August 27. Volatility and risk priced more appropriately

–Yesterday featured a much steeper curve, in follow through from Tuesday, as NY Fed President Dudley walked the market back from the edge of the cliff, saying that a rate hike was “less compelling”. (Actually, a 25 bp hike should be more like stepping off a curb, but such is the fragility of the global financial system that small acts are magnified). Though stocks jumped, many commodities closed at or near new lows…copper, silver, oil.  (Seeing a bounce this morning).  Sept Copper settled -6.55 or 224.8, the lowest settle for this contract.  In terms of the curve, Dudley’s comments helped spark an 8 bp surge in 5/30 to 146, in addition, talk of a GS re-allocation trade with $20 billion to be deployed into stocks by month’s end naturally weighs on the long end (…out of bonds, into stocks).  Red/gold euro$ pack spread settled at a new recent high of 140.375, up 5.5 on the day.
–January ’16 Fed funds settled 9972, more or less indicating only a 50/50 chance of a rate hike prior to year end.  Though Dudley mentioned “the data”, it’s not about the data anymore, it’s all about financial stability and the price of risk.  Today the KC Fed’s Jackson Hole Symposium starts, “Inflation Dynamics and Monetary Policy”.  Perhaps I can sum it up…a zero rate policy destroys capital, promotes excessive risk taking in financial assets, and casts a deflationary pall over the economic landscape.
–Today’s news includes Q2 GDP expected 3.2%, Jobless Claims 270k, and the 7 year auction.
–As an aside, there is an article about tech start-up trends on Business Insider, and there was an interesting point: “Security is the new hot ticket”…protection against hacks.  The other note is “Social start-ups are dead”.  Maybe part of a broader trend a bit more toward reality and away from frivolity?

Posted on August 27, 2015 at 5:27 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply