June 25, 2018. Stanching global liquidity and trade

-Trade jitters again as Trump proposes blocking Chinese investment in US firms with industrially significant technology. After key reversals last Thursday both Nasdaq and Russell are lower (along with ESU of course). Russell has been a leader to the upside, but a couple of closes below 1675 would target the 1600 area. SHCOMP also lower despite a telegraphed cut by the PBOC in RRR. Yuan making new low this morning. USD stronger across the board as Italy is pressing on migrant issues, helping to undermine the euro.

–In TY in both August and Sept options, the 120/122 call spreads are the largest long positions with over 125k in those strikes. TYU is just above 120 this morning having failed that level on Friday.

–The Telegraph’s Evans Ambrose Pritchard has a piece summarizing the BIS report: BIS fears snapback crunch as rising rates meet record global debt. “The stronger dollar and rising US rates together act a tightening tourniquet on world liquidity.”

–Not much of a change in rates on Friday, but a more pronounced downturn in stocks would likely cause reds and greens to lead an upside charge. The first three one-year spreads are Sept/Sept at 49.5, Dec/Dec at 35 and March/March at 23, essentially declining by 1/8% every 3 months forward. Though it currently seems unlikely, a shift in the first spread down into the 30’s would create a bit of a scramble to cover short exposure in midcurve calls.

Posted on June 25, 2018 at 5:20 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

June 24. Pin the tail on the Donkey

Starting with a micro theme this week, sparked by a couple of Eurodollar option trades.  Last Wednesday there was a buyer of 50k EDM9 9687.5/9675/9662.5 put butterflies for approximately 1.7 bps (using a futures hedge).  On Friday, the top put spread of this fly was bought in size of 100k at net premium 3.75 to slightly lower.  Settles were: EDM19 9711.0, puts 7.25/3.75/1.75.  The 9687.5/9675 put spread settled 3.50 and the put fly 1.50.  These options expire June 17. 2019 so there are 357 days to go.  Trades like this can be thought of as trying to ‘pin’ the final settlement based on Fed policy (though these might be a part of a larger strategy).  With EDM18 having expired at 97.675 and the Fed in a quarterly tightening mode, one could just tack on 100 bps of Fed hikes over a year and forecast final settlement of EDM19 at 96.675.  Therefore, the top put spread will fill out to 12.5 and the put butterfly will be worth 7.5.  The only problem is that recent euro$ settlements have not moved in discrete 25 bp increments, as the table below shows.

12/14/2016 to 0.75 12/15/2016 0.99317 99.0068 99.0057
3/15/2017 to 1.00 3/16/2017 1.15178 98.8482 98.8688 13.69
6/14/2017 to 1.25 6/15/2017 1.26744 98.7326 98.7198 14.90
12/13/2017 to 1.50 12/14/2017 1.60042 98.3996 98.3745 34.53
3/21/2018 to 1.75 3/22/2018 2.28557 97.7144 97.7775 59.70
6/13/2018 to 2.00 6/14/2018 2.33469 97.6653 97.6753 10.22

Over the five hikes shown above, the average move is 26.6 bps, but the variation per hike is pretty wide, from 10.2 to 59.7.  This is, of course, due to volatility in the libor/ois spread, as the chart above shows.  Nothing too special here, the trend is captured.  We just can’t be too sure about relationships that used to be more stable.  Going forward libor may not even be the benchmark rate.

In observing a few markets since Q4 of last year, this idea of somewhat elevated volatility jumps out.  As a small example, consider the nearly 5% surge in the front crude oil contract just on Friday!  Or look at the July Copper contract, which was under 3.00 in December, soared over 10% to 3.31 in January, broke down below 3.00 again in April, started June around 3.00, went to 3.30 in six sessions and is now back at 3.02.  This is Dr Copper, supposedly the metal with a PhD in economics.  A bit more like Jekyll and Hyde.

Where we do have strong trends over the past several years is in the realm of consistently appreciating financial claims on income streams supposedly derived from the real economy.  For example, the increase in the value of stocks relative to commodities is represented in the chart of SPX divided by BCOM, the Bloomberg Commodity Index, up 6x from the low in 2008.

I also include a variant of one of Buffet’s favorite indicators, the value of stocks relative to GDP.  This shows a new high using the Wilshire 5000 as the numerator. However, when using the Corporate Equities value from the Fed’s Z.1 report, the value of stocks is 133% of GDP, below the peak of 151% in the Nasdaq mania of 2000.  CHART FROM DSHORT ADVISOR PERSPECTIVES.


In any case, the economy itself seems to be driven more by financial asset values than by productive investment.  On the other hand, estimates for Q2 GDP are quite strong, with the Atlanta Fed GDP Now at 4.7% and the NY Fed at 2.87%.  The case for continued near term hikes remains intact, even though the back end of the euro$ curve from EDZ19 forward is pinned flat.  On the treasury side, 5/10 closed 12.7 bps and 10/30 at 14.2.

Not much in the way of news to finish out the last week of the first half.  Durable Goods Wednesday and 3rd estimate of Q1 GDP on Thursday.




July option expiry on Friday saw the TY contract fall short of the 120 strike (TYU8 contract 119-26.5s and USU8 143-31).  The 120 call strike in both August and Sept are peak open interest levels.  Actually, the 120/122 call spreads are the position stand-outs.  TYQ 120/122cs settled 25/64’s (29 and 4) with OI of 125k in each strike.  TYU8 120/122cs settled 33 (43 and 10) with OI of 127.7k and 121.7k.  The flattening curve, Trump’s tariff rhetoric and European issues driven by both Italy and Merkel’s future have tempered enthusiasm for the downside.

There was notable buying Friday in TUQ calls, for example a late buy of 25k TUQ 106.25/106.375c spd for 1/64.  Max value is 8/64’s.  There was also buying of the 106.125/106.375cs, which settled 2.0 (3.5 and 1.5).  With a settlement of TUU8 at 105-275, the 106.125c (106-04) is about 12.5 bps out of the money and the 106.125/106.375c spd is about 12 bps wide; 2/64’s is ~ 1.5 bps.  TUU8 DV01 is $41.60.  August options expire July 27.  Compare these call spreads with 0EN 9712/9725 call spread vs EDU19 9704.5.  Settled 1.75 bps, 8 out of the money, expiring sooner on July 13.  Perhaps TU has a slight edge due to flight into short treasuries and 2 extra weeks of time?


There was buying of EDU8 9762c (2.25s ref 9754.0) vs 0EU 9750c (2.0s ref 9704.5).  There have been many trades that have piled into this sort of theme.  Buy front calls near the money and sell deferred calls that are out of the money for close to even premium due to elevated call skew in mids.  I wouldn’t exactly call the trade ‘crowded’ but I would say that if the front calls appear to be in play because of an iced Fed, the back end could have a monster rally as well. If the Fed has to stop it’s probably due to a big exogenous change.



6/15/2018 6/22/2018 chg
UST 2Y 255.0 254.5 -0.5
UST 5Y 279.7 277.2 -2.5
UST 10Y 292.2 289.9 -2.3
UST 30Y 304.6 304.1 -0.5
GERM 2Y -61.8 -66.5 -4.7
GERM 10Y 40.3 33.7 -6.6
JPN 30Y 70.6 70.7 0.1
EURO$ Z8/Z9 37.5 35.0 -2.5
EURO$ Z9/Z0 2.5 1.5 -1.0
EUR 116.09 116.56 0.47
CRUDE (1st cont) 64.85 68.58 3.73
SPX 2779.66 2754.88 -24.78
VIX 11.98 13.77 1.79
Posted on June 24, 2018 at 11:40 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

June 22. First weekend of summer, have some tequila

–Yesterday featured outside day ranges in emini-SP, Nasdaq and Russell, with the latter two posting new contract highs, outside ranges and lower closes.  The excuse was the Supreme Court ruling allowing states’ taxation of the internet, which can perhaps spread to a broader sense of unease regarding fiscal imbalances.  We had the tax cut, but will other tax increases of various sorts creep up around the periphery?  In any case, stock futures are rebounding this morning, but the market signal of key reversals (Nasdaq, Russell) is to be short.  Another interesting news snippet concerns administration proposals to remove federal charters from Fannie and Freddie; i.e. privatize them.  Could the Fed still buy mortgage bonds in a downturn in this case?  Sure, the banking system just passed another ‘stress test’ under the Fed’s scenarios.  I don’t pretend to know the ramifications of government withdrawal  from the housing market, but on balance I would have to say risks increase slightly.
–Mexico raised its key funding rate to 7.75% yesterday as capital outflows create inflation concerns.  There’s sort of an interesting, if disturbing article on Business Insider this morning noting that May had a record number of homicides in Mexico, and that deadly violence is increasing across the country.  http://www.businessinsider.com/violent-crime-in-mexico-may-2018-deadliest-month-since-1988-2018-6
I recall a Dept of Defense paper long ago that warned of a key risk for the US: a rapid, unexpected collapse of Mexico’s economy.  I’m sure this risk has receded, but not all risks are on the other side of the world.  Mexican peso was up yesterday on the hike and is around unchanged this morning. BTW, in 1994, we called it the ‘tequila’ crisis, which I’ve personally experienced in various forms.
–Vol better bid yesterday as stocks slid.  There was a buyer of at least 20k EDU8 9750 puts yesterday for 3.0, but late in the session with a small 53.5 bid 2.5’s traded; seems like a no-brainer buy for a possible Sept hike.  New lows in EDM19/EDM20 at 12.5 EDU19/EDU20 at 5.5.  Probably worth buying for a bounce. [THESE ARE NOT TRADE RECOMMENDATIONS]
Posted on June 22, 2018 at 5:24 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

June 21. Another 100 bps higher by next summer solstice?

–Yields rose yesterday and the curve had a slight steepening bias; 2y note +1.3 bps and 10s +3.3 for a close in 2/10 of 36.8.  Red/gold pack spread was also +2 on the day, bouncing from Tuesday’s cycle low of just 2.875 bps.  Notable weakness in FF contracts as Fed Effective printed 1.91 for Tuesday (as opposed to 1.90).  July FF were offered late at 9807.5 or 1.925.  There are two month-end days in the contract as July 1 is Sunday and July 31 is a Tuesday.  There are technical concerns that Fed Eff could again drift toward the upper band.   EDZ8/FFF9 spread closed 39.0.
–There were some large option trades yesterday, kicking off with a sale of approx 100k EDU8 9762c (ref EDU8 9753) at 2.50 to 2.25, but others came in to scoop same calls up, so the net effect on open interest was -12k.  The large change was in 9775c as the 9762/9775cs was bought for 1.5, along with the 9762/9775c 1×2.  9762c settled 2.0 and 9775c at 0.5 ref 9752.5.  Open interest in 9775c was +78k.  Of more interest is continuous buying of 12.5 wide deferred put butterflies.  Yesterday it was EDM9 9687/9675/9662 p fly for 1.7 in 50k.  With EDM18 having just expired around 9767, quarterly hike targets are again in play.  Previously there had been a large buyer of EDH9 9712/9700/9687p fly.  However, at face value, if there’s a hike every quarter then EDM9 would target 100 bps below EDM8, closer to the lower strike of the fly.  On another note, there’s consistent buying of 2EU 9687p, which settled 9 vs 9696.5.  Another 25k (new) yesterday.  OI up to 179k.  2EU 9700^ settled 27.0.
–This morning SHCOMP at new low as is EUR.  Treasuries modestly bid going into July option expiry tomorrow.  Looking for a close above the 120 strike.
–Job claims expected 220k, and Philly Fed expected 29 from 34.4.  LEI +0.4.
Posted on June 21, 2018 at 5:31 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

June 20. Short market cycles

–Like every other market disturbance, this one, (Trump’s threat of another $200b tariffs to be levied on China) caused an immediate market dislocation that faded within 24 hrs. Russell index closed at its high and is at a new ath this morning. GE, which was the largest stock by market cap in 2001 at $400b, has been removed from the Dow. November soybeans plunged 67 cents on the China threat, but came back to close 9.11, down just 20 cents, and Corn was nearly unchanged by the end of the session. VIX ticked as high as 14.68 but ended 13.35.
–However USD is maintaining its strength and is at a new high. This morning, the PBOC notes that a cut in the RRR (reserve requirement ratio) might be appropriate as growth eases, thus cushioning financial conditions as SHCOMP sank yesterday by 4%.
–In US rates yesterday yields fell, with the green ED pack leading at +4.125 bps (reds +3.0). The ten year eased 3 bps to 289.3. Once again, the red pack to gold pack (2nd to 5th year) posted a new low of just under 3 bps. By the end of the day, EDZ20/Z21/Z22 one-year butterfly was at a new low (on the curve) at -3.5/-3.0. EDM0/EDM1 which was bought Monday for -0.5, closed -1.5. Positioning reflects continued fear of lower rates, for example there was a late buyer (roll) of 10k TYQ 120.5/121 c 1×2, paying ~5.5 for 20k of the 121 line. However, in ED midcurves there was selling of calls vs puts to take advantage of elevated skew.

Posted on June 20, 2018 at 5:23 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

June 19. Summer’s here, turn up the heat

–So the strategy is to turn up the pressure until the other side buckles… it worked with N Korea right?  Might not be so easy with China.  CNY at five month low 6.4754.  SHCOMP well below 3000 support level (2907).  ESU -33 as of this writing and TYU above the 120 strike. (Trump floats another $200 billion of tariffs on China, with immediate vow of retaliation).
–It was a quiet day in rate futures Monday with almost everything closing within 1 bp of Friday.  Continued buying in EDZ8/0EZ 9750 call spread for flat (+EDZ).  There was also buying of Sept midcurve premium, for example 0EU 9700 straddle bought for 22.0 and 2EU 9687p 10 paid vs 9694.5 in size 50k with open interest +38k (27.0 in straddle).  Also a large buyer on the day of 2EZ 9775/9800c spread just under 1.5 (settled 1.25), appears to be rolling short to higher strike.
–Will trade and EM stress cause steepening of front end?  EMB, emerging mkt bond etf, closed at a new low yesterday.  There was a buyer of 6k EDM0/EDM1 for -0.5, settled -1.0.  Ought to snap back to positive…
–Interesting snippet by Keith Weiner, CEO Monetary Metals, “Social Security will begin tapping into its trust fund this year.  This happens as the Social Security Board of Trustees states antiseptically, ‘four years earlier than projected in last year’s report.’  In other words, the economy is growing by every conventional measure, yet Social Security is spending more than its tax revenues years earlier than projected.  According to those same inaccurate projections, the trust fund won’t run dry until 2034.”
–Another mass shooting, 56 hit and 9 dead, according to the Chicago Tribune.  Just another Chicago weekend.  Sometimes your intended targets fire back….
Posted on June 19, 2018 at 5:27 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

June 18, 2018. Is the Fed too tight?

–With today’s expiration of EDM18, Sept contracts are now the lead.  The back end of the euro$ curve further inverted on Friday, with EDU20/EDU21 and EDZ20/EDZ21 being the low points, both settled -1.5.  Using Sept’19 as the front red, the red/green pack spread settled at just 2 bps and the red/gold pack spread just over 3 bps (new lows).  In treasuries, 2/10 closed just over 37.  The market is perceiving the Fed as “tight” even though various measures of inflation are still accelerating.  For example, the NY Fed’s Underlying Inflation Gauge continues to press higher, with ‘prices only’ at 2.31% in May from 2.28 in April, and the ‘full data set’ at 3.27.  Q2 growth is expected 4.8 in Q2 according to the Atlanta Fed’s GDPNow.  How can FF sub-2% be considered tight against that sort of growth?
–Though China’s immediate response to match US tariffs didn’t cause much of a ripple on Friday afternoon, weakness in equities this morning is being attributed to heightened trade tension.
–Continued buying Friday of EDZ8/0EZ8 9750 call spread for flat, buying the front. About 30k trade Friday.  Also buying of EDU8 9737/9725p sprd, 0.25 paid for 40k with EDU8 trading 9752/52.5.  Commodities slammed on Friday with dollar strength continuing; oil pressing a bit lower again this morning.
Posted on June 18, 2018 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

June 17. A Courtesy Nod to Economic Projections

-You try to gimme your money / you better save it babe / save it for your rainy day

Jimi Hendrix / Fire



One of the interesting things about the Fed’s Summary of Economic Projections (SEP) released last week is the forecast for the unemployment rate.  For the end of 2018 it’s projected at 3.6% and for 2019, 3.5%.  Know when the last time unemployment was 3.6%?  Nearly 50 years ago in 1969.  So what else was going on in 1969?  Woodstock.  The iconic Woodstock poster echoes last week as Trump and Kim Jong-un hailed the white dove of peace and denuclearization.  It’s astonishing that it’s been only 9 months since yields plunged to their lows (Sept 2017) as impending conflict loomed with N Korea.  Now, that particular risk has evaporated and the market seems to treat other risks as if they too, will fade into the background.

According to the site thebalance.com, in 1969 the unemployment rate was 3.5%, GDP 3.1% and Inflation 6.2%.  As recession ensued, in 1970 unemployment leapt to 6.1, GDP sank to 0.2% and inflation to 5.6%.  Wikipedia has an interesting post on the recession of 1969/70. [With unemployment rate chart below]

The Recession of 1969–1970 was a relatively mild recession in the US. According to the National Bureau of Economic Research the recession lasted for 11 months, beginning in December 1969 and ending in November 1970 following an economic slump which began in 1968 and by the end of 1969 had become serious, thus ending the second longest economic expansion in U.S. history which had begun in February 1961 (only the 1990s saw a longer period of growth).

At the end of the expansion inflation was rising, possibly a result of increased deficit spending during a period of full employment. This relatively mild recession coincided with an attempt to start closing the budget deficits of the Vietnam War (fiscal tightening) and the Federal Reserve raising interest rates (monetary tightening).

Sound familiar?  Deficit spending during a period of full employment corresponding with rate increases from the Fed?  Perhaps better to save it for a rainy day…

The other feature of the Fed’s SEP was the increase in rate hike projections, to 2.4 by the end of 2018 (2 more hikes), 3.1 by the end of 2019, 3.4 by the end of 2020, and 2.9 longer term.  While not outright dismissive, the Eurodollar curve isn’t fully buying into these forecasts. One-year forward EDM19 settled 9709, or 2.91%, less than 60 bps above the current 3 month libor rate.  The following one-year calendars shave 1/8% every three months: EDU18/U19 settled 51, EDZ18/Z19 37.5 and EDH19/H20 25.0.  Where the ED curve does give a nod of acknowledgment to the Fed is the idea that the longer term rate is BELOW the peak 2020 projection.  The lowest ED contract out four years is, coincidentally, EDZ20 at 9693.5 or 3.065%, and for the next year, prices invert.  EDU0/U1 and EDZ0/Z1 both posted new lows for all one-year spreads at -1.5 bps.  I would also mention that in terms of the rest of this year, the July/January Fed fund spread, which captures hike odds, closed at 37 bps, essentially pricing a 50/50 chance of one or two more moves.  All ED contracts from the 4 years between Dec’19 (96.96) to Dec’23 (96.91) are with 5 bps of each other, so just north of 3%.

The longer end of the curve also flattened to new lows for the cycle.  Below is an updated chart of the red/gold ED pack spread and 2/10 treasury spread.  Red/gold (2nd year forward vs 5th year frd) is below the low of the last hiking cycle 2004/06.  2/10 closed at 37 bps, having been negative in 2006.

Over a longer timeframe, the Fed wants to prevent overheating and a surprise surge in inflation due to wage increases.  Articles abound bemoaning the lack of skilled workers, and during the press conference Powell said that business contacts repeatedly identify labor shortages as an issue.  The broader topic of financial conditions (championed by the NY Fed) is shown in the chart below.  While conditions generally eased as Yellen’s Fed raised the FF target, more respect for tightening is being shown to Powell.

It might not be completely clear on the chart, but there are 5 lines.  The short term rate, 3-month libor, has obviously shown tightening.  Since last September the ten year yield has risen by 90 bps, also tighter, and a notable change from Yellen.  While fairly modest, the spread between BBB corporates and treasuries has also widened since Powell took over.  The dollar index has surged in Q2, leading to tighter conditions, especially for Emerging Markets.  Odd man out is stocks, blithely ignoring these other factors.

Investors have been paid to fade every risk from Brexit to Trump’s election, to escalation of armed conflict, to trade wars.  However, the back end of the euro$ curve and skew favoring calls is an indication of unease with the roadmap going forward.  Indeed there was heavy buying of TY calls over the past week, and on Friday commodities took a tumble.  On the political front there’s a chance that Merkel could be bounced as chancellor this week. Pressure in Emerging Markets  threatens to boil over with EEM and EMB at new lows for the year.  Ditto for Shanghai Composite, off over 15% from the high in January.  Week over week US yields were little changed, SPX was exactly unchanged, and VIX rolled marginally lower.  Sometimes it’s not the week that EVERYONE knows could be a big one, but the one where no one expects anything.  Seasons change; summer solstice on June 21.

Posted on June 17, 2018 at 11:06 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

June 15. Eurodollar curve inverts: 2020 to 2021 contracts


–The event of the day was the ECB meeting, where the central bank vowed to keep rates unchanged until summer 2019.   EUR had a huge outside day, initially rallying and then plunging, high of 1.1851 and low at end of day at 1.1577.  Dollar strength is causing further trouble for emerging markets, with JPM FX Index closing at a new low,  Argentine peso was obliterated trading nearly 28 to the dollar.  BRL weakened as well, though not to new lows, but the Mexican peso also made a fresh low of 20.85 late.  EMB (EM bond etf) was strong early but closed on the low, marginally below Wednesday.
–Back end of the eurodollar curve inverted, with new lows in all calendars from reds back.  For example, the red/green ED pack spread (2nd to 3rd year) closed at just 6.25 bps, and red/gold (2nd to 5th) also closed at 6.25 as greens and golds settled at the exact same price (9691.875).  The Fed this week indicated a slightly more aggressive posture with respect to hiking, but the market views it as a mistake.  Both EDU0/EDU1 and EDZ0/EDZ1 settled at NEGATIVE 1.5; the nadir for calendars.
–Large trades included TY call buying, example TYU 123c all day 5 paid vs 119-18.5, 14k.  Also, a post-futures-close buyer of EDX/0EX 9750c call spread for 0.0, 40k.  Both calls settled 3.0.  EDZ8/EDZ9 spread settled 37.5, but was 36.5/37.0 at the time of the trade.  Odds are that both calls expire worthless, unless this week’s hike was the last of the year.  The idea is that vol is very low on the front contracts, and the skew to calls is extreme in midcurves, which allows this entry point.  However, if the Fed is stopped in its normalization mission, there’s got to be a reason, and the 37 bps of cushion on this trade may not seem like enough.  On the other hand, the trade DOES allow for selling of EDZ8/Z9 spread with protection.
–The on again/off again trade wars are again in play, with $50 billion in tariffs levied on China.  Initial reaction in stocks is negative.  New low Shanghai Comp.
–Industrial Production today.
Posted on June 15, 2018 at 5:20 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

June 14. Nasdaq vs Shanghai Comp

Posted on June 14, 2018 at 1:00 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options