.054% while the 30y bond was only -0.3bp to 3.316.  Also worth noting is that the ten year inflation indexed note at 1.136% is nearing the high of the move which was 1.164.  The spread between the ten year infl index note (tip) and treasury hit a new low of 192 bps.  Both market measures of inflation and economic data (domestically and globally) give Powell cover if he confirms recent market pricing of a less aggressive Fed.  Some think Trump’s criticism could easily make Powell lean against the market, as the Fed’s long term independence and credibility are seen as more important than short term fluctuations in data and stocks.  The market is more inclined to take Powell at his word of monitoring incoming data; for example, EDH9/EDH0 closed yesterday at just 21.5 (-1.0), less than one hike over the forward period.  Guidance on balance sheet normalization pace is key.
–There was a large adjustment trade yesterday, a seller of >150k 0EH 9675/9662/9637p fly 1x1x1 at 4 covered primarily at 9691.0.  On 12-Sept there was a buyer of >150k 0EH 9687/9662/9637p 1x3x2 for 1.5 to 2.0.  Yesterday’s trade leaves the core position long the 9687/9675p spd which settled 5.25 (11.25 and 6.0).  Open interest: 9787p 588k, 9675p 488k, 9662p 1m, 9650p 268k and 9637p 641k. The short analysis is that the target price has moved up from the 9662 strike to 9675 strike, and premium was taken off the table.
–Euro a bit weaker this morning at 1.1289, near a new low.  Strength in the dollar is another factor which could limit inflationary impulses in the US. On/off prospects for the Trump/Xi trade breakthrough are also a major factor; CNY remains close to 7.0 and will probably depreciate through that level if no progress is made.
Posted on November 28, 2018 at 4:55 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 27. Let’s Make a Deal

–Trump again threatened to slap increased tariffs on Chinese goods if no progress is made on a trade deal this weekend.  The market yawned.  What if, just hypothetically of course, the other side clandestinely  gained access to valuable information in The Art of the Deal and sees this gambit as a transparent bluster?  What if this bold negotiating technique (which we’ve all now seen repeatedly) actually makes progress more difficult?  What if The Lack of a Deal is instantly met with a ‘shock’ depreciation of the yuan?
–Implied vol in rates was pasted yesterday, starting with a notable new sale of 15k TYG 138/141 strangles from 1’55 to 1’44 with a settle at 1’41.  USH 139 straddle sank to 3’44 from 4’00.  Midcurve straddles lost 2-2.5 bps.  While stocks and oil bounced, rates edged only slightly higher, with tens  +1.6 to 3.068.  Pricing for closed books into the end of the year.
–Fed Vice Chair Clarida speaks at 8:30, on Data Dependency and Monetary Policy.  There will be Q&A from the moderator.  Having overtly signaled a shift in the Fed’s emphasis a couple of weeks ago in an interview with Steve Liesman, even the least imaginative market watcher should get the message this time, perhaps using the speech’s title as a clue.  Housing has softened.  Auto sales are dependent on financing rates, and GM announced plant closures yesterday.  Higher rates are biting and the market has now flattened the trajectory of prospective hikes.  The real question is whether it’s bullish or bearish for the longer end of the treasury curve.  Bullish due to a slower economy?  Or bearish because of increased supply and resurgent stocks which are more responsive to intravenous liquidity jolts than economic growth?
Posted on November 27, 2018 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options