More insurance cuts for funding issues, or slower growth?

August 12, 2019

–Yields rose a bit Friday with tens up 2.1 to 1.733% and the red euro$ pack -4.5 bps, however, those moves have been more than erased this morning as issues with China appear to be the dominant factor.  The Hong Kong situation appears to be getting worse with HK’s airport cancelling all flights due to protests.  China’s loan growth was reported at 1.06 trillion yuan, slightly lower than expected.  Money supply growth also lower than expected.  There is a ZH story citing Goldman showing that the 7 day repo in China has more than doubled recently, from around 4% to over 8%.  I am not sure how to gauge the impact, but funding tightness has a way of spreading.https://www.zerohedge.com/news/2019-08-11/chinese-banks-no-longer-trust-one-another-repo-rates-skyrocket 

–This morning EDZ9/EDZ0 prints -48 from a settle of -45.5.  As EDM’19 was nearing expiration the front spread EDM9/M0 had been below -70.  April ’20 FF (FFJ0) settled Friday at 98.65, a spread of -78 to the current FFQ9 contract. so that market is pretty certain of at least three 25 bp cuts into the first quarter.  The only one who doesn’t know we are  not in a full blown easing cycle is Powell.  There have been a lot of large euro$ option trades recently, but since I mentioned Q1, I will note that there has been consistent buying in EDH0 9950c for 1.0, 45k Friday, with March ’20 futures more than 100 bps below strike (EDH0 9841.5s).  Whether to cap risk or as a spec play, that’s an expensive wing.  

–Another spread worth noting is EDZ9 vs FFF0 which settled 32.0, 9816 vs 9849.  If funding problems accelerate, this spread will likely capture the sentiment.  I’d say that 45 is more likely than 25 at this point.

–August midcurve expire Friday.  ATM straddles 0EQ, 2EQ and 3EQ all settled 11.0 on Friday, sort of expensive with a week to go, but delivered vol probably makes them fair.  

Posted on August 12, 2019 at 5:26 am by alexmanzara · Permalink
In: Eurodollar Options

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