August 20. Even the Fed’s starting to notice…

–From the FOMC minutes:  “Some participants also discussed the risk that a possible divergence in interest rates in the United States and abroad might lead to further appreciation of the dollar, extending the downward pressure on commodity prices and the weakness in net exports.”

–The clues are piling up so fast that even some participants at the Fed are starting to notice.  Crude oil was again crushed yesterday and this morning is threatening to break into the 30’s (CLV 40.60, -67).  Junk bond spreads continue to widen.  An index of Investment Grade Credit Default Swaps is breaking out to the upside, mirroring corp bond spreads in general (thanks RR). The plunge in commodities knocked 10% off the value of Glencore in one day (after poor earnings).  Emerging market currencies continue to make new lows on a daily basis, punctuated by a 27% plunge in Kazakh’s tenge, which abandoned its peg.  Even US stocks are beginning to look wobbly, which would weaken one of the famous pillars of the US recovery, the ‘wealth effect’.  “Market based indicators of future inflation” like the spread between 10 year treasury and tip yield made a new low yesterday of just 158 bps. And yes, cats sleeping with dogs.

–So, the odds of a September rate hike diminished as reflected by futures pricing. New lows were made in all near eurodollar futures calendars.  For example, the peak one year spread, Dec’15/Dec’16 fell 4 bps to break decisively through support at 75, settling at just 72 bps.  There isn’t a three month spread above 20 bps, in a supposed tightening environment.  Some say the Fed will still hike in Sept, just to maintain credibility.  There was a time when the central bank stood up to the market.  That time is not now.

–Somewhat surprising that implied vol in treasuries was steady on yesterday’s push to lower yields and higher strikes.  Sept options expire Friday.  TYU settled 128-03, heaviest call Open int 128 and 129 at 67k and 72k.  The 127p has 78k open, up 19k yesterday on new buying.

–Plenty of economic data today, which is likely meaningless.  Jobless Claims 270k (can’t get much lower).  Philly Fed 7.5.  Existing Home Sales 5.4m and Leading Economic Indicators +0.2.

Posted on August 20, 2015 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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