Jan 22. The reversal dance, but what happens when the music stops
–Rebound in stocks as Draghi said inflation concerns make it necessary to reconsider the ECB’s policy stance in March. Stocks and crude oil rallied, interest rate futures fell. All highly correlated. Next week is the FOMC meeting, there will likely be mention of declines in market based measures of inflation in the statement. All highly choreographed.
–I don’t know much about the European banking system, but I do know that monetary authorities are taking notice. DB’s stock price has been cut in half in last year’s high of 36 in April, and this month’s decline from 23 has been on very heavy volume. Many financial shares have been pounded, and central banks always want to ensure a functioning financial infrastructure with which to implement policy, such as it is.
–In the US, yields rebounded slightly, with tens back over 2% (+3.3 bps to 201.7). Eurodollars pushed lower and the curve steepened. Red/gold pack spread actually made a new monthly high of 98 bs, up 1.625 on the day. If the Fed refrains from further tightening, the curve should steepen; it’s likely to steepen over the next couple of days pre-FOMC. There were again some huge eurodollar option flows. I will just note the new buy of 90k 0EJ 9875/9837ps for 7 bps ref EDM6 trading 9891.0 (6.5s / 9893.0s). Also, EDU6 put spreads bought in size with 9900 the top strike. EDU 9900p gained 150k in open interest, now up to 320k.
–Today’s news includes Chgo Fed National Activity Index, which has been negative for the past 4 months straight, last at -0.30. Existing Home Sales expected 5.2 million. Leading Indicators -0.1.
