Jan 6, 2016. Butterflies and rainbows
The butterfly effect – the flutter of a wing in one part of the planet altering the course of seemingly unrelated events in another part – is on center stage.
That’s kind of a cool quote on ZH from an article citing Nomi Prins’ pontifications. Except for one little detail, it seems to understate the start of 2016 which is decidedly less nuanced than the flap of a butterfly wing. N KOREA TESTED A HYDROGEN BOMB WHICH CREATED A SEISMIC EVENT. Doesn’t take a genius rocket surgeon to get a little unnerved by that. But let’s just jump right in with a few other strands of thread. The Chinese yuan is making a new low at 6.56. (More on this below). Aussie has fallen 2 cents since the beginning of the year. Canada and Mexican Peso are making new lows. Oil is making new lows as the Saudis appear to want to flood the market in their geopolitical cage match with Iran. US stocks are jittery. The euro has fallen more than halfway back from Draghi’s tepid measures announced in the beginning of December. Bravo, the goal of euro depreciation is back on pace despite the ECB. Except that the only thing it’s depreciating against is USD (oh, and the yen). Every other currency is racing lower too.
–The FT had this little headline this morning: Renminbi Poses Communication Challenge. I didn’t read the article. Perhaps there were some gems in it. However, I am starting to wonder why people in high places think that “communication” serves as some sort of elixir to cure stupid policies. China just extended its ban on short selling that was set to expire. China is depreciating its currency after having made it into the SDR and now NEEDS to recapture global market share of exports so its economy doesn’t implode. It will also continue to claim more territory in the South Sea in provocation of its neighbors and the US. Seems pretty clear, there are problems there. Bigger than a butterfly. And we can include the Fed’s communication policies as well, but that’s for another post.
–Sorry this is getting long and I am afraid, a bit tedious. So I might as well continue. As Obama finished wiping his tears away 4 were shot dead overnight in Chicago including two teenagers. Nine others wounded. 480 homicides last year in Chicago. Getting an early start on a record for 2016. Matter?
–Back to markets. Large buying in FV call flies yesterday: The five year yield closed at 172.4 with FVH6 closing 118-17.5. DV01 in FVH is $50.4, so it’s approximately 20 bps per point in the contract. There were two large call flies that traded in FV. FVH6 118.75/120/120.75 c fly 1x3x2 was bought for 14/64’s covered 118-19. Excluding the futures, this fly has max value at 120.00 which is around 28 bps lower in yield or around 1.44%. The range in fives in 2015 was 1.155 to 1.795, halfway back is 1.475 which is fairly close to the 120 strike. This traded 8-10k. The other similar idea is 118.75/120.75/121.75 c fly 1x3x2. No risk on this one besides premium paid, which was 23 to 23.5 covered 118-195. Max profit is 120.75 strike which is around 43 bps away or around 129 yield…closer to the lower end of last year’s range.
–Today’s news includes the ADP report expected 198k. Trade Balance expected -$44 billion. ISM Services expected 56.0 and Factory Orders expected -0.2%. Fed minutes from Dec 16 released at 2:00 NY time.
