Feb 15. Taking downside risks ‘on board’

–Treasury yields fell Thursday, initially spurred by weak retail sales, which fell 1.2% on headline (broad-based weakness and worst since 2009).  Fed Governor Lael Brainard mentioned the miss in retail in the context of increased downside risks, and noted weaker foreign growth and political uncertainty as well.  She further said that she favored ending balance sheet run-off in late 2019.  The ten year yield fell 5 bps to 265.7.  On the euro$ strip reds thru blues were up 5 to 6 bps. Volume was light and implied vol continues to be smothered.  About a month ago the green pack 9750 straddle strip traded as high as 372, but settled yesterday at 307.5.   Sure, some of that is due to time decay, but not 17%!   

–Stocks fell, but then shrugged off the retail sales number. However, by the end of the day domestic political uncertainty again crept in, with reports that Trump would declare an emergency to build the wall.  Perhaps at the margin there was also a negative reaction to the decision by Amazon to pull out of plans for HQ2 in NY.  The general move on the political spectrum to the left may be sharpening the edges between gov’t and business.  After Trump was elected, the NFIB Small business optimism index surged and remained elevated…until recently.  Perhaps some of THAT decline is due to dragging uncertainty related to China negotiations.  But a harsher environment for big tech and business in general has to figure into the equity valuation equation.

–There is still upside accumulation of EDU9 9775/9787cs, bought for 0.75 yesterday only in 10k, but both strikes have over 215k in open interest.  Also a new buyer of 30k EDZ9 9850c for 1.0.  When Brainard repeatedly says the Fed is “taking on board” the idea of growing downside risks (in spite of solid domestic employment trends) it’s not that much of a leap to envision rate cuts in 2H.

Posted on February 15, 2019 at 5:17 am by alexmanzara · Permalink
In: Eurodollar Options

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