They got a name for the winners in the world
I want a name when I lose
They call Alabama the Crimson Tide
Call me Deacon Blues  
–Steely Dan, Deacon Blues


I couldn’t decide whether to go with ‘Roll Tide’ or ‘Winning’, popularized by Charlie Sheen, for the title to this note.  Had to go with the decisively positive Roll Tide after the amazing come-from-behind win over Georgia on Saturday featuring the redemption of Bama quarterback Jalen Hurts.  This is collegiate sport as religion.  A scan of the stands after big plays captures the range of almost every human emotion of the fans: giddy elation, devastating deflation, nervous hopefulness.


This was a week of winning for Trump. First, the Fed’s Powell changed the narrative for future hikes, saying that the fed funds rate was near the lower end of the neutral range, in what some perceived as capitulation to Trump’s demand for an end to hikes.  Then, he called a 90-day truce with China’s Xi on imposing further tariffs in January.  Perhaps it’s a kick the can down the road victory, but for now it’s certainly a positive.  China agreed to buy more US agricultural products, surely a boost for grains.


This should be a week of hopefulness and elation for stocks, and clearly the strong close to the week is a reflection of the mood.  The funeral of former President Bush will focus national attention on the positive aspects of US.  While it’s unclear whether the huge drop in oil prices will ultimately be a boost for the US economy, Trump claimed the decline as another win, both for himself and for the average SUV American.  Winning, as defined by a lower cost of inputs for American businesses to gain global market share, and households, to support employment and consumption.


In comparison to news images of Paris rioting, it’s hard to argue that things are anything but relatively positive in the US.  Fifty years ago major US cities experienced rioting, looting and arson after the murder of Martin Luther King Jr.  That was during the Chicago rule of the original Mayor Richard Daley, and the response in April of 1968 was somewhat different than it is today:


“I have conferred with the superintendent of police this morning and I gave him the following instructions…. I said to him very emphatically and very definitely that an order be issued by him immediately and under his signature to shoot to kill any arsonist or anyone with a Molotov cocktail in his hand… because they are potential murderers…  Above all, the crime of arson is to me the most hideous and worst crime of any and should be dealt with in this fashion.”


Trump may not always be politically correct, but it could be worse.  In any case, while there are positives for risk assets, there are also changes in financial conditions that have yet to completely work their way through the system.  The rise in rates will continue to bite corporates trying to roll over significant debt.  The Fed’s balance sheet reduction is not being tweaked (for now).  Inflation, which can roughly be thought of as business pricing power, is trending slightly lower, according to market measures like the breakeven between the ten year treasury and inflation-indexed note (now below 2% after having been above that level all year).  Actually, as shown by the FOMC minutes, the Fed in November was already considering a change in language regarding “further gradual increases” in rates, by dropping the word “further” which would, according to Bloomberg, “ signal that multiple quarterly rate hikes are no longer a given.”


So we have an improvement in terms of forward Fed tightening prospects, possible relief regarding fears of an escalation in trade wars, lower energy input prices.  The Core PCE price index year-over-year was slightly lower than expected at 1.8%.  The employment report this Friday will probably show solid payrolls (200k) with average hourly earnings growth of 3-3.1%.  This latter data, if on the high side, could temper enthusiasm of those that think the hiking cycle is drawing to a close.


In terms of market structure, there are issues related to libor/ois that are reverberating.  New high this week in EDZ8/FFF9 spread at 40.25 bps.  Deutsche Bank (NYSE listing) closed at a new low of 9.16.  The German ten year bund is hovering just above critical support at a mere 30 bps; slowing EZ growth and continued concerns about financial system vulnerabilities are driving a bid to safety.   In the US, Goldman made a new low on Friday.  GE has no bounce, closing at 7.50, which is nearly half its level of just 1.5 months ago.  On the Eurodollar curve, near calendar spreads all closed the week at new lows, with EDZ8/EDZ9 at just 22.75 bps (-5.75), and EDH9/EDH0 at just 17.0 (-4.5).  Part of this is due to funding concerns related to libor/ois, but some is definitely due to a perceived economic slowdown on the horizon as the tax cuts and other government stimulus measures wane in effect.  New low as well in EDZ9/EDZ0 to -2.5, meaning that the slowdown horizon is moving closer, rather the receding.  In Fed Funds, January ‘19 to Jan ‘20 spread is still holding above ¼% at 31 bps, but after the March FOMC, the FF April’19/April’20 spread is just 19 bps, signifying less than one hike over that time frame.


While interest rates declined over the week, except for the 30 year bond which was unchanged at 3.31%, there was not a corresponding bid for implied volatility.  That’s one of the largest changes; the market is withdrawing odds of a ‘crisis’ rally which could lead to easing.  This market is pricing a slow glide deceleration.  Consider the week over week crush in midcurve straddles which lost 5-5.5 bps:


9700 straddles 11/23/2018 fut price 11/30/2018 fut price bp chng
0EH 32.0 9694.0 26.5 9698.5 -5.5
0EM 44.5 9695.0 39.0 9700.0 -5.5
2EH 33.5 9697.5 28.5 9702.0 -5.0
2EM 46.5 9698.5 41.0 9703.5 -5.5
3EH 32.0 9697.5 27.0 9703.0 -5.0
3EM 44.0 9696.5 39.0 9702.5 -5.0


Stock investors long for the return to financial engineering and loose conditions that support buybacks and increased earnings per share.  The Fed had leaned against the wind to take the froth out.  Now there’s nervous hopefulness for risk assets, though some measures like VIX remain stubbornly high at 18.  A slowdown in Fed tightening doesn’t mean it all goes back to the way it was.


The Fed calendar has Brainard speaking Monday on Treasury Market Structure.  Should be interesting as it relates to QT and treasury market supply under the regime of large deficits.


Powell was scheduled to testify to Congress on the Economic Outlook on Wednesday, however, the national day of mourning for Bush may change that.




“Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months.” – Dr. Irving Fisher, Professor of Economics at Yale University, one of the most important US economists of his day, speaking on October 17, 1929, a few weeks before the Great Crash.


“There’s really no reason to think that this cycle can’t continue for quite some time, effectively indefinitely,” -Fed Chair Jerome Powell On October 3, 2018.



Feb/April FF spread settled 11.0, down another 1.0 on the week.  May/July settled 6.0, also down 1.0.  Spreads have pared back Fed hike odds for the past several weeks.  EDZ8/EDH9 settled at just 5.25 (down 2.25 on the week).

Trade flows have favored Fed *pause* or *skip* ideas.  For example both EDH and EDM 9712/9725/9737 c fly 1x3x2 were bought for 0.75 and -0.5, settled 1.0 and -0.25.  The change in skew is reflected by a few trades.  On Nov 21 there was a buyer of 60k EDU9 9725/9750c 1×2 for -0.5 (took credit by selling 2), that now settled 1.25 for the one leg.  EDM9 9725/9737c 1×2 was bought for -0.5 after Powell, settled -0.25.

When the market perceives the end of hikes, the curve steepens.  5/30 closed just under 47 bps which is testing a downward sloping trendline.  Watch for possible breakout in terms of Fed perceptions.  Given low 30-yr bond vol it’s still worth selling FV puts and buying US puts.  Call for pricing.




11/23/2018 11/30/2018 chg
UST 2Y 281.6 280.9 -0.7
UST 5Y 287.8 284.1 -3.7
UST 10Y 305.2 301.0 -4.2
UST 30Y 330.8 330.9 0.1
GERM 2Y -58.3 -59.6 -1.3
GERM 10Y 34.0 31.3 -2.7
JPN 30Y 82.1 80.0 -2.1
EURO$ Z8/Z9 28.5 22.8 -5.8
EURO$ Z9/Z0 -1.0 -2.5 -1.5
EUR 113.39 113.20 -0.19
CRUDE (1st cont) 50.42 50.93 0.51
SPX 2632.56 2760.17 127.61
VIX 21.52 18.07 -3.45

Posted on December 2, 2018 at 12:30 pm by alexmanzara · Permalink
In: Eurodollar Options

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