End of hikes, end of growth

June 23, 2022

–The message from the interest rate market is becoming more shrill: a recession is coming fast. This conclusion probably isn’t good for stocks but hold the thought. 

–For a while the lowest contract on the euro$ strip was EDM3. The idea was that Fed tightening would be over by the middle of next year. Then, on June 13, EDH3/EDM3 inverted at settlement…and hasn’t looked back (-9.5 settle).  So, EDH3 became the cheapest contract on the strip.  But yesterday EDZ2/EDH3 inverted…and was trading negative 2 late (-0.5 settle).  The market has moved the end of hikes up to the end of the year. The lowest (most inverted) spread is EDH3/EDH4 at -47.5.

–Consider EDU2/EDU3.  On June 10 it was 87.  Yesterday’s settle was 26.5, and shortly after settle it was 23.  It’s almost astonishing that a 1-yr spread like EDU2/EDU3 could be below 1/4% while a 1-month spread like Oct/Nov FF could be 36.5.  (FFF3/FFF4 settled -23.5!) Spreads from 2023 to 2024 are telegraphing an unmistakably bearish economic signal, although further back the curve is actually steepening.  Yesterday reds settled +20.25 while golds were only up 12.25.

–Now, what does that mean for stocks?  The economy is expected to grind to a halt. Look at the bbg base metals chart.  It had a half-hearted bounce at the 38 pct retracement and is now looking at 50%.  The 50% for SPX is ~3500.  Do earnings really hold up where the administration is jawboning constantly against profits?  My answer is no….we’re not in the Kansas of an accommodative Fed and a capitalistic govt any more.  From Chevron CEO’s Mike Wirth letter to the President: “…your administration has largely sought to criticize, and at times vilify, our industry.  These actions are not beneficial to meeting the challenges we face…”

Posted on June 23, 2022 at 5:25 am by alexmanzara · Permalink
In: Eurodollar Options

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