Stuck in neutral (on the peak of a hill)

May 14, 2019

–When asked about the implications of a full blown trade war, Warren Buffet unequivocally said, “It would be bad for the whole world.”  US stocks are certainly following the script, with SPX falling 2.4% and Nasdaq 3.4%.  In spite of a threat by China to trim US Treasury holdings, the ten year yield fell 5 bps to 2.403%.  China is taking a negotiating tactic from Trump and lobbing outrageous claims to keep markets off-balance (while quietly letting CNY fall to a new low, 6.88 this morning).  However, treasuries remain the biggest and most liquid safe haven.  Bitcoin, on the other hand, is acting as an illiquid safe haven, having leapt from $5000 at the end of April to a new high of $8170 this morning.  Gold has also shown a spark, closing above 1300 and breaking a downward sloping 3 month trendline (GCM9).  Finally, Corn made a new low but had an outside day and closed higher, a sign of a short covering squeeze to come. 

–Williams joined a chorus of other Fed officials in noting that the neutral rate is low, and further added that the central bank should prepare for slow growth.  Nice cheerleading effort.  

–In terms of levels, some markets have pierced late March spikes and some have not.  For example, FFF0 settled at a new high of 9791.5, more than 25 bps lower in yield than the current Fed Effective (projecting at least one ease by year end).  Aug/Oct Fed fund spread closed -8.5, signifying about 1 in 3 chance of a hike AT the Sept meeting.  The spread between May and Oct is -15.75, so that indicates a chance of around 60% that the Fed eases BY Sept.  As mentioned over the weekend, when things start to get bad the Fed eases quickly; it’s a lot easier for reds to rally 10 than decline 10, and that’s what the call skew has been reflecting.  A large trade yesterday underscores that sentiment: new buyer of 50k EDV 9800/9825 c spreads up to 2.5 (settled 2.25 vs 9765.5 in EDZ9).  This trade needs 2 or 3 eases…but the Fed keeps talking down the neutral rate for a reason:  It’s because they are preparing to ease, or at least letting the markets know it’s probable.  Kashkari is the only one that didn’t get the memo, saying no cuts are necessary because the labor market is strong.

–One year ED calendars didn’t quite take out late March lows.  The cheapest is again EDM19/EDM20, the front spread, which settled -37.75 vs a low of -42 in March.  The peak contract is EDH21, which settled 9797. just shy of the 2% strike.   VIX well through March highs, now 19, but stock indexes haven’t quite taken out March lows.  Chance of reprieve with turnaround Tuesday…

Posted on May 14, 2019 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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