Dec 10, 2018. Broken Windows


–Goldman rescinded its forecast for a March hike.  A cursory glance at the Fed Funds futures curve tells you the same thing, as Feb/April FF spread which had been trading above 12.5 a couple of weeks ago, settled at just 6 on Friday.  The Bank of France cut economic growth forecasts for the 4th quarter, due to rioting.  Pretty clear by just turning on the tv, unless you subscribe to the ‘broken window’ theory of growth (disputed by Bastiat in 1850 / That which we see and that which we do not see).  We’re in a time where you CAN see with your own eyes.  On Friday, EDZ8/EDH9 spread inverted to -1.0.  It doesn’t look right in a hiking cycle, but there it is.  All near eurodollar calendar spreads were crushed to new lows.  EDZ9/EDZ0 settled at a new low of minus 12 bps, now more negative than EDZ8/EDZ9 which settled at positive 10 (the high point and low point on the curve in terms of one-year calendars).  One might almost say that the market is now placing higher odds of forward easing rather than forward tightening.  Hints of a change in the balance sheet reduction schedule are likely to occur at next week’s FOMC press conference.
–Option vols have also firmed.  The greens have been the star performers to the upside, with the green pack up just over 22 bps on the week (friday to friday).  The atm 2EM straddle went from  46.5 on Nov 23, down to 41.0 in Nov 30 (both 9700 strike) while the 9725^ settled 43.0 on Friday.  At the end of November it appeared as if nothing could happen from an option perspective, now it’s as if there’s uncertainty in every corner of the globe.
Posted on December 10, 2018 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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