Feb 3. Hey Esther, grab a mitt
–Hard to know where to begin today, but I’ll start with the continued implosion of eurodollar calendar spreads. New lows in everything nearby, with March’16/June’16 at just 4.5 bps and March/March (EDH16/EDH17) just 23.5 bps, down 6.5 on the day. Peak one year spd is just 35 bps. New low in red/green (2nd to 3rd yr) pack spread at just 34.375 bps. New low in 2/10 at 111.6, down 4.3 on the day. However, Esther George, head of the KC Fed, insists that the Fed should still be raising rates. Fed policy “cannot respond to every blip in financial markets,” she said of recent volatility. Hey Esther, grab a mitt and catch a clue. There are over 500k contracts of 100 calls in open interest across the euro$ curve. Japan just went negative, and the possibility of negative rates has become an open question in the US (except in Kansas City). Speaking of which, Kuroda indicated that Japan may not be done with ‘stimulus’ measures; the Nikkei fell over 3%.
–In treasuries, fives, tens and bonds all fell about 10 bps yesterday, with 5’s at 128, essentially back at the low yield of October after the Fed had disappointed by not tightening in September. I still think 122 to 125 is a big support level, but when compared to other 5yr yields around the world it looks strangely out of place.
–Carnage in financial stocks continues. As a few examples, Morg Stanley closed at a new low yesterday, GS and BAC are getting close. But the real damage is in some large european names which gapped lower and are being gutted. CS, DB, UBS. And Kuroda isn’t helping either. Nomura is pressing for new lows, and Mizuho is already there. I think the financial stocks are pretty much all in that Japanese candlestick formation called ‘the toilet’.
–In spite of renewed pressure in oil and in stocks, VIX remains just under 22. Signs of panic are mostly absent.
–News today includes ADP expected 190k and non-mfg ISM expected 55.5.
