Dec 21. Couldn’t sleep last night

–Early yesterday morning, David Tepper: “Powell basically told you the Fed put is dead.” Dudley in the afternoon: “The Fed’s not there to take away the market’s pain.”  

–Even more unsettling: General Mattis resigned yesterday.  The two top generals, Kelly and Mattis, in August of 2017 vowed to coordinate travel plans so that one would always be in the US to baby sit “monitor orders coming from the White House.”  Now they’re both out. (link below).  In other countries, the military seizes power when the country becomes unstable.  “It could never happen here, right?” *Nervous laughter and downcast eyes as we look around the conference table for assurances.*  While that’s a huge stretch, it’s completely realistic to believe that the top of the US military will give full support to the Mueller investigation and findings.  Not good for US assets.

–In the meantime, QT is on autopilot.  It’s not going to be on auto-pilot for much longer.  Sometimes the Fed is criticized for being slow to respond to deteriorating conditions.  When the complaints against the Central Bank come from the executive branch, there might be a tendency to bristle against the incursion into the bank’s independence.  An economic slowdown engineered by a loss of confidence will blow-up the deficit.  There’s no way the Fed will be able to continue rolling off $50/billion a month while the treasury’s borrowing needs balloon.  Unless, of course, the Fed slashes rates so that the carry is simply irresistible.  My guess is that the balance sheet roll-off will come to an end sooner rather than later.  Rate cuts: curve steepener.  QT end: curve flattener.

–Yesterday’s action included new lows in stocks, and new lows in most one-year euro$ calendar spreads.  EDZ19/EDZ20 is lowest on the curve; settled -18.0, but was -19.5/-19.0 during the day.  In the 2006 end-of-year inversion, the 4th to 8th bottomed at -26.5.  At the end of 1994, it bottomed at -23.0, but of course rates were much higher then. (In both instances).  Red/green euro$ pack spread settled -7.0 yesterday, but green/blue settled +7.0.  Flows favor strength in the green pack (for now).  For example, a new buyer yesterday of 60k 2EM 9800/9825 call spread, settled 2.25 ref EDM21 9739, versus an exit of 0EH 9737/9775 call condor, settled 2.0 ref EDH20 9723.5.  Several sources pointed out the suffocating agony of negative carry possibilities, (thanks DW).  Another comment came from Bill Sokolis of MNI, who noted that 3 month libor is now above the ten year yield.  Ruh-roh. 

–Stocks lower again this morning, and the dollar generally a touch stronger.  Gold is lower (probably a safe-haven gift here).  Also note that bitcoin has had a nice bounce from the recent low and now trades around $4000.  If only there was some decentralized asset outside the purview of government authorities where I could store wealth safely…

Posted on December 21, 2018 at 4:59 am by alexmanzara · Permalink
In: Eurodollar Options

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