Aug 5. Weekly rate comment – “Good luck bro!”

(Reuters, July 6).  Tracking the journey of the vessel, Peak Pegasus, as it motored toward the northern Chinese port of Dalian was the 34th-highest trending topic on [China’s] Twitter-like Weibo on Friday, beating out the World Cup, showbiz gossip and Beijing’s escalating trade war with Washington.

The snippet above was one of several stories about Peak Pegasus, a US cargo ship with a hold of soybeans that was racing to the Chinese port of Dalian in an effort to beat implementation of tariffs on July 6; the ship had left Seattle on June 8.  Weibo users were rooting for the ship to make it: “Good luck bro!” “Go, ship go!”  It reminds me of the movie The Gauntlet, where Clint Eastwood plays a washed-up cop tasked with delivering a prostitute across the desert from Las Vegas to Phoenix so that she can testify in a mob trial.  Of course there are many attempts to kill them on the way, and a side-show of wagers on whether they can actually make it alive.  Peak Pegasus fell just a few hours short, incurring a 25% surcharge.  Clint, of course, delivers.  Hey, you make YOUR comparisons, I’ll make mine.

The overarching plot of US vs China trade wars is taking center stage, outlined by Larry Kudlow last week on CNBC.  “…it looks to me like the China economy is declining in growth. It’s weakening almost across the board. And it looks like the People’s Bank of China is trying to pump it up by adding high-powered money and new credit.  …Some of the currency fall, though, I think is just money leaving China because it’s a lousy investment. And if that continues that will really damage the Chinese economy. If money leaves China – and the currency could be a leading indicator – they’re going to be in a heap of trouble. And so I’m going to make the case that they are in a weak economic position – that’s not a good place for them to be vis-à-vis the trade negotiations – first point. Second point, they better not underestimate President Trump’s determination to follow through on our asks…”

Perhaps one finer point of the above quote is this:  If the US continues to ratchet up pressure, and if that DOES accelerate the Chinese economy to “heap of trouble” status, will the US not also suffer negative consequences?  Danielle DiMartino Booth in her newsletter the Daily Feather, highlights some interesting notes with respect to trade effects on California.  “CA has the highest exposure to China and the largest trade gap with China of any US state.  In 2017 CA accounted for nearly 40% of the merchandise trade deficit with China or $143b of the total $375b.   …CA’s $159b in 2017 Chinese imports was almost 4 times as large as the next closest state, Texas, which imported $43b in good from China last year.”

She adds: “The ports of Los Angeles and Long Beach comprise the largest port complex in the US….Together they handle a fourth of all container cargo traffic in the US.”

When looking at the Port websites (links at bottom), it appears as if cargo volumes have surged, likely to beat trade measures, with a lot of Peak Pegasus runs.  The Port of Long Beach had a record June 2018, with loaded inbound containers totaling 384095.  “Container cargo volumes reached record heights at the Port of Long Beach last month, surging past the previous mark and distinguishing June 2018 as the Port’s best month ever.”  The Port of LA had a small yoy dip in June, however, “It is the second fiscal year the Port has surpassed the 9.1 million TEU mark, with 24 months of record breaking cargo movement.”

We’ve already seen the wholesale price of lemons double due to California wildfires.   How much more can the state handle if Chinese trade abruptly declines?  The US continues to talk up the fight against a powerful adversary.  A little like Muhammad Ali.  But sometimes, there’s an unexpected response:  “His mouth made him [feel] like he was gonna win. Not his hands, I had my hand. He had his lips.”  –Joe Frazier, who beat Ali March 8, 1971.

If the yuan reflects weakness in the Chinese economy, then the Chinese can sell reserves to stem that decline, and that means US treasuries.  However, the treasury market just doesn’t seem to be that sensitive to supply and demand sometimes.  From the Credit Bubble Bulletin. “An analyst on BBG tv made the important point that global QE is today in the neighborhood of $25 billion monthly, down from $125b one year ago.”  This week’s treasury auctions of $34b three-year notes, $26b tens and $18b of thirty year bonds will raise $39.78 billion in new cash.  It seems as if yields should conceivably be higher than they are.  However, the ten year note pulled back from the 3% brink last week, closing at 2.95% as non-farm payrolls came in on the soft side at 170k.  On the other hand, 30-yr JGB’s tacked on another few bps to 84.2, up from 68.5 two weeks ago.  Perhaps also worth a mention is that the spread between Italy and Germany tens increased on the week, closing at a five-week high of 252 bps, nearing the 290 bps set at the end of May.

There are a lot of geopolitical stresses and uncertainties across the globe.  Trump keeps pushing.  Domestically, it necessarily puts the Fed in a response mode.  That is, hold to a steady course until the data actually begins to change.  Although Mick Mulvaney, head of the OMB, insists that the US economy is not in a “sugar high”,  the market is projecting a slowdown into the end of next year and 2020, with the Eurodollar curve completely flat between September 2019 and September 2021 (all prices in that 2-yr period between 97.005 and 9695.0).  The only thing that’s absolutely 100% certain is that the terminal rate can never get back above 4%.  That is, if the guy that keeps adding long dated Eurodollar put ratios is correct.  Last week these traded: EDZ0 and EDM1 9625/9575 p 1×3’s at a 0.0 and a credit of 1.0, selling the 9575 (4.25%) puts.

One last point regarding sugar highs.  US equities surged into February on the President’s tax plan.  There was tremendous coverage last week regarding Apple’s trillion dollar market cap.  However, leadership is narrow, and much hope rides on the idea of continued buybacks.  Fourteen of the 30 Dow Jones Industrial components are lower ytd.  Not every horse has wings.

Treasury auctions this week.  PPI and CPI released Thursday and Friday.


7/27/2018 8/3/2018 chg
UST 2Y 267.3 264.1 -3.2
UST 5Y 284.6 281.6 -3.0
UST 10Y 296.0 295.1 -0.9
UST 30Y 308.7 309.2 0.5
GERM 2Y -59.9 -59.0 0.9
GERM 10Y 40.3 40.8 0.5
JPN 30Y 81.3 84.2 2.9
EURO$ Z8/Z9 39.0 37.5 -1.5
EURO$ Z9/Z0 0.5 1.0 0.5
EUR 116.56 115.68 -0.88
CRUDE (1st cont) 68.69 68.49 -0.20
SPX 2818.82 2840.35 21.53
VIX 13.03 11.64 -1.39

Posted on August 5, 2018 at 10:43 am by alexmanzara · Permalink
In: Eurodollar Options

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