April 16. All about Spain

–A bit of drama on the trading floor Friday as several large market making groups boycotted the euro$ option pit because of block trades that were deemed unfair due to lack of transparency. The story has been covered already, but deserves mention here only because it may have negative liquidity ramifications going forward.
–Spanish yields again rose Friday and CDS reached record levels, above 500 bps for 5 yr. By the end of the day, US equities closed at their lows, with SPX down about 1.25%. However the banks, which were leaders on the way up, were slammed: Citi, Wells, JPM all down around 3.5% while BofA lost 5.3%. GS -4.4% and MS -5.2%.
–In Spain, “cash business transactions over 2500 € are to be banned” in an effort to tighten tax collection. John Mauldin notes that many will try to get cash out of the country (as will occur with other peripherals). What does that do for gold coin demand? In another story about cash controls, China is LOOSENING the band on the yuan, which some say may also increase investment outflows from China. Safe haven flows to US?
–US curve flattened with tens sub 2% again. After last month’s surge to 2.40, the subsequent plunge in rates leaves bad positions which face more pain with increased eurozone stress. Euro$ calendar spread EDZ12/EDZ13, which was around 10 early in the year, then ran to 36.5 on the mid-March bond sell off, is now back to 14-14.5. I am beginning to think these spreads will invert (EDZ13/14 and EDU13/14). Financial strains will also ratchet up calls for more QE in the US, which may put pressure on funding rates if sterilized in nature (repos). I don’t know if the ideas are related, but there was a buyer of about 15k FFN 9975p for 0.5 Friday…selling pressure on FF’s due to massive bond repo? Even FFZ2 9975p are only about 1.5 bps. Might be well worth buying these as cheap insurance.
–There is some fairly good open interest in TYM 133 and 134 calls…around 95k in 134’s. Generally the idea has been that the market is capped on the upside, and that rallies will be grinding, associated with lower vol. I would strongly guard against that sentiment. The european crisis and other geopolitical wildcards could see treasuries revisit their low yields, i.e 1.80 in tens, very rapidly.
–In US news Retail Sales expected +0.3% and +0.6% ex-autos. Empire State expected 18.0.

Posted on April 16, 2012 at 6:54 am by alexmanzara · Permalink
In: Eurodollar Options

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