Capitulation
October 15, 2021
–Eurodollar curve continued to flatten even as stocks soared on earnings. New recent lows in pack spreads: red/green at 54.625 (holding above 1/2% but down 2.125 on the day). Red/gold 96.875, down 1.625 on the day. There was massive futures liquidation with open interest plunging 220k, almost all in the first two years. The only two contracts on the ED curve that didn’t close positive on the day, EDM’22 and EDU’22 (which were both unchanged) had the largest drops in OI, down 63k and down 84k. This suggests to me that longs finally capitulated. At a price of 9858.0, EDU2 is 29 bps over the current libor setting, so one hike is priced. Note that on Sept 21, the day before the FOMC, EDU2 settled 9972.5, so this morning’s print of 57.5 is exactly 15 bps lower. If taper is over mid-year, then a hike comes in Q3. Summers is practically cheerleading with a megaphone, chastising the Fed for being behind the curve and losing sight of the core mission.
–Commodities continue to trade higher, from A to Z, with aluminum and zinc getting headlines on new highs. IKEA warned of continued supply shortages. Retail Sales are released today, expected -0.2 but +0.5 ex-autos. If shortages are impeding sales, does that mean interest rates should be going lower?
–Midcurve option expiration today for October. EDZ’24 settled exactly on strike at 9837.5. The Blue Oct (3EV) 9837.5 straddle settled 4.5. This morning’s low print in the contract is 9832.5….that straddle was a little too cheap. Worth noting that there has been heavy long liquidation of 0EZ 9937.5 puts and 9937.5/9912.5 p spreads, but that there was some new put buying on blues. 3EZ 9837.5/9800p spd settled 10.25, 11 was paid in 30k. Also a new buyer of 8k 3EG (Feb) 9800/9762p 2×3 to open those strikes. Settled 3 and 1.
–The back end rally has likely run out of steam. If front eurodollars are truly an indication of capitulation, it may not be too much of a stretch to think it has occurred throughout the curve, in other words, the rally on long treasuries was, in a way, forced, and that back end yields can resume a higher path.
