Feb 10. Yellen to pull us back from the brink?
–Highlight of the day will be Yellen’s testimony. Prepared remarks will be released at 8:30 EST, an hour and a half before the 10:00 appearance. Data dependent. My own rule of thumb over the years is that the Fed errs on the side of dovishness. The market has given an unambiguous signal that the Dec hike was a mistake. Is it reasonable to expect a ‘steady as she goes’ message? The Fed really can’t do anything about what has been one of the big catalysts in all markets, the drop in oil, though a dovish message would likely weaken the dollar and help commodities in general.
–Remember, central bankers are quite sensitive to the global financial architecture. All financial stocks have been under pressure and DB has become the posterchild. Yesterday German’s Finance Minister Schaeuble said he had “no concerns” about DB, though the company said they may buy back the securities that are reflecting the market’s concerns. Almost like when Bear Stearns recapitalized their decimated mortgage funds to instill the market’s confidence. I personally think the full faith and credit of Germany stands behind DB, but the issues are global, not just related to a few financial institutions.
–In terms of markets, vols are still quite elevated. TYJ 131 straddle traded as high as 2’40 before coming back down to 2’24 settle, still 6.5 vol. One year calendars are still making new lows. For example, EDZ16/EDZ17 settled -2 on the day at just 21.0. The market is saying that Fed tightening will simply result in a flatter curve. This happened Monday, but interesting to note that red/green/blue pack butterfly is now negative, just under -2. Red/green settled 30, and green/blue 32.125. I think renewed dovishness from the Fed will push this fly back positive; will be watching today’s close. Also watch gold…it has pulled back this morning but if Yellen flubs it, new highs will come quickly.
–In terms of markets, vols are still quite elevated. TYJ 131 straddle traded as high as 2’40 before coming back down to 2’24 settle, still 6.5 vol. One year calendars are still making new lows. For example, EDZ16/EDZ17 settled -2 on the day at just 21.0. The market is saying that Fed tightening will simply result in a flatter curve. This happened Monday, but interesting to note that red/green/blue pack butterfly is now negative, just under -2. Red/green settled 30, and green/blue 32.125. I think renewed dovishness from the Fed will push this fly back positive; will be watching today’s close. Also watch gold…it has pulled back this morning but if Yellen flubs it, new highs will come quickly.
–As of yesterday Russell is down 26% from June’s high. Monetary officials are begging consumers to spend, but price action is saying to pull in the reins.
