Dec 10. New lows ED spreads —> gradual

–Was yesterday just a little hint of what’s to come?  Front eurodollar calendar spreads at new lows tells you all you need to know.  For example, EDH6/EDM6 made a new recent low at just 14 bps.  Does 14 bps for a near three month spread reflect a hiking cycle?  EDH6/EDH7 one-yr spread made a new recent low of just 59 bps, less than 5/8%.
–So if the Fed validates the market and projects really, really, really gradual rate hikes, how might other markets react?  The dollar’s strength has been in part predicated on a hike “cycle”, so the dollar could give ground (as happened yesterday).  In fact, there’s a chance the dollar index has formed a double top, with the recent high testing the March level just above 100, pulling back at the start of this month to end yesterday at 97.35.  Risk assets could see further deterioration as was seen yesterday.  The curve, from greens back steepened slightly, and there was a slight flight to quality in the belly.
–From another note citing DB: “Corporate leverage is at the point where previous default cycles starting kicking in” with nonfinancial debt at 44% of GDP.  The Fed’s Z.1 report is released today which will have summary statistics of debt levels and growth of various economic sectors.  We already know that corporate debt in absolute numbers is at a record level.  But as this metric also gains as a percent of GDP while the debt markets have started demanding higher rates to compensate for risk, the specter of forced deleveraging rises.  On a related note, ratings agencies are poised to downgrade Brazil to junk, and the US Senate declined Puerto Rico’s request that some municipal entities could declare bankruptcy.  The point is that there’s been an increase in risk, and the Fed will be sensitive to that as it discusses trajectory.
–Jobless claims today expected 270k.  China yuan at new low this morning 6.4386.

Posted on December 10, 2015 at 5:17 am by alexmanzara · Permalink
In: Eurodollar Options

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