Dec 3. Yellen signals hike, Draghi’s turn to ease

–Yellen’s comments yesterday gave a green light for a Dec 16 hike.  This morning it’s Draghi’s turn to move further in the opposite direction with more accommodation, (with the EUR at new lows 105.60).
–New lows as well in both 2/10 at 124, and 5/30 which was down 5 bps at 127.4.  The oil market was hammered with Jan crude probing below $40/bbl and the front contracts sliding to new recent low discounts versus the back end.  [CLF6 vs CLF7 chart attached, spread at -7.70].  Both the sell off in oil and the shooting in San Bernadino pushed stocks lower, but that weakness has been reversed this morning.  A broader issue concerns the bond market.  For example, Vodaphone pulled a 30 year bond deal which was being marketed at 250 over treasuries, because of investor requests for more protection and a juicier yield.
I saw another story noting a new high in CCC bond yields at 16.6%.  The point is that some areas of the market are becoming much less welcoming.  Here’s a link to Fred chart.
–The idea of a Fed hike has pushed the dollar to new highs and was responsible for pressure on the short end yesterday with reds -4.25 and greens -5.25.  January 3-month euro$ (after Dec FOMC) settled at 9944.5, exactly 25 bps below Jan FF at 9969.5, and I would say the EDF price almost fully reflects a hike.  The question is, what comes after?  Not only is there weakness in high yield bonds, but issues in emerging markets continue to percolate, with problems in Brazil (BTG Pactual and Rousseff impeachment) and Mexico, Empresas ICA SAB on verge of a bond default.  The idea of pricing a hike in the US at every quarterly FOMC is simply not in the cards.
–Today’s US news includes Jobless Claims 270k, Factory Orders +1.4% and Service ISM, expected 58.2.

Posted on December 3, 2015 at 5:19 am by alexmanzara · Permalink
In: Eurodollar Options

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