March 20. Front end reflects EU bank funding concerns
–Front part of eurodollar curve under pressure as european bank funding pressures grow due to Cyprus’ rejection of the deposit tax. Large buying of near puts, for example EDJ 9962p traded 0.75 early and buying continued to 2.0, settled 2.5. Front eurodollar options have barely traded in past few months, but EDM3 puts added 52k new positions yesterday. Front end weakness went out two years, with reds -2.75 and greens +1.50. Curve flattened as back end was pulled higher on flight to quality treasury buying. Ten year yield fell nearly 5 bps to 190.8. Implied vol exploded higher.
–FOMC announcement today. Time has changed to 2:00 NY time, with Economic projections also at that time. Press conference begins half hour later. While economic data has improved, global risks have increased.
–While many feel that the impact from Cyprus’ banking troubles should be minor due to small numbers, the risk of contagion and loss of confidence has grown for the entire eurozone. The thought that Germany can “write a check” to stave off EU problems is fading, especially approaching German elections in September. I thought the ECB’s late statement – ECB will provide liquidity to Cyprus WITHIN EXISTING RULES- was tepid at best. In contrast after the 1987 crash, the Fed issued this statement: “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” Unconditional. Certainly Cyprus hasn’t yet forced crisis conditions…but it could.
