Oct 3. Gov’t shutdown will drag on…
–The government shutdown continues, and the way it looks it will come down to the Oct 17 wire. Another shutdown, probably more harmful to the US economy, is the Silk Road website and arrest of Dread Pirate Roberts. (Used bitcoins as medium of exchange for drugs to avoid tracking). Of course I am joking about the economic impact, but press reports claim $1.2 billion in sales from the site.. And on a more serious note it seems that anonymity from the gov’t in any form is becoming more difficult, so expect some new computer glitches to surface, courtesy of Anonymous. It’s almost amusing that gov’t action to shut down bitcoins comes at a time when gov’t websites are likely at their most vulnerable in terms of staffing. Thank goodness the NSA is on vacation and isn’t watching this…
–In terms of the gov’t shutdown, it seems to me that many estimates of a pickup in 2nd half growth were predicated on gov’t headwinds abating (the sequester). The current round of gov’t stalemate will certainly have a negative impact and is probably being treated with too much complacency by the markets.
–While we saw a lot of put activity in interest rates in the beginning of the week, yesterday’s flows were weighted toward buying in the front end. There was a notable buy of about 140k EDU15 around 9906-07, and large buying of EDZ4 up to 9951. A couple of weeks ago it was EDU14 that was bought in size of 150k in a clip…that was around 9949 and the contract now trades 9957. In terms of open interest, EDU4 fell 39k, Z4 gained 91k and U5 was up 76k. New buyers, though likely a partial exit of EDU4 as it compresses toward nearer contracts.
–The other big feature of the day was selling of vol in interest rates. For example, early yesterday EDH5 9937^ was sold 20k (new position) down to 46.5, 2.5 bps lower than Tues settle. All ED straddles fell around 2-2.5 bps. USZ 133 straddle went from 4’00 to 3’52. While it might seem strange to see premium selling associated with economic uncertainty due to the gov’t shutdown, it probably makes sense in that the “heavy lifting” of keeping some economic momentum will fall to the Fed, and as we’ve seen previously, the tools the Fed uses tend to repress interest rate movement. It really amounts to a negative forecast for the economy….
