Aug 15. Relief rally

–As the worst fears of war with N Korea receded, stocks staged a strong relief rally and VIX took a swan dive.  Safe haven trades gently reversed, with gold and treasuries both lower; the latter coming under additional pressure from Dudley comments: “Market expectations not unreasonable on Sept balance sheet move; inflation to move somewhat higher; backs another hike in 2017 if economy evolves as expected.”  He also again referred to easy financial conditions.  “The stock market’s up, credit spreads have narrowed, dollar has weakened…”

–While it’s clear that fear trades were abandoned, dependency on central bank largesse may still be an issue for asset markets.  Jackson Hole is 24-26 August and may provide evidence of changing central bank tactics.  Additionally, trade friction with China is continuing.  And while N Korea fades, Iran steps forward with plans to move warships to the Atlantic, and Rouhani warned that Iran could quit the nuclear deal if further sanctions are imposed.

–Ten year yield rose 3 bps to 221.7.  Eurodollar calendar spreads were little changed.  Good buying of EDZ7 9850/9837p spd for 3.0 with futures settling at 9855.5.  August ED contract final settle was 9868.58, so a hike in December would perhaps put the Z7 contract around 9844.  Late in the day there was a large liquidation sale of EDH8 9837/9825/9812 put fly (1.5s).  Implied vol fell.  TYV7 126 straddle settled 1’19, or 3.9%.

–Today’s news includes Retail Sales, expected +0.3 with Core (ex-auto and gas) expected +0.4.   A story on ZeroHedge notes that restaurant sales are deteriorating: “… in July both same-store sales and foot traffic declined once again, and this time the slide was more pronounced, tumbling by -2.8% and -4.7%…”

Posted on August 15, 2017 at 5:01 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply