Oct 22. The Crash
I couldn’t help going back and looking back at my old original Oct 20, 1987 newspapers, from the day after Black Monday. Thirty years have now gone by, and I always sort of thought that the image of BLR looking up at the boards and holding his head in grim disbelief captured the essence of the day (although the beauty of the trading floor is that those emotions might be crystallized as a snapshot in time on almost any trading day). The other headlines also hold nostalgic interest. The US, like now, was entangled with Iran, having bombarded two armed Iranian oil platforms. Iran, in an echo of N Korea, vowed a “crushing response” to the Reagan administration. There was also news out of Japan, as Prime Minister Nakasone backed Noboru Takeshita as his successor. One of the other candidates was Shintaro Abe, father of the current leader of Japan, Shinzo Abe, whose Liberal Democratic Party just crushed opposition parties in Sunday’s election. Plus ça change, plus c’est la même chose.
Actually though, I now prefer the picture of Pedro Sanchez, (the caption says ‘Clerk Pedro Sanchez expresses the prevailing attitude on the CME’). Sanchez, holding his tie up over his head, is giving the universal floor symbol for being ‘hung’ on a trade. And from his face, it looks like he’s saying “We’re hung” to whoever he is gesturing to. Meaning, we haven’t executed the trade which we owe to the customer. And in 1987, that put some people out of business.
There was a lot of emotion on the floor. There was volatility. There was action.
The markets don’t seem to exhibit the same sort of dynamism that prevailed going into the end of the last century! The shift to ‘Passive Investing’ says it all. However, we’re beginning to see glimmers of volatility in various markets. Bitcoin is on a parabolic tear, soaring over $6000. The Nikkei has also had a strong rally, to levels not seen since the 1990’s (Closed at 21458). US equity indexes are at new highs. The US two year note made a new high yield of 157.6, and the ten year is testing resistance at 240/242, with a close Friday of 238.
This week we’re likely to get an announcement naming the next Chairman of the Federal Reserve, and on Thursday, the anxiously awaited ECB meeting takes place. We’ll just have to see how today’s crop of emotionally charged traders digests the new information:
In the week just passed, the curve made new lows early, with 2/10 testing 75 bps and the red/gold euro$ pack spread closing just below 38 on Tuesday. However, there was a solid bounce going into Friday’s close, with 2/10 ending at 80.3 and red/gold at 45.875. Although there were reports that Trump was favorably impressed by Taylor, a transition to a rules-based Fed, while perhaps providing more stability over the long term, is certainly too much of a constraint for Trump, who seems (only on occasion, mind you) to operate outside of shackled boundaries. I’ll place my wager on Powell as the new Fed Chair. While Taylor or Warsh might be perceived as ‘tight’ policy advocates, Powell is seen as status quo. A tight Fed would slow the economy and prevent long rates from moving higher. With Powell at the helm, there won’t be as much resistance for longer rates to rise.
In Europe, ideals of political unity seem to be fraying. Aside from Catalonia, there is a new leader in Austria and a new Czech prime minister. In Italy, Lombardy and Veneto are holding referendums for greater autonomy. The Euro is tracing out a possible head and shoulders top; a close below 1.1650 should target the area of 1.1275 to 1.13. (Chart below).
The biggest event of the week will probably be the ECB meeting. Treasury supply on Tuesday, Wednesday and Thursday in the form of 2, 5 and 7 year notes.
_________________________________________________________________
| 10/13/2017 | 10/20/2017 | Chg | |
| UST 2Y | 149.3 | 157.6 | 8.3 |
| UST 5Y | 190.5 | 201.9 | 11.4 |
| UST 10Y | 227.8 | 237.9 | 10.1 |
| UST 30Y | 281.1 | 289.2 | 8.1 |
| GERM 2Y | -72.5 | -71.7 | 0.8 |
| GERM 10Y | 40.3 | 45.2 | 4.9 |
| JPN 30Y | 86.3 | 88.6 | 2.3 |
| EURO$ H8/H9 | 29.5 | 36.0 | 6.5 |
| EURO$ H9/H0 | 14.5 | 19.0 | 4.5 |
| EUR | 118.21 | 117.83 | -0.38 |
| CRUDE (1st cont) | 51.70 | 51.84 | 0.14 |
| SPX | 2552.17 | 2575.21 | 23.04 |
| VIX | 9.61 | 9.97 | 0.36 |
__________________________________________________________________
