April 8. Increased deflationary pressure from Asia?
–Stocks continued to fall yesterday, supporting a bid in fixed income. Yields fell 2.5 to 4 bps across the curve. Implied vol being relentlessly hammered with treasury vol at new lows. I marked TYM 124^ at 4.0, down 0.4. There was a new seller yesterday of 20k Green Sept 9800 straddle at 50.5 and continued exit of Short (red) Sept 9900/9862 put 1×2, suggesting diminished confidence in the idea of rate hikes beginning in spring of 2015.
–While five year vol has fallen significantly from the high, from 3.3 to 2.7 currently, eurodollar calendar spreads remain elevated. Peak one-year calendar EDZ5/EDZ6 is 117, only 1.5 off the high. Vol becoming cheap relative to curve? Probably not, but bears watching.
–Nikkei hit overnight as BoJ refrains from adding to monetary stimulus. US warns China on currency moves. It appears as if China has a choice of either depreciating its currency to support exports (unleashing deflationary pressure on developed markets), or doing nothing to offset its monetary reforms, which could threaten a domestic asset deflation spiral given a huge debt overload. Having already used the situation in Ukraine to push Russia to look toward Asia for economic deals, the US is now intent on antagonizing China.
–On a related topic, with the increased consumption tax in Japan, and the Chinese now taking forceful steps to counter Japan’s yen devaluation, how can the Nikkei maintain its inflated level?
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Business Insider released its “Most Important Charts” piece (with a notable contribution from colleague Todd Colvin)
Quite interesting, with many charts focused on China, and many charts which suggest tight spreads or stretched values across markets, vulnerable to reversals
http://www.businessinsider.com/the-most-important-charts-in-the-world-2014-4
