Dec 17. Stocks have a lot of bad news priced in

–Yields fell Friday as stocks closed near the lowest levels of the year.  The Russell 2k did close at new lows at 1410, off 19% from the year’s high.  The ten year yield fell 2.4 to 288.6.  Greens were the strongest part of the eurodollar curve, closing +4.0.  There was a decent amount of euro$ future rolls Friday as EDZ8 expires today.  

–Headlines on BBG aren’t all that encouraging this morning: China bankruptcies surge; Malaysia bringing criminal charges against Goldman in the 1MDB case; Euro-area inflation revised down.  Not much change in futures prices on what should be a fairly quiet session.  

–Commodity indices are also closing the year near new lows.  The ten year note vs inflation-indexed note is at a new low of 182.7 bps, having started 2018 right at 2% and spending most of the year around 2 1/8% before tumbling back under 2 in late November.  Market measures of inflation expectations are falling. 

–On Friday, EDZ8 to FFF9 spread closed at 42.5 with EDZ 9719.5.  The forward libor/ois proxy is EDH9/FFJ9 which settled  9722 and 9753 or just 31 bps.  If the higher former spread is primarily the result of year-end pressure, then the forward March spread may stay around 30-35 bps, which would imply a settlement of EDH9 somewhere around 9730 at expiration – if the Fed’s final hike is this week.  There was a buyer of EDM9 9725/9737/9750 c tree for just under 1.0 on Friday (settled 1.0 vs 9716.5).  This type of trade will likely remain popular.

Posted on December 17, 2018 at 5:44 am by alexmanzara · Permalink
In: Eurodollar Options

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