Oct 11, 2018. Going Loco

–Carnage continues this morning in equity markets.  ShComp -5.2%, Hang Seng -3.5%, Nikkei -3.9%, Kospi -4.4%, Dax down only 1.5% but new lows for the year.  When markets have large moves like yesterday, technical guideposts like moving averages and retracement levels become much more important because all the machines that trade one product against another find that correlations are looser or breaking down altogether, and either the machines are turned off or markets widen out.  Of course liquidity drops; I’m sure it will become a head-scratching topic on financial tv.
–Yesterday both 5/30 and 2/10 posted new highs at the futures close with both just above 34 (using w/i).  It was after the floor close that interest rate futures really jumped.  For example EDZ9 settled 9675 and now trade 80, EDZ0 9670s and now 76.  Russell blew through the 200 day moving average early yesterday and the Nasdaq closed right at its 200 DMA.  NY Fang index was around 17% off its high from June yesterday, and will probably hit the 20% ‘bear market’ definition today.  Trump helpfully blamed the Fed hike for the turmoil.  He said the Fed was “going loco” by raising.  Now it’s time to handicap how the Fed responds: does Powell stay with the theme of gradual hikes because the stock market is NOT the economy?  Or will the hiking schedule go into hibernation?  I had yesterday mentioned that Feb/April Fed Funds traded 18.5 first thing in the morning, indicating new high odds for a hike in March.  This spread settled 18 but was 17.5 offer late and will probably visit 12.5 shortly.
–Finally, Financial Conditions, as outlined by former NY Fed President William Dudley, have tightened a lot.  Dudley mentioned 5 things.  1) Short term rates: new high after Sept’s hike. 2) long term rates: new high for the year last week 3) the value of the dollar: stronger, esp against EM. 4) Stocks: significant declines yesterday though still positive on the year 5) Corporate spreads.  This last one deserves a bit more attention.  The last domino to fall…  There have been many articles about deteriorated corporate credit, noting that in the investment grade universe, the percentage of debt which sits just above junk is at its highest level ever.  That means a lot of companies are clinging by their fingernails to investment grade ratings.  The spread blow-out in late 2016/2016 was easy to identify because of the energy rout.  This time it will be much more systemic and pernicious.  It’s not the Fed we have to worry about in terms of tightened credit, it’s the market.  Many pension funds can’t hold junk.
–CPI and 30 year auction today.
Posted on October 11, 2018 at 5:29 am by alexmanzara · Permalink
In: Eurodollar Options

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