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
In: Eurodollar Options

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