Abrupt Reversal in China

March 8, 2019

–Yesterday I mentioned the sizzling year China’s shares have had, but today Shanghai Comp fell 4.4% as BBG reports that a rare sell rating on PICC by Citic, the nation’s largest broker, was seen as a broad signal that government officials believe the rally has become too speculative.  In addition, China’s February exports fell the most in three years.  US shares are down in sympathy after yesterday’s losses.  

–Strong rally in fixed income, sparked by the ECB’s growth downgrade and new TLTRO stimulus steps.  The euro plunged to a new low of 1.1178, a level last seen in mid-2017.  While there has been a small bounce this morning, data didn’t help with German Factory data falling 2.6%.  There is a decidedly risk-of tone to end the week going into employment data for the US.  Nonfarms expected 180k with a rate of 3.9%.  Average Hourly Earning expected 3.3% yoy.  

–For the past two sessions there have been large buys in May TY and FV call spreads: on Wednesday it was 80k TYK 122.5/124.5cs bought for 22/23 ref 122-02 which settled 37 yesterday vs 122-21.  Yesterday it was 40k 123/125cs, which settled 24.  Vol still relatively low.  It’s clear that flows favor the upside.  On the eurodollar strip greens led the surge closing +6.875.  Probably worth owning some May or June otm FV calls in case the global risk-off theme starts to snowball.  Even if there are stronger than expected payrolls, data would likely be met with a dip-buying mentality in treasuries.

–Yesterday the Fed’s Z.1 report came out, unsurprisingly showing a big drop in Household Net Worth due to the stock market rout in Q4. This report also shows growth rates in debt for the major sectors: Households, Business, and Gov’t.  Household debt is broken down into Mortgage and Consumer Credit.  The largest increase in growth was in Consumer Credit, +6.17%.  Total HH was 2.86%, Business +3.78% and Fed’l Govt only 2.50% (expect the latter to start going up by A LOT).  As noted yesterday, credit card interest rates are at new historic highs.  Default rates are increasing.  It’s interesting that Consumer Credit is growing strongly as the price of it increases, which I conclude is due to a stretched consumer.  The data  on wages and debt service ratios tell a more supportive story, but it’s obviously the case that banks are tightening as default rates increase with higher debt levels.  Credit quality is declining across the spectrum.

Posted on March 8, 2019 at 5:09 am by alexmanzara · Permalink
In: Eurodollar Options

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