A Tweet from Trump Sparks Temporary Reversal

August 14, 2019

— A tweet from Trump suspending September tariffs on additional Chinese goods sparked stocks and caused a pullback in fixed income.  At yesterday’s close SPX was up 1.5% and Nasdaq nearly 2%.  The ten year yield rose, but only 3.4 bps to 1.673%, as the brunt of selling pressure occurred up front.  The two year yield rose 8.6 bps to 1.662% and was weakest on the treasury curve.  2/10 plunged over 5 to end at just 1 bp (it’s down from 21 at the end of July).  5/30 plunged 7.8 bps to end at 57, essentially at the 38% retracement from last Sept’s low of 22 to the June/July double top of 80.     

–The eurodollar curve flattened to new recent lows as well: Reds -11.0, greens -10.875, blues -9.0 and golds -6.125.  Red/gold pack spread closed at just 9 bps, having been over 42 in mid-June.    

–Markets have recovered some of yesterday’s moves this morning, as every financial site has similar headlines referring to the deceleration in China’s industrial output and Germany’s slump in exports with GDP falling 0.1% in Q2. Obviously the protracted trade war is impacting growth. The problems in Hong Kong are ongoing, and China denied US warships request to dock in Hong Kong.  Although trade talks are on again for early September, there doesn’t seem to be much reason from China’s perspective to modify its position.    

–While the front end of the curve was thrashed, odds on forward easing prospects didn’t change all that much.  In Fed funds, the Aug/Oct spread rallied 5.25 to -29.25, but it still indicates at least a 25 bp cut in Sept.  EDZ9/EDZ0 only rose 3 bps to close at -45.0, while EDU9/EDU0 closed -61, up 5.5.

–Speaking of odds, a consulting firm said high taxes and fees make a Chicago casino not feasible.  Perhaps this is a problem that never blows up, but Illinois is searching for every bit of revenue it can find to the point of squeezing.  A decline in growth will bring pension problems to a head; low rates are already hurting.

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5/30 treasury spread
Posted on August 14, 2019 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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