Real value

Sept 6, 2019 Thursday

–After Wednesday’s settles at new highs in many euro$ contracts, fixed income took a tumble yesterday with the ten year jumping 11 bps to 1.565%.  In euro$’s, reds led the move falling 12.5, greens -12.375, blues -11.75 and golds -11.25.  Long liquidation was sparked by renewed enthusiasm for US/China talks scheduled in October, a stronger than expected ADP at 195k, and robust Service ISM at 56.4.  Reduced odds of a hard Brexit also factored into the mix. 

–This morning brings the employment report, with NFP expected 160-170k and yoy Average Earnings 3.1 to 3.2% from 3.2 last.  Powell speaks mid-day at 12:30.  Rate futures are pressing slightly lower this morning.  Trump’s tweeting about strong jobs is perhaps skewing expectations higher for NFP. 

–We’re now just a week from Sept midcurve option expiry, and a week and a half from the FOMC.  The market is comfortably priced for a cut of 25 bps with FFV9 falling 4.5 yesterday to 98.15.  While EDU22 fell 12 bps yesterday, settling exactly at the 9875 strike, 3EU 9875 straddle settled 11.5, perhaps a bit under-valued considering loose prices.  Implied vol eased across the curve.  It’s fairly certain that Powell will follow script and echo Williams by sticking to mandates and outlining geopolitical risks. (Followed by a tweeting flurry by Trump).  

–Blackrock’s Rick Rieder posted a blog yesterday, https://www.blackrockblog.com/2019/09/05/monetary-policy-endgame/  which was quite interesting: “…the solution is to hold an asset that maintains its real value – an asset that cannot be printed.  We would include stocks (dividend yields are set on payout ratios, companies have some degree of pricing power, and shares outstanding are limited in number)….”  He also references gold.  Ray Dalio has mentioned some of the same ideas, but the overarching theme with both Rieder and Dalio is that Central Banks are becoming impotent and may resort to more drastic efforts to debase currencies and generate inflation.  Powerful stuff.  Especially so given the context of isolated (?) recent events.  For example, WSJ reports that Autonomy lost $1 billion on Argentina – a country which seems to have little problem accomplishing ccy debasement.  Also, WeWork is considering an IPO valuing the company at just $20 B, even though its last funding round suggested a $47 B valuation.  Obviously this is causing stress at Softbank. “Hold an asset that maintains its real value.”  Not always easy…

Posted on September 6, 2019 at 5:08 am by alexmanzara · Permalink
In: Eurodollar Options

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