Ball of confusion

August 5, 2019

–Staggering moves this morning as China let the yuan breach 7 and suspended US agricultural imports.  New highs in all treasury contracts.  Red euro$ pack up 15 as of this writing with EDU0 at 9862.5 strike.  Stock markets are seeing fairly large losses with ESU down 44.  New low copper.  Gold is at new highs.  

–On Friday there was sizable new buying of EDU 9812c with EDV 9825/9850 c 1×2.  Nice buys with EDU9 now +6.5 to 9799 and EDZ9 +12.5 to 9817.  Oct FF print 9819.0 or 1.81% vs current effective target of 2.15%, a spread of 34.0.  Once again, the market is coming close to pricing 50/50 odds for a cut of half a percent in September.  

–Although PMI and Service ISM are released today, with latter expected 55.5. economic data is of little importance in times of stress.  

–From the low on June 3 in ESU of 2732.25 to the high at the end of last month 3029.50, the halfway point is 2881.0.  Low so far today is 2887.25.  When unexpected large events shake markets, technicals like retracement levels become more important. 

–I’ll start the week off with a classic from 50 years ago… the Temptations Ball of Confusion.

Posted on August 5, 2019 at 5:03 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

It’s not me. It’s you.

Aug 4, 2019. Weekly Comment

Consider the Sept’19 copper chart.  In Q4 it slid to a low of around 2.60 as risk assets tanked, partially in response to the Fed’s last hike in December.  As the Fed made a u-turn on policy at the start of the year, it ramped up to 3.00.  In the month and a half from late April to early June, it crashed all the way back down to 2.60.  This period was, of course, during difficult China/US trade negotiations which ultimately broke down, and Trump had also threatened Mexico with tariffs in late May.  From the start of May until June, SPX fell from 2950 to 2730.  But while SPX subsequently recovered to a new high of 3025, copper traded sideways at best, and, with Trump’s Thursday tweet of new tariffs on China, copper plunged to a new low for the year of 2.57.  Stocks, although they traded lower in response to new perils for global trade, have been extremely resilient with SPX still up 17% ytd.  Given the transformation to a digital economy, I’m not entirely sure if Dr Copper should maintain its vaulted economic status.  Perhaps it should be relegated to Member-Emeritus like that old guy Katz who used to shuffle around the CME floor.  

The German bund traded at -50 bps this week. The chart below shows ERZ0/ERZ2, a forward 2-year euribor calendar spread.  It has done nothing but compress, falling 50 bps since the start of the year, to its current level of 17.5.  The banking system in Europe remains vulnerable; a friend sent a note last week citing new lows in Allied Irish Banking Group (thanks RL).  On the other hand, Mayo advanced to the semi-finals in the GAA.  So that pretty much offsets the bad news.  Are these overseas developments the Fed’s fault?    

ERZ0/ERZ2 euribor 2y calendar spd

At his press conference, Powell said the US economy has been resilient in the face of global downside risks. These risks are not only evident in Europe, but also in Aisa.  Kospi is testing the lows for the year as trade frictions with Japan intensify.  The Australian dollar is making multi-year lows vs USD (though not quite to the crisis low of 2008).  Of course, the big event of the week was Trump’s tweet piling more tariffs on China. That’s what sent stocks lower and caused yields to plunge.  On the week, the ten year yield fell almost one-quarter pct, (-22.4) to 1.855%. 

While Powell can be blamed for his less than dovish press conference, he has to navigate global issues related to trade flows and financial risks.  The biggest of these come from the US/China relationship.  From this week’s Credit Bubble Bulletin (link at bottom) “Let there be no doubt: Chinese developments have become the critical factor for global markets. And the issue is not the possibility of 10% tariffs on an additional $300 billion of Chinese imports. The critical issue is Chinese financial and economic fragilities, and the very real possibility that an escalating trade war pushes a vulnerable China over the edge.” (CNY closed near a new low at 6.94).

I am no expert on China.  However, the combination of Hong Kong protests, friction with Taiwan, regional bank failures and the continuing pressure building with the US certainly qualify as a top risk.  Hong Kong has GDP of around $350 billion, about the same size as Ireland.  While Trump boasts about the amount of tariff money pouring into the US, the US budget deficit continues to widen, unabated.  The point is, it’s not Powell that is causing volatility.  It’s Trump.  Dissent at the Fed is an inevitable outcome; a sign of the times. 

Regarding the US budget, there were a couple of interesting snippets in the latest TBAC minutes, released on July 31.  (link at bottom).   First, the FOMC was no surprise: “The majority of primary dealers expected the Fed to make a 25 bp cut to the target range for the fed funds rate and to end balance sheet normalization early.”  Exactly what occurred.  The minutes noted that ytd FY2019 gov’t receipts totaled $2.6T, 3% higher than the previous year comparable period, while outlays totaled $3.4T, 7% higher than last year. [how long can that go on?]  One other interesting line: “Pietrangeli estimated that reinvestment of maturing MBS proceeds into Treasuries and potential Federal Reserve balance sheet growth could reduce financing needs from the public by an additional $100 to $200 billion annually over the next several years.”  The minutes summary didn’t elaborate, but my personal conclusion is that means $100-200 billion MBS flowing into the private market annually.  And while the Fed didn’t hedge convexity risk, private holders do.  Which means that implied vol on treasuries should likely increase at the margin. 

From the TBAC borrowing estimates released July 29, “During the July-Sept 2019 quarter, Treasury expects to borrow $433 billion in privately-held net marketable debt… The estimate is $274 billion higher than announced in April 2019.”  This week the Treasury auctions 3’s, 10’s and 30’s in the amount of $38b, $27b and $19b, raising $26.66 billion in new cash.   It took the Fed a bit over 7 months to shift from hike to ease.  If it takes the same amount of time to go from balance sheet selling to balance sheet buying, expect another round of QE to start in March. 

The Kansas City Fed’s Jackson Hole conference is in two and a half weeks, Aug 22-24, appropriately titled Challenges for Monetary Policy.  Central banks can only respond to events like Brexit, China tariffs, tensions with Iran.  Monetary policy is not a cure-all.


I am personally looking to buy wing puts into next year on HYG.  That is not a recommendation. Just a thought that high yield may be coming closer to an event which causes forced selling. 

There were a couple of 100k lot trades Friday.  Buyer of EDU9 9812c with EDV 9825/9850c 1×2, both new.  Settled 1.75 in EDU 9812c vs 9792.5 and 2.0 in EDV 9825/9850c 1×2 vs 9804.5 in EDZ9. (traded at 3.5).  That’s a high price for EDU9 calls 20 out of the money, given that the FOMC is after EDU9 expiration. What is interesting about Friday is this:  in Fed Funds, the Aug/Oct spread, which prices the Sept FOMC, actually went more negative by 3.75 bps to -29.0.  This indicates certainty of another 25 bp cut and increasing odds for 50!  However, the Oct/Nov spread, which prices the Oct 30 FOMC, settled -12.5, and Nov/Jan, which captures the Dec FOMC settled at -11.5 from -13.5.  The implication is that this market, at least on Friday, embraces the idea that the Fed may become even MORE aggressive in terms of ‘front-loading’ eases.  The buying in EDU9 calls and bidders chasing the outright contract higher shows the same.  EDU9 was the strongest thing on the board on Friday, rising 5 bps.

5/30 fell nearly 4 bps Friday to end at 72.2.  Still holding in a tight 69 to 78 range and still above the upward sloping trend line.  If the short end is right about the Fed being pushed into faster easing, then the high should be taken out.  If it’s more of a midcycle reaction, then this spread should retrace. 

I believe auctions are becoming more important.  While demand for safe assets was on full display last week, with new recent highs also posted in implied vol in treasuries, current low yields may stifle demand to some degree.  Sept treasury options expire the Friday of the Jackson Hole conference.  Cheap September put spreads make sense in treasuries.

7/26/2019 8/2/2019 chg
UST 2Y 186.8 171.8 -15.0
UST 5Y 186.0 167.0 -19.0
UST 10Y 207.9 185.5 -22.4
UST 30Y 259.9 239.2 -20.7
GERM 2Y -75.0 -78.8 -3.8
GERM 10Y -37.6 -49.5 -11.9
JPN 30Y 35.1 32.1 -3.0
EURO$ Z9/Z0 -40.0 -43.5 -3.5
EURO$ Z0/Z1 1.0 -1.5 -2.5
EUR 111.28 111.09 -0.19
CRUDE (1st cont) 56.20 55.66 -0.54
SPX 3025.86 2932.05 -93.81
VIX 12.16 17.61 5.45

Posted on August 4, 2019 at 11:41 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

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 · Leave a comment
In: Eurodollar Options

When is an easing cycle not an easing cycle?

Aug 1, 2019

–The Fed cut 25 and ended balance sheet run-off, pretty much as expected.  However, Powell caught the market off-guard with comments that indicate he’s the only one that doesn’t yet realize the Fed is in an easing cycle.  Stocks tanked and the curve flattened dramatically.  The two year yield rose 4.4 bps to 1.892 while tens fell the same magnitude (-4.5 bps) to 2.016.  Near euro$ contracts were slammed, with EDH0 and EDM0 weakest at -7 bps.  Red pack fell 4.875 bps, golds were up 5.625 for net change in pack spread of 10.5!   New recent lows in calendars from reds back.  EDZ9/EDZ0 printed -44, but settled -41.5. 5/30 treasury spread fell about 5.5 bps but is still holding upward sloping trend line (attached).  At settlement, FFQ/FFV (Aug/Oct spread which gives an indication of odds for September’s FOMC) was 15.25 from -17.25, bringing it closer to 50/50 for another 25, (but still leaning toward ease).

–The dollar index made a new high for the year with EUR and GBP weaker yet this morning and racing for parity with USD.  Global USD debtors will have a harder time servicing loans.  10 year Bund traded record low -44 bps yesterday.

–Now attention will focus on the employment data on Friday.  Today ISM Mfg expected 52.0 vs 51.7 last, and Prices 49.0 vs 47.9 last.  I can’ t help but think that upcoming treasury auctions will also start to become more important than they have been.  

–There were some large option adjustment trades, of which I will mention a couple.  Buyer of 50k EDZ9 9812c for 5.0 (new), settled 4.5 ref 9785.5.  Also paid 2.5 for 25k for same strike in Oct, also a new position.  Late new buyer of 25k 2EZ 9937/9962cs for 0.25.  Disaster trade.  Could things unravel by the end of the year?  Brexit.  ECB handover to Lagarde, stalemate of China/US trade with more chances of military accident, EM crisis due to dollar shortage, Iran military response.  I prefer just owning something like 2EZ 9825c for 0.5.  Sure, they’re 95 bps out of the money.  But there are worse ways to spend half a tick.

Posted on August 1, 2019 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

It’s a league game Smokey

July 31, 2019

–Is Powell’s foot going to slip over the line?

–Former NY Fed chief William Dudley wrote in an opinion piece yesterday on Bloomberg that today’s rate cut may not be followed by more.  He cited a concern that today’s move could “erode people’s expectations of future inflation…”  The Fed continues to point the spotlight on quiescent inflation, and on the risks of a global slowdown spillover.  Of course, Core PCE deflator yesterday was only 1.6%.  Is it REALLY all about expectations?  C’mon… anyone that watches political polls knows how fickle opinions can be.  Imagine for a second, that Trump, the master at (mis)directing the narrative, was the head of the Federal Reserve, and his goal was to increase inflation expectations.  I would bet he could achieve it in about ten tweets.

–There is perhaps a 3% chance that Powell goes off the reservation and cuts 50, followed by a ‘one-and-done’ press conference. However, it’s simply nowhere near consensus Fed opinion.  25 is a lock and the entire curve is pretty well priced for it.  If a cut of 50 did occur, I think reds could briefly test June’s highs, i.e. 20 higher than here.  That’s how unexpected I think such a move would be.  

–In any case, the market believes more than one ease is on the way.  FFV9 at 98.065 is 46.5 bps lower in yield than the current Fed Effective.  In other words, 25 now and high odds of 25 in September.  Beyond that, EDU9/EDU0 has gravitated to -50 bps (-49.5s).  As it stands now, the market is pricing the idea of eases now (in 2019) and fewer later.  Interesting to note that EDZ9/EDH0 settled at a new low of -24.5.  This is more about turn-of-year pressure than specific easing, which is apparent from the Jan/April FF spread, which settled -13.5.   

–In terms of global risks, What about Brexit?  Dec19/Dec21 short sterling spread was POSITIVE 30 in May, and is now NEGATIVE 10, a new low.  What about a China deal? Progress is stalled.  What if there is a huge blow-up in Hong Kong?  China PMI’s were soft this morning, with Mfg 49.7 and Service at a new recent low of 53.7.  And, on the domestic front, what if the flood of treasury supply overwhelms demand?  

–Put sales were apparent yesterday, with decent selling in TYU 126.5 puts, settled 12 vs 127-11.  Late in the day there were block sales of 75k EDU9 9775p at 3.0 vs 9782.5 with 30 delta (EXIT). 

–News today includes ADP expected 150k and Chicago PMI expected 51.0.  

–Mark it a zero, Dude.

Posted on July 31, 2019 at 5:13 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Beyond Budgets

July 30, 2019

–Yields eased yesterday with tens down 2.6 bps to 2.053%.  The first five years of the euro$ strip were +2 to +3  bps.  This morning rate futures are steady to a bit higher with US stock futures under marginal pressure.  The British pound is sinking due to Brexit worries, now below 1.22.  Bank of Japan kept policy steady but stands ready to add more accommodation without hesitation if circumstances warrant.  The FOMC announcement is, of course, tomorrow, with the market priced for a cut of 25 bps with an outside possibility of 50 bps.  Large trade yesterday was a new buyer of 100k FVU 114.75 puts for 1.  This is a 2 to 3 delta put; every cycle one large player buys these wings.  He also paid 1 for 25k USU 143 puts.  

–The treasury released borrowing plans yesterday.

“During the July-Sept 2019 quarter, the Treasury expects to borrow $433 billion in privately-held marketable debt,assuming an end of September cash balance of $350 billion.  The borrowing estimate is $274 billion higher than announced in April 2019.  The increase in borrowing is primarily driven by changes in cash balance assumptions.”
Well, apparently the assumptions in April, just 3 months ago, weren’t that great.  $274 billion higher?!?!   I remember when $100 billion  per month really meant something.  Maybe having those way-out-of-the-money treasury puts isn’t so crazy.  New round of democratic debates starts tonight.  Balancing the budget will probably be one of the main topics.  Right?

-Huge data breach at Capital One.  “What’s in your wallet?”  Nevermind, we already know.   

–News today includes Personal Income and Spending, expected +0.4 and +0.3.  The key Core yoy PCE deflator expected 1.7%.  

Posted on July 30, 2019 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Quick note

July 29, 2019

–Longer maturities were little changed on Friday with tens at 2.079% (from 2.076).  However, the front end of the eurodollar curve was heavy with reds -3.0 on the day.  EDM0 and EDU0 weakest on the board closing -4.0.  The event of the week should be Wednesday’s FOMC announcement and press conference, followed by employment data on Friday.  Dallas Fed today, expected -5.0 from -12.1 last.  

–Interesting story on ZH citing Morgan Stanley research showing that US data and global PMIs are now worse than they were in 2007 just prior to the first insurance cut.
–There is also a piece in Bloomberg noting that Treasury auctions on Aug 6-8 of 3. 10. 30’s will total $84 billion.  Today at 3:00pm the Treasury is set to release its quarterly borrowing projections.

Posted on July 29, 2019 at 5:07 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Cheeseburger. No Coke. Pepsi.

July 28, 2019

Above is an interesting graphic from The Daily Shot last week, that shows the change in price over the past year for cheeseburger ingredients.  Of course, they forgot the Grey Poupon.  And the bacon.  An increase of 4.8%.  A couple of questions.  Who, in America, eats a 4 oz cheeseburger?  And how does McDonald’s make any money? 

The title above refers of course, to the classic SNL skit parodying Chicago’s Billy Goat Tavern on lower Michigan.  If you don’t read another word, watch the skit.  My work is done here…

Every central bank in the world is easing, ostensibly because there isn’t enough inflation. Perhaps though, it’s just to keep the sovereign debt merry-go-round spinning.  Q2 GDP report from Friday showed US Federal Gov’t spending growth at 7.9% rate for the quarter.  From the Fed’s last Z.1 the rate of growth of Federal borrowing was 8.57% in Q1, to $18.2T.  More outstanding debt than the Household Sector at $15.7 and more than Total Business at $15.6T.     

This week brings the FOMC announcement on Wednesday and a flurry of other economic data, including Core PCE Deflator on Tuesday, the Fed’s preferred measure, expected 1.7%.  Mfg ISM and Prices on Thursday, expected 52.0 and 49.0.  The employment report caps the week on Friday, with NFP expected 170k. 

First, let’s focus on the Fed.  Guidance toward a 25 bp insurance cut has been explicit.  It’s generally acknowledged that financial conditions are fairly loose going into this week. However, it’s somewhat interesting to compare prices from June 21, the Friday after the last FOMC meeting to the week just ended.  The two-year yield rose, from 1.78% to 1.868%.  Tens and thirty year bonds are essentially unchanged, 2.064 to 2.07 and 2.59 to 2.60.  The large changes were, EDU9 from 98.015 to 97.815 (+20 bps in yield) and EDZ9 98.115 to 97.905 (a 21 bp yield jump).  In these past 5 weeks, SPX gained about 2.5% and Nasdaq 4.0%.  The BBB Corp bond spread went from 160 bps to 148, equaling the low of this year. 

Obviously, part of the increase in the yield of near eurodollar contracts was the deflation of hopes for a fifty basis point cut.  However, week to week changes in EDU9 and EDZ9 were -9 and -8.5 bps (97.905 to 97.815 and 97.995 to 97.905), as the debt-ceiling deal raises the prospect of heavy sales of t-bills.  Stocks and credit spreads seem to be responding positively to the idea of combined monetary and fiscal stimulus.   That’s the “rocket ship” Trump seems to be touting, but it’s mostly the result of financial engineering. On the fiscal side, that fuel will be burning right into next year as the election looms.

The Fed will almost certainly cut by 25 bps Wednesday and characterize it as an insurance ‘risk-management’ action, to immunize the US from overseas spillover.  ISM and Employment data immediately following will set the tone.  If stronger than expected, the criticism will be that a cut wasn’t necessary.  If weak, the market will price higher odds of another move in September. 

In terms of pricing, the Aug/Oct Fed Fund spread, which isolates the September FOMC, settled at -16.5 on Friday, indicating odds better than 50/50 for another 25 bp cut in Sept.  The near one-year eurodollar calendar spreads settled as follow:  EDU9/EDU0 -48.5, EDZ9/EDZ0 -40.0 and EDH0/EDH1 -21.5.  While these settles are near the lower end of recent ranges, they don’t reflect the idea of truly aggressive forward easing out of the Fed. In late 2007 the near one-year spread touched a record low of -158 bps.  As it turned out, that spread was actually conservative relative to the magnitude of easing in the following year.  As mentioned, some of the current weakness in the front ED contracts (which has kept pressure on the one-year spreads) is due to possible t-bill supply issues.  At this time, interest rate markets are probably appropriately priced, without an exaggerated lean one way or the other.

Perhaps the more interesting focus going forward will be on whether the market accommodates voracious US Federal Gov’t borrowing.  If the front end of the curve responds to bills, does the market need to make a concession in longer maturities?  It’s worth noting that DXY has firmed since the last FOMC and that the Emerging Market etf, EEM, has only gone sideways.  The administration is trying to jawbone the dollar lower (by officially announcing that the idea of weakening the dollar has been dismissed).  Gold has maintained a bid.   

It should be an interesting week.  The only conclusions I will draw is that growth is less organic, and more engineered by the authorities.  After the tax package and repatriation of early 2018, there was a spurt in activity that fizzled out going into the end of last year.  My suspicion is that current efforts will have a decreased marginal effect on the economy.


On Friday, FFQ9 settled 97.885.  That’s probably within a few bps of what will be its ultimate settlement.  Open interest in the contract is most for any FF at 565k.  October is the next highest at 345k, having settled 98.05.  It was a banner day on Friday for FF options, as 16k FFQ9 97.8125 puts were sold from 1.75 to 1.5 bps.  There is NO OTHER open interest in FF options besides Aug puts. 

Treasuries are in consolidative patterns, with possible head and shoulder tops beginning to form.  This week may point the way to larger moves.

7/19/2019 7/26/2019 chg
UST 2Y 181.2 186.8 5.6
UST 5Y 180.3 186.0 5.7
UST 10Y 204.7 207.9 3.2
UST 30Y 257.7 259.9 2.2
GERM 2Y -76.8 -75.0 1.8
GERM 10Y -32.4 -37.6 -5.2
JPN 30Y 37.2 35.1 -2.1
EURO$ Z9/Z0 -39.0 -40.0 -1.0
EURO$ Z0/Z1 4.0 1.0 -3.0
EUR 112.34 111.28 -1.06
CRUDE (1st cont) 55.76 56.20 0.44
SPX 2976.61 3025.86 49.25
VIX 14.45 12.16 -2.29
Posted on July 28, 2019 at 9:12 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Q2 GDP (lower than expected?)

July 26, 2019

–Rate futures closed lower yesterday after an initial surge higher on the ECB (no rate cut, exploring additional stimulus).  EDU9 closed at 9784.0 (-2.5), the lowest settle since late May.  Front end continues to trade weak as t-bill supply is expected to weigh.  EDZ9 also settled -2.5 at 9793.5.  Once again, in terms of end of year funding pressure, it’s illustrative to compare EDU9/Z9 at -9.5 vs FFV9/FFF0 at -21.5.  EDZ9 trades heavy due to turn-of-year considerations, and it could get sloppy.

–All treasuries made outside ranges and closed lower, suggesting that longs are paring back.  Ten year yield rose 2.6 bps to 2.076%.  Today is August option expiration, and yesterday saw the onset of wing replacement: a buyer of 100k TYU 123p for 2/64’s (3 delta).  

–Today Q2 US GDP released, expected +1.8%.  Atlanta Fed is now at 1.3% and NY Fed’s Nowcast is 1.4%.  

–I was chatting on Bloomberg with a friend during ECB press conference, and I said that all Draghi cares about now is getting through the end of his term in October without the whole thing blowing up.  The response was, Not unlike a prop trading firm.  “She did it” *points at Lagarde*.  My working thesis (and I am not letting facts stand in the way), is that markets test new Fed chiefs, and I am going to expand that to: markets test new Central bank heads.  Greenspan had the crash of 87.  Bernanke had the crisis.  Of course, Yellen just sort of sailed through, and Powell didn’t have any initial problems.  Good luck Christine. 

Posted on July 26, 2019 at 5:08 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Jumping off a bridge

July 25, 2019

–Yesterday’s Markit manufacturing PMIs pretty dismal for US and Germany as the attached chart shows.  ECB today with expectations of ease as the German bund trades negative 39 bps.  An article in Reuters notes that Swiss 50-year yields slipped below zero today, “meaning none of its bonds now offer buyers any interest.”  As I mentioned yesterday in an email, ERZ0 appears to have experienced a wardrobe malfunction, as it rocketed higher in the space of a few minutes yesterday afternoon.  ERZ0/ERH1 calendar spread surged from 3.0 to 14.5 and right back down.  Fat finger on a fat machine… As an aside, in early October of last year, ERZ0 was trading 99.640.  Yesterday’s spike high was 100 bps higher, at 100.645.  

–US stocks also exploded to new highs.  Without the anchor of interest rate markets and yields to provide some sort of base value, the sky’s the limit.  Little change in US  treasuries with all maturities easing 0.5 to 2.5 bps in yield.  Tens finished down 2.2 bps at 2.05% as 7-years are auctioned this afternoon.  

–I looked back three months ago at some straddle levels in near euro$ contracts.  On April 11, EDU9 settled 9748.0 and the 75^ 14.5.  EDZ9 settled 9748.5, with the 75^ 24.0 and EDH0 9761.0 with 76^ 35.0.  Yesterday, EDU9 9786.5, Z9 9796.0 and H0 9818.5.  The atm straddles: 14.0, 27.0 and 35.5.  Hasn’t really been much in the way of ‘decay’  : – /   

–When news came out the other day that US officials were flying back to China for face-to-face meetings, stocks skipped a bit higher.  Going into those meetings, the US has sailed a warship through the Taiwan Strait.  Two completely separate events.  Right? 

–Fascinating article on ZeroHedge which was sourced mostly from a Bloomberg piece, highlighting the Fed’s Applied Critical Thinking unit, headed by Margaret McConnell.
I think it’s absolutely fantastic that the Fed has an internal group like that, tasked with finding out what can go wrong with policies, and if research is based on flawed assumptions.  On the other hand, in the big global macro picture, I think you can boil it all down to what Mom used to say: “And if all your friends decided to jump off a bridge, are you going to be an idiot and jump too?”  In other words, just because all the other Central Banks have jumped into the negative rate river of doom, should the Fed follow?  Those policies are not working.

–According to the article, Geithner said of McConnell, she has a “flair for darkness”.  Yeah, but does she have gold buried in the backyard and a stash of weapons?  Extra cabin out in the woods?  She ought to meet some of the people I’ve met in the euro$ option pit.  Flair? McConnell, do you want to keep working here with just a minimal amount of flair?

Image preview
Posted on July 25, 2019 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options