April 19. Rosengren: You guys got it all wrong…
–Fairly dramatic reversal in equities Monday, as the failure of an oil output agreement in Doha caused ESM to gap down 16.5 from Friday’s settlement, only to rally back 30 handles and close with a gain of +11.75. New highs again this morning, even after NFLX and IBM traded weaker in the wake of earnings reports. The FT captured the general market sentiment with this line about MS: “Morgan Stanley results clear very low bar.”
–Two interesting articles to note. First, Bloomberg highlights shaky conditions in China’s $3 T corporate bond market, noting that defaults are increasing, yields are rising and new issues are being cancelled. “Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest sell off in onshore junk debt since 2014. Local issuers have canceled 61.9 billion yuan ($9.6 billion) of bond sales in April alone, and Standard & Poor’s is cutting its assessment of Chinese firms at a pace unseen since 2003.”
It’s worth keeping in mind that China’s surprise devaluation in August was the spark that caused a hard sell off in US equities.
–Second, Boston Fed’s Rosengren thinks the markets have it wrong. ““While I believe that gradual … rate increases are absolutely appropriate, I do not see that the risks are so elevated, nor the outlook so pessimistic, as to justify the exceptionally shallow interest rate path currently reflected in financial futures markets,” said Rosengren.
http://www.reuters.com/article/us-usa-fed-rosengren-idUSKCN0XF2V4
After Yellen warned of uncertainties and global headwinds just last month, echoed by Dudley last week, Rosengren wanders off the reservation. So why don’t YOU step in and buy some ED calendars Eric? Easy money, right?
–While treasuries traded lower yesterday, there was little action. The ten year yield rose 2 bps to 177.1. May options expire Friday, and the ATM straddle (TYK 130.5) was sold down to 31/64’s and settled 30.
–On Friday there was selling of EDZ16/EDZ17 spread at 20.5. This spread edged up to close at 22 Monday.
–Here’s an interesting point: On Feb 11, the Dec/Dec spread closed at 16.5. This was a panicked day with ESM closing at 1815. By the middle of March, the spread had rebounded to 33 bps, as ESM rallied 200 points to 2017. However, since then the spread drifted lower and in April has only ranged between 19 and 23, while ESM has tacked on another 70 points to bring the total rally to nearly 15%. There does appear to be a disconnect between equities and the interest rate complex (Clearly Rosengren tilts toward the stock market’s view being the ‘right’ one). Interest rate markets have taken Yellen’s warnings to heart, and have thoroughly discounted the idea of an equity inspired “wealth effect” from spurring consumption.
