August. The sleepy holiday month

August 2, 2019

–Trump’s cunning plan to announce additional tariffs on China to show Powell that lower rates are necessary went off without a hitch. Stocks tanked (SPX -0.90%) and interest rate futures have now priced two more cuts by the end of the year as a certainty.  FFQ9/FFF0 (August-Jan FF spread) settled -51.25.  Ok, so that’s a bit MORE than 2 cuts.  April 2020 FF settled 98.505, or 1.5% vs the current FF target midpoint of 2.12%.  

–Yields plunged and the curve steepened, taking back some of Wednesday afternoon’s losses sparked by Powell’s press conference.  Tens fell 12.6 bps to 1.89%.  2/10 treasury spread rose 4.2 to 18.5, while 5/30 jumped 8.3, back up to 76.1.  Red/gold euro$ pack spread rose 6, getting back a chunk of the 10 bp loss from Wednesday.  Red euro$ pack was the star performer on the curve, rocketing 19.75 higher on the day.  Yesterday morning I had suggested either buying 2EZ 9825c at 0.5 or the 9912/9925 call stupid for 1.0.  9912c settled 2.5 and 9925c 1.5.  

–Implied vol exploded.  I had a guy poking fun at me the other day for suggesting that EDZ9 9800 straddle might be cheap at 28.0.  Reasonable criticism, except that Wednesday’s low of 9779 to yesterday’s high of 9809.5 in EDZ9 is 30.5 bps, and the 9800 straddle settled yesterday at 29.0.  It’s not just US tariffs. There’s a whole global geopolitical cauldron of swirling uncertainty.  However, the shock tariff announcement caused CNY to trade a new ytd low of 6.9422 as China prepares to declare martial law in Hong Kong.  It was August 2015 when China devalued.  Here we go again.  

–News today includes employment data, with NFP expected 165k and yoy avg hourly earnings +3.1%.  Trade balance and Factory Orders as well, but the data today probably doesn’t mean that much.  Worth noting though, is Mfg ISM Prices from yesterday at just 45.1, the lowest since Q1 2016 (when crude oil rout was occurring with the front contract trading ~30). 

Posted on August 2, 2019 at 5:11 am by alexmanzara · Permalink
In: Eurodollar Options

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