Europe. Fixed

No real bounce in either of these….

Posted on July 19, 2018 at 10:56 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 19. Musings

-After a brief reprieve yesterday, commodities are again getting hammered as the dollar strengthens, with DXY near a new high for the year.  Copper was 3.31 in June, now 2.68, down nearly 20%.  Gold was 1360 in April, now 1220, down over 10%.  Lumber was limit offer yesterday and likely going lower today.  WTI down 85 cents as of this writing, beans slightly lower.  Blame it on China, as the yuan tumbles with CNY now 6.7719, highest since last August.  SHCOMP continuing to probe lower as well.  So…if China is once again “exporting deflation”, then why are treasuries lower?  Marked down for Amazon Prime?  Might as well blame treasury weakness on China too, and what it’s exporting isn’t specifically ‘deflation’; simply forced sales.  Sell what you can to patch holes where you HAVE to.  This hypothesis may be a stretch, but if there’s even a modicum of truth in it, then spillovers could get ugly.  Certainly, the pounding of interest rate vol in the US will seem misguided at best.  And, as criticism of Trump’s performance in Russia reverberates, how can he regain his strong man persona?  By ratcheting up pressure on China.  it’s for the AMERICAN WORKER.
–Headline blurb in the Financial Times: ‘Bernanke says distortions mean an inversion does not necessarily point to recession.”  Hmmm.  And who, may I ask, is most responsible for the ‘distortions’?  More on this later….
–Large trade yesterday is dismissive of near term inversion.  Bought 80k EDZ8 9737/9750c spreads to sell 40k 2EZ 9737c.  Package settled 0.75 (3.25 for call spread and 5.75 for call).  Front call spread works out if the Fed hikes in Sept but passes on Dec.  But if it starts looking as though a Sept hike was wrong, then I’m not so sure that being short green midcurve calls is a path to sound sleep.
Posted on July 19, 2018 at 5:05 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 18. Cyber-safety bid

–Not much reaction to Powell’s testimony yesterday although some parts of the eurodollar curve notched new lows.  For example, red/gold ED pack spread fell 0.25 bp to close at a new low of -1.875.  Implied vol continues to be smothered; at or near new lows across the curve.  Powell reminds us that he has JUST TWO JOBS, prices and the labor market.  Monetary policy on auto-pilot…  Ten year yield essentially unchanged at 2.858%.

–Nasdaq floats to new highs despite NFLX stumble, and Bitcoin surged yesterday as well.  Flows are somewhat puzzling, not into ‘safety’ because gold is at a new low this morning (as is copper) and treasuries are nearly unchanged.  New low in CNY now at 6.7183.  China’s stocks under further pressure.  Dollar index near new highs.  Italian bank index (IT8300) slumping again and appears as if it might re-test lows made in late May/early June.  Saw a BAML note yesterday that said SPX would be down on the year if FANNG names were excluded.  It’s a cyber-safety bid; not sure if that should make the broader market comfortable or uneasy.

–Focus on the neutral rate for funds is sharpening.  Along with Powell’s comments yesterday, Pimco’s missive says it’s “somewhere between 0% and 1% for the real funds rate, which translates to a 2%-3% nominal rate if inflation is at the 2% target.”  It continues, “…a new useful table in the Fed’s latest Monetary Policy Report that lists econometric estimates of the neutral real rate from seven studies, mostly by Fed economists, confirms just that, The seven point estimates of the neutral rate range from 0.1% to 1.8% with a median of 0.7%.  Assuming 2% inflation, this is very close to FOMC participants’ 2.9% median estimate of the so-called long run fed funds rate…”

–Large trades yesterday include new buy +40k EDU9 9737/9775/9812 call tree for 4.0 (11, 5, 2).  There continues to be a large amount of 2×5 put structures trading further out the curve.  Example: EDZ0 9637/9600p 2×5 trade flat (+20k and -50k) appears to be rolling short puts to lower strikes.  New high settle yesterday in EDU8/EDZ8 at 21.5; large buyer +35k at 21 yesterday.

Posted on July 18, 2018 at 5:27 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 17. Powell and NFLX. We’ve seen this movie before…

–A couple of large one-year eurodollar calendar spreads: EDM9/EDM0 10.0 paid for 30k.  This settled 8.5 on Friday and 10.5 yesterday.  EDU9/EDU0 2.5 paid for 40k.  This settled 2.0 on Friday and 3.0 yesterday.  In EDM9/EDM0 Friday’s low of 8.5 equals the previous low, set Dec 27, 2017.  The high in mid-May was 20.5.  In EDU9/EDU0 Friday’s close of 2.0 was the low.  The high in mid-May was 14.0.  Both were new positions with open interest up in all four contracts. M9 +7k, M0 +10k, U9 +26k, U0 +38k.
–So Kashkari was out saying (again) that the Fed should stop hiking now: “…the bond market is telling us that inflation expectations appear well-anchored, the economy is not showing signs of overheating and rates are already close to neutral. This suggests that there is little reason to raise rates much further, invert the yield curve, put the brakes on the economy and risk that it does, in fact, trigger a recession.”  Today, Powell testifies before the Senate panel.  If Kashkari’s comments were to seep into Powell’s delivery, then surely steepeners like the euro$ spreads cited above would get the green light.  I would note however, that Powell seems much more focused on possible imbalances (including elevated financial asset valuations and a hot labor market) which could grow and overwhelm the system.
–Red to blue euro$ pack spread settled at a new low of minus 4 bps, and red/gold at a new low of minus 1.625.  Even if Powell doesn’t soften the idea of gradual hikes, further downside is probably limited in the short term.  There are cheap ways to express steepeners through options; call or email for thoughts.
–On Friday, Nancy Davis of Quadratic Capital was on CNBC saying that the tech stock rally may be over (citing skew on big tech versus the broader market).  NFLX out to prove her right; after releasing earnings which indicated that subscriber growth fell short, nearly $50 was lopped off the stock in after hours trading (which is approx 12% representing an evaporation of $20 billion).
Posted on July 17, 2018 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 16. If the Fed stops hiking buy stocks. Right?!?!

–Nasdaq creeping to a new high this morning, currently +16 at 7409.  However, China stocks were a bit lower as data shows GDP +6.7% as expected.  WTI also moving lower.  Today’s US news includes Retail Sales, expected +0.5% and the Trump/Putin lovefest.
–New lows in the curve to wrap up the end of last week.  2/10 just under 25 bps.  Last week EDZ19/EDZ20 became the nearest one-year euro$ spread to settle negative, ending Friday at -2 bps.  Red/green pack spread also finished at a new low of -2.125. It appears as if stocks like the prospect of an end to the Fed’s tightening campaign as telegraphed by the curve, but the fact that long rates are easing means economic growth is suspect going forward.  All topics that Powell should address during tomorrow’s testimony.  Greens remain pivotal on the curve, reds +2.875, greens +3.75 and blues +3.50.  July midcurves expired between strikes; I would expect replacement buyers of red midcurve puts early in the week.
Posted on July 16, 2018 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 15. Late Cycle Behavior… What’s next?


Both Jeffrey Gundlach and Bill Gross made bullish calls on commodities earlier in the year. I think I recall Gundlach saying a rise in commodities is ‘classic late stage behavior’.  I did a quick search and found this quote from mid-January: “Commodities always rally sharply – much more sharply than they have so far – late in the business cycle as we lead into a recession.”

This week was a trying one for commodity bulls.  In no way am I trying to cast a negative light on the earlier calls, because they were absolutely correct.  The question is, if a commodity rally is ‘classic late stage’ stuff, and if commodities have now turned, what comes next?

On Wednesday, front month WTI took a dive, falling $3.73.  On the week it fell 2.79 to 71.01, yet it is still well above the lows from early June (64.00 to 65.00/bbl).  However, other commodities have absolutely plunged.  Silver fell to a new low settle Friday.  Soybeans made new lows, same with corn.  As mentioned during the week, base metals have melted, with Dr Copper down 17% from its high in June.  These moves are related to trade war concerns and strength in the USD.  There are also a slew of technical factors, the intricacies of which I don’t pretend to know.  Not only don’t I know, it seems as if some of the most sophisticated players have been caught out, as a Reuters article on energy notes: “Trading desks of oil major BP, and merchants Vitol, Gunvor and Trafigura have recorded losses in the tens of millions of dollars each as a result of the “whipsaw” move when the spread [between WTI and Brent] reached more than $11.50 a barrel in June, insiders familiar with their performance told Reuters.” I don’t think the article (link at bottom) does justice to a complex topic, but it gives a sense of underlying turmoil.  I’ve highlighted vicious rallies in near WTI calendar spreads in daily notes, and I’m sure there are other more nuanced moves between products.  Actually, spread moves have had all the nuance of a sledgehammer.  The point is that smooth, discrete moves are perhaps becoming less of a feature, (and more of a bug?)

These moves come at the same time that many (IMF, BIS, etc) are sounding the alarm on excessive global debt.  Financial bloggers anxiously scream that these debts will NEVER BE REPAID!  That’s not really the crux of the problem.  The issue is whether the debts can be serviced and rolled.  The problem is that one man’s debt is another man’s asset, and if the ‘collateral’ underlying these debts were commodities, why, then we might have reason for concern on both counts.  Especially if those debts are dollar denominated.  Thankfully though, tech stocks are the pillars of the US economy, and it’s there that we can take solace in *socially driven and beneficial for mankind* decision making, an example of which is WeWork banning meats from company events and expense reports.  It’s really no wonder that Nasdaq soared to a new high this week.  However, on Tuesday the Russell 2000 posted an outside day and closed lower, essentially leaving a double top just under 1710 (cash index) on June 21.  These highs remain intact (even with a new high in Nasdaq), and represent strong resistance.  It’s hard to buy into the scenario of robust economic growth if only a few tech names provide all the juice.

The interest rate curve is reflecting similar trepidation with respect to forward economic prospects.  On Friday, the 30-yr and ultra bond contracts had new high settlements, exceeding highs set in late May when concerns about Italy gripped the market.  Inversion on the Eurodollar curve keeps edging closer in time.  Many one-year Eurodollar calendar spreads made new recent lows, for example, EDM19/M20 settled at a new low of just 8.5.  This spread is one year forward, and more or less indicates that the Fed’s tightening campaign will be over by then.  If there’s any doubt as to timing, the next spread, EDU19/U20 is only 2 bps, and then… depression set in.

I mean, then inversion sets in, with EDZ19/EDZ20 at MINUS 2.  Last week was the first time this spread traded negative, and it’s the nearest one-yr inversion.  The red Eurodollar pack (2nd year forward) is at a higher yield than the green pack (3rd year) which in turn, is at a higher yield than the blue pack (4th year) 2.955%, 2.9337%, 2.9175%.  These spreads are at new lows for this cycle, and near lows of previous tightening cycles.  Until the Fed changes its tune on future gradual rate hikes, the back end of the curve is announcing that, gradually, rate hikes will choke the economy.

Doesn’t this inversion signal possible risks to financial stability?  Perhaps.  However, the semi-annual monetary report released by the Fed on Friday doesn’t really address that topic in the section entitled, Developments Related to Financial Stability.  Instead, the Fed says that risks are generally low, while noting that “valuation pressures in various asset markets remain elevated by historical standards…” and that “commercial property valuations continue to be stretched.”  The report says “Risks from abroad are moderate overall” and concludes this section with “Globally, potential downside risks to internat’l financial markets and financial stability include political uncertainty, an intensification of trade tensions, and challenges posed by rising interest rates.”  On the last point, the Eurodollar curve is sending up a flare.  On trade tensions, commodities might be sending up a flare.  And on political uncertainty, well, we can all draw our own conclusions.  This week’s Trump/Putin summit will perhaps paper over uncertainties regarding US/Russia relations.  On the other hand, the prospect of China using slow currency depreciation vs USD is another clear risk to international capital flows.

So we have a pretty good handle on possible threats, and some pockets of the interest rate markets are gently pricing these risks.  The commodity complex has been more strident.  VIX is on a summer stroll through the countryside. Implied volatility in interest rates is similarly languishing near lows.  It’s hard to lay out premium when every shock is absorbed in shorter and shorter cycles.  This is when tails should fatten.



7/6/2018 7/6/2018 chg
UST 2Y 254.1 258.2 4.1
UST 5Y 272.1 272.7 0.6
UST 10Y 282.9 282.9 0.0
UST 30Y 293.8 293.3 -0.5
GERM 2Y -65.8 -66.3 -0.5
GERM 10Y 29.2 28.0 -1.2
JPN 30Y 67.9 67.9 0.0
EURO$ Z8/Z9 32.0 31.0 -1.0
EURO$ Z9/Z0 1.0 -2.0 -3.0
EUR 117.44 116.85 -0.59
CRUDE (1st cont) 73.80 71.01 -2.79
SPX 2759.82 2801.31 41.49
VIX 13.37 12.18 -1.19

Posted on July 15, 2018 at 12:51 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 13. Implied vol crushed on US interest rates; CNY makes new low

–Vol crushed in rates yesterday on heavy straddle sales. With inflation data out of the way, and auctions having been easily absorbed, all straddles on ED curve lost 1-2 bps. In addition, publication of an interview with Powell was uneventful. Sales included 5k EDU9 9812.5^ at 44.0, 7k 0EH 9700^ at 43.5, 5k 0EM 9700^ at 53.0, etc. Same in treasuries, where US August and Sept straddles each fell 10/64’s from Wed to Thursday settles: USQ 145.5^ from 1’36 to 1’26 and USU 145 from 2’50 to 2’40. Late in the day there was a buyer of well over 100k EDH9 9800c for 1.0 (EDH9 settled 9720.5). This was a short cover buy of a trade early in the year, -EDH 9800c to buy 9750/9737ps, but the open interest sheet only shows a decline of 7300 contracts, so data is sometimes suspect on prelim sheets….
–The indiscriminate vol selling may be somewhat misguided, as this morning’s news reveals a record June Chinese trade surplus. Interestingly, the yuan is at a new low this morning 6.6979, a level not seen since last August. From RTRS: “…data showing China’s trade surplus with the United States swelled to a record in June as exports grew could further inflame tensions.” USD stronger across the curve.
–Marginal new lows yesterday in 2/10, down 1 bp to 25.9 and in 5/30 to 19.5. While front end calendar spreads remain pinned to their highs (indicating high odds of a Sept hike), the flattening further back is relentless until the Fed cries uncle. EDU8/EDZ8 spread closed at its high of 20 and was 20/20.5 during Thursday’s session. Aug/Oct FF spread traded small at 21.5 and settled 21.0; this spread isolates the Sept FOMC.
–In the big picture, the flattening curve and declining yields on long dated assets spurs gains in equities as competition from FI dwindles. Earnings expected to be solid, and now appear more than adequate against 10’s that seem to have decisively turned away from the 3% level (2.85% yesterday).
–The Fed releases its semi-annual Monetary Report to Congress this morning.

Posted on July 13, 2018 at 6:22 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 12. Commodity Carnage

–It’s been a tough month for most commodities besides oil, which did its best to catch up yesterday with Aug WTI down 3.73 yesterday to 70.38. Grains made new lows. Dec Corn was 4.25 in early June, closed at a new low yesterday near 3.53. Beans have plunged from 10.60 to 8.48 over the same time frame. Copper and other industrial metals also hit new lows yesterday. Copper is down 17% from last month’s level, from 3.31 to 2.75. Gold and silver had seen small bounces in the first few sessions of July, but went back down to the lows yesterday. Emerging markets were again under pressure, but it really all seems to be tracking China, where the yuan was set higher this morning and SHCOMP rallied.
–Yields fell yesterday in spite of the ten year auction. Ten year yield fell 2.9 bps to 2.842%. On the euro$ curve, greens were the leaders, rising 4.25 bps, while reds were up only 3.0. Reds to all deferred contracts made new lows. Red/green -1.25 to NEGATIVE 1.25 bps. Red/blue -1.125 to -3.125, and red/gold -0.875 to -0.875. Ominously, the inversion is seeping further up the curve. Yesterday was the first time I saw EDZ19/EDZ20 close underwater, at -1.0. In treasuries, 2/10 posted a new low of 26.8. This in spite of robust PPI data yesterday (yoy Core +2.8. Today brings CPI, expected 2.9 headline and 2.3 Core on a yoy basis, which would both be 0.1 higher than last month.
–The market is pricing high odds of a hike in September, but after that it’s becoming murkier by the day. 30 year auction this afternoon.

Posted on July 12, 2018 at 5:28 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 11. Trump admin pokes China while preparing for NATO/Putin

–Late yesterday, the Trump administration ratcheted up the trade war with China by threatening fresh tariffs, causing an immediate sell off in stocks.  Russell 2000, on a technical basis looks particularly vulnerable, with the index setting a slight new high early in the day (1708 cash index), creating a double top with June 21 high, had an outside day and closed lower.  Ultimate target measures to 1550-1560.
–The big trade of the day was a buy of 150k TYU8 120/122 call spread for 33 to 34 ref TYU8 120-01 to 02.  This same spread was bought 100k on June 11 for 29/30, and then on Friday’s employment data 100k TYU 121/122 call spreads were sold at 15.  Settlement was 39 and 5 for 34, versus 120-005.  Delta is 39, so this represents 58,500 contracts.  One full point in the contract is worth about 13.25 bps, so with the ten year yield at 2.871, the upper strike is about 26.5 bps away, or a yield of 2.605-2.61.  Open interest in strikes +141.5k and +165k; the 120 strike has a whopping 281k open.  Also, OI was up in all treasury futures with FV and TY both +22k.  Today the treasury auctions $22 billion tens; 150k contracts is notional $15 billion.
–There has been a decent amount of coverage of last Friday’s COT report, which reported that as of July 3, the net speculative short was a record 500k contracts, I suppose one can think of the call spread as a significant counterweight.  I would also note that the chart of base metals along with other factors, suggests that demand for industrial commodities is waning (BBG base metals index at its lowest level since Q3 last year).  In addition, while some latam currencies have bounced, India rupee, Indonesia rupiah and Thai baht are all near new lows.  (This morning USD stronger across the board).  Further, comments by Italian European Affairs Minister Paolo Savona warning that the country had to be ready for “all eventualities” on Eurozone membership was a weight on the Italian banking sector (IT8300).  In short, there are many factors suggesting that fixed income should see safe haven flows, in spite of supply considerations like today’s auction.
–New low close in red/green euro$ pack spread yesterday at 0.0; red/blue and red/gold both slightly inverted.  New low in 5/30 just below 20 bps.
–News today includes PPI expected +0.2 both headline and Core, with yoy Core +2.6%.
Posted on July 11, 2018 at 5:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

July 10. Copper vs Oil

Attached is chart of front copper vs front crude oil contract.  Seeing a pretty large divergence in direction on these two economically sensitive commodities.  However, I have noted in rectangles several other instances of copper declining while oil maintained a rally, and these have concluded in favor of the rising oil trend.  However, in this case, copper is making a significant new low in the face of higher oil…not sure how it resolves this time.




Posted on July 10, 2018 at 7:05 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options