Aug 25. One hike by….April?

–Wild intraday swings Monday; final outcome SPX -3.9%, Nasdaq -3.8% and DJIA -3.6%.  News sources this morning are mostly finding a positive spin, saying that it’s just because of China, that US growth continues to look stable, that we can shrug it off because it’s not the real economy.  I am not saying that’s all wrong, just considering the other side.
–Interest rate markets were more circumspect than stocks.  While the VIX exploded, implied vol in treasuries firmed modestly, for example, with the ten year yield down 5 bps to 2.00%, ten yr implied was only up 0.3 to 0.4, closing 6.1 in TYV.   Odds of Fed hikes continued to be squeezed out.  Near eurodollar calendar spreads made new lows, with peak one year spread of EDH16/EDH17 now only 67.5 ( -1 on the day).  Consider April 2016 Fed Funds which settled 99.64, +8.5 on the day.  That price indicates just one 25 bp hike, and besides meetings this year there are FOMC dates at the end of Jan and mid-March.  So the market as of yesterday’s close only priced 1 hike over five meetings.  Sept 17 FOMC just 23 days away…
–The problem, or potential problem, is the damage to confidence in the system.  Again the outcome isn’t clear, but back in 2007 I heard many people in the US say they were simply stunned that activity just stopped.  Will it happen again?  Probably not.  (GDP Now from Atl Fed is tracking just 1.3% for Q3). In terms of China, issues that were just below the surface have now bubbled up, or literally exploded, as the case may be.  I would personally bet that the response will be to step up military activities in the South Sea, and to continue to provoke neighbors, for example by drilling in waters claimed by Vietnam, so that an actual fight develops, to spur national pride and shift the mood away from economic issues.  It’s a longer term scenario, but one that will likely expose political paralysis in the US.

Posted on August 25, 2015 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

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