Get ready

May 29, 1973

–Rare Earth was a band from the 70’s, the first all-white band that was signed to the Motown label.  They did a bunch of Temptations covers, the most famous of which was ‘Get Ready’ from 1969, but I’ve included a youtube link below from 1973.  

–I don’t know how many times I read that the US holds all the cards in the US/China trade squabble, but what comes to mind right now is the famous Mike Tyson quote:”Everybody has a plan until they get punched in the mouth.”  Get ready, China is threatening to suspend sales of rare earth elements to the US and all of a sudden, US stocks are looking quite vulnerable.  Of course, maybe YOUR plan was to buy bonds.  In that case, happy days as all interest rate contracts are making new highs.  Should the threat of rare earths cause an increase in Fed easing probabilities?  This is when we start hearing about complex modeling techniques with “transmission effects”.  In other words, if stocks go down, the Fed reacts (as it did in January).  As an aside, it’s not particularly rare, but copper is also making new lows this morning.   One other aside, 1973 had another parallel, the OPEC oil embargo, starting in October.

–In yesterday’s trade, all near eurodollar calendar spreads fell to new lows.  The lowest one-year is June/June EDM19/EDM20 which settled -55.25, down 5 on the day.  (It’s currently -59.5). EDU9/U0 fell 5 as well to -49.5 and EDZ9/Z0 down 3 to -39.5.  The move to price Fed eases is unstoppable for now.  The attached chart shows it’s not just the US, but Short Sterling and Euribor, as those near one-year spreads are also declining (though still positive).  

–The other active trade theme was buying of treasury wings.  As examples, +60k FVQ 134.5c for 2/64’s and +75k FVQ 111.75p for 1.  The TYQ calls are 90 to 100 bps out of the money, which might hint at a return to the low yields of 2016.

–May FF contracts expire on Friday to the average of the Fed effective rate over the contract month and settled 9761.25.  The October contract is 9777, or 15.75 higher in price, indicating odds of an ease by the Sept meeting over 60%.  

–Today’s new includes the 7 year auction.   

Posted on May 29, 2019 at 5:01 am by alexmanzara · Permalink
In: Eurodollar Options

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