Jan 29, 2017. Under water
–There was a Pimco piece by Harley Bassman circulating the last few days entitled “Finding Sea Level for Interest Rates”. It wasn’t really about the absolute level of rates, more about the correct benchmark, but it’s a little ironic that Japan just went below sea level, cutting their excess reserves rate to -0.10%. Funny that a few days ago Kuroda suggested China adopt capital controls to defend the yuan, and then turned around and moved to devalue the yen. So this is what the currency wars are coming to. Hmm, maybe those 100 calls in the euro$ strip aren’t looking so bad after all. (There was a buyer yesterday of 10k EDM7 100c for 1.5).
–In response to Japan, US stocks and interest rate futures are both higher, in spite of Amazon’s beat down after missing growth targets. (Stock was immediately down $70 after hours).
–Today the advance estimate of Q4 GDP is released, expected +0.8%. The Atlanta Fed GDPNow estimate which was released yesterday was 1.0%, so there’s probably not much drama associated with this report. However, yesterday’s Durable Goods Orders were rather weak, and previous data was revised lower. For example Capital Goods Orders (core, non-defense, ex-air) were -4.3% following a revised -1.1%. The other big feature of the trade yesterday was the rally in Crude oil as rumors swirled about the possibility of Saudi production cuts. CLH immediately rallied from just below 33 to 34.82, but pulled back from there and traded a fairly tight range. Some assets are seeing hopeful bounces related to energy stabilization, including high yield etfs.
–On the dollar curve, action continues in EDZ6; there was a seller of 100k EDZ6 9862/9837 put strip at 4.5 to 4.0, the last being sold at 4.0 vs 9911. So the long put spread owner (of 250+ k EDZ 88/90 and 87/86 put spreads), took in downside premium to help pay for the wait, which may be a long one, in the process crushing vol further. EDM6 9925 straddle settled at just 16, having lost over 20% of its value in a week. EDM6/EDZ6 went as low as 16 offer. The BoJ is no friend to the EDZ shorts.
–It was pretty surprising a few days ago to see that American Express missed on earnings and was savaged. It continued lower yesterday and made a new low. Discover Financial Services (DFS) suffered the same fate on its earning release. In fact, a quick review of US financial names reveals quite a bit of weakness. Citi is holding in a tight range near new lows, Wells has taken out the August low and has rebounded to just above, BAC is well below Aug and Sept lows, JPM is trying to fight off the lows. Capital One lost 1/3 of its value since July; seeing a small bounce in the last two days. Morgan Stanley is pressing to a new low just above 25, it has lost over 20% of its value this month. I’m not an analyst of financial stocks, but the weakness in AXP, DFS and COF doesn’t appear to reflect a strong consumer, and the flat curve is no friend to banking spreads.
