August 12. The North Anatolian Fault

The old Chicago Mercantile Exchange trading floor between Monroe and Madison Streets on the east bank of the Chicago river is somewhat of an architectural marvel.  The three storey, 36000 square foot (3345 square meter) space was designed to be devoid of structural pillars that would impede eyesight across the pits, and so it was suspended between two towers.

However, as engineering feats go, it’s a mere trifle in comparison to Hagia Sophia in Istanbul.  Originally commissioned by the Byzantine Emperor Justinian as an Eastern Orthodox cathedral, it was completed in the year 537.  At the time, it was the world’s largest building, capped by a massive dome that required completely new building techniques.  The architects were Greek geometers Anthemius of Tralles and Isadore of Miletus.  The main building is square, with soaring arches on each side.  Because of the immense spans of these arches, huge supporting pillars are on the outside, containing the lateral forces.  It is 269 feet long and 240 feet wide or over 64,000 square feet.  The dome rises 182 feet.

The architects were aware that earthquakes were prevalent in this area, and it is thought the design accounted for this fact.  The building used new materials, including a mortar composed of crushed brick, lime and sand, which was more tensile.  The bricks in the dome were fired at lower temperatures than ordinary brick and were thus less dense and lighter in weight.  The building is near the North Anatolian Fault (comparable to the San Andreas Fault), and while the dome collapsed in an earthquake in 558, it was re-built and has miraculously withstood many quakes since that time including the 1999 Izmit disaster (7.6).  One could easily spend all day watching documentaries and reading articles on this fascinating building, but I have only added a couple of links at the bottom.

Hagia Sophia means Holy Wisdom, in ironically short supply across our modern world.

The markets were shaken this week by a metaphorical earthquake which collapsed the Turkish lira (down nearly 14% on Friday alone, and down 41% ytd).  Like the computer generated models that simulate earthquake effects on Hagia Sophia, modern central bankers create ‘stress tests’ for the financial system.  However, the ECB expressed concern about some banks’ exposure to Turkey and shortly thereafter Trump decided to ramp up the pressure by increasing tariffs.

The last period of market angst was in late May, as the Italian political situation caused some to question whether Italy would stay in the euro.   Many markets are testing key areas right around stress levels that obtained at that time.  The euro actually slid below the level of late May which was around 1.15, now 1.14.  The US ten year treasury note which ended Friday at 2.86% (at futures settlement) is holding just above the low yield in late May which was 2.78%.  The German bund which traded 26 bps on May 29 was yielding 31.7 on Friday.  The spread between Italy and German 10’s got just above 290 in late May.  Friday’s level of 268.5 is the highest it has been since early June.  The JPM emerging market currency index (FXJPEMCS) is testing lows last seen in early 2016, after the energy rout of 2015.

Overall, equity markets have shown utter disregard.  While some European bank stocks were hard hit on Friday, including the Italian bank stock index which is around the low of late May, US markets are well above levels from that period.  VIX had a slight tremble, moving up 1.52 on the week from 11.64 to 13.16.  The eurostoxx index was down 1.94% Friday, around the low in May but well above the low of the year in March.

In spite of long dated treasury auctions in the past week, the curve flattened, with the 2y note -4.5 bps and tens -8.6.  Tens also easily absorbed a large exit of TY call spreads Thursday and Friday, with over 200k TYU8 120 calls sold (120/122 call spreads and 120/121 call spreads).  The 120 call started the week with nearly 330k open and ended with just 135k.  September treasury options expire one week from Friday; TYU settled 120-12.

Recently, every time a large event is perceived to rattle markets, follow-through is limited, forcing break-out players to exit positions.  Currently, many markets are in critical areas which could lead to violent moves.  The dollar index made a new high for the year (will it continue?).  The euro has a head and shoulder formation, closing below the 50% retrace from the late low in 2016 (1.0341) to the tax-plan high earlier this year of 1.2555. Friday’s close targets the 105 area.  In terms of yield, the ten year treasury is right at the support of a gently sloping uptrend from April.  A close below 2.84 would initially target around 2.70.  While vol firmed slightly in rates at the end of the week, premium is still quite cheap.  That is, if we see break-out moves.  The jury is still out.  The light volume, low liquidity, holiday month of August can still provide excitement.  We’ll see if it holds together or crumbles.

Domestic news this week includes Retail Sales and Industrial Production on Wednesday.  TIC flows also late Wednesday with focus on Japan and China treasury holdings. Philly Fed on Thursday.  Of course, the geopolitical drama with US, Turkey, Russia, China and Iran is likely to overshadow all else.

EURUSD below








Posted on August 12, 2018 at 11:14 am by alexmanzara · Permalink
In: Eurodollar Options

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