Feb 23. Any turmoil in US likely to be sparked by EM troubles, which in turn were exposed by Fed’s liquidity reversal, i.e. tapering
–March treasury options expired quietly Friday, pegging the 125.5 strike. In eurodollars there continues to be selling of Short (red) June 9950c which added another 26k Friday to 224k with underlying OI in EDM5 of 875k. 0EM 9950 straddle for the past three Fridays has settled 18.5/18.0/18.0. The last time there was a huge short build up in the 9950 calls on the second red, Jack McGrath and I watched it closely, and while there was never an upside explosion due to short covering, by the time of expiration the contract had traded as high as 99.63-64. Week over week change in 2EM 9850^ was 42.5 to 40.5 though the range in EDM6 over the month of Feb has only been 9844 to 57.5 (on closing basis).
–The widest one year euro$ calendar spreads have had only 6 bp rnages in the past month, EDZ15/16 105.5-111.5 and EDH6/7 104.5-110.5).
–This morning NatGas is making new highs, as is gold, with crude and silver close. Rate futures are slightly better bid.
–Treasury auctions 2, 5, 7 years this week. Probably the largest domestic event will be Yellen on Thursday morning. Apart from the cold weather, US economic news hasn’t really had much impact.
–BIG THEMES continue to be emerging market fragility, the absolute explosion in the CRB this year, a slight change in Fed stance as policy moves to a more qualitative framework in the context of tapering.
–In terms of EM, with regard to political instability the news is non-stop, Ukraine, Thailand, Venezuela, etc. But there has been much more attention paid to China lately perhaps reflected to some degree by a weakening of the renmimbi from 6.06 to a bit over 6.09 last week. Not much of a move but against the drumbeat of slowing property values and a huge shadow finance architecture, it’s worth noting. Interesting item from BBG Friday: “China’s record imports of iron ore and copper, driven by traders who use them as loan collateral, risk repeating the vicious cycle of repayment difficulties and falling prices already seen in the steel-trading market. Xiao Jiashou, known as the ‘steel-trading king’ in Shanghai, had his assets frozen as China Minsheng Banking Corp. sues for money owed. Lenders seeking repayment are finding irregularities, including the same pile of materials used as collateral for multiple borrowings, China International Capital Corp. said. Money-market costs have surged, with the benchmark three-month Shanghai Interbank Borrowing rate jumping to 5.6% yesterday from 3.89% in June 2013.” THE SAME PILE OF MATERIALS USED AS COLLATERAL FOR MULTIPLE BORROWINGS…sounds like the theme for The Producers. Or American Hustle. “You believe what you want to believe.”
And while some EM currencies seem to have at least stabilized, for example TRY, INR, etc, Brazil seems to have a struggling equity market, within spitting distance of last summer’s EM crisis low, which was a 4 year low.
–CRB has absolutely exploded this year from 272 in early January to 302 on Friday, an increase of 11%. Mostly due to NatGas and Crude, but there are also fears of water shortages in California that could lead to surging food prices. Actually, not “fears”. There ARE water shortages and the state is cutting off water to some farmers. http://www.redflagnews.com/headlines/feds-withhold-water-to-california-farmers-for-first-time-in-54-years
http://www.zerohedge.com/news/2014-02-19/142-cities-brazil-are-now-rationing-water-drought-goes-critical
–But Yellen won’t mention those things Thursday. Steady as she goes…we think the US property market can make further headway.
