November 15. 2019

–This morning it’s all about US/China Phase I, with Kudlow setting the table tor a deal.  Stocks have surged to new highs.  Timing’s right for a December signing and the tease of further progress. Bonds also surged yesterday, with tens -6.1 bps to 1.813%.  Euro$ contracts from EDH21 through the golds were up 5 to 6 bps.  Near calendar spreads declined, for example, EDH0/EDH1 fell 3.5 bps to -21.0.  Powell is assuring the market of liquidity, driving up odds of renewed rate cuts.  December is pretty much priced for a pause (thus limiting the rise in near contracts) but the back end floated higher.

–The Fed yesterday afternoon announced 28 and 42-day repos to get the market over the turn.  In 1999, where there were genuine fears of a turn meltdown due to Y2K, the Fed addressed the problem early.  The Aug 24, 1999 FOMC minutes show that the Fed approved “a temporary financing facility authorizing the NY Fed to sell options on repo agreements” to cap funding costs for dealers.  From a footnote in a Fed paper of Oct 2013: “In the months leading up to Y2K, the Fed sold options that provided dealers with the right to obtain overnight repos from the Fed over specified periods at a rate set 150 bps over the target fed funds rate.”   Why am I bringing up Y2K?  Obviously the Fed is quite nervous about this year’s turn and is sloshing out the liquidity.  The Fed is relying on repo ops and balance sheet explosion to hold down a rate which, if left to its own devices, would lay bare the facade of enormous funding pressure.  As Zoltan Poszar of CS recently said, ‘the world is funding itself overnight’.  And it’s a LOT of funding due to the increase in treasury supply.  It’s a little like WeWork, we’ve committed to borrow long (WW lease obligations) but our client base is a fickle group that leases from us short term (funds o/n).  I’m not saying that date mismatches can cause problems.  Central banks can hold things together.  Like the SNB with the EURCHF peg.  : – /

–It’s shaping up to be an interesting year-end.  Stocks understand the liquidity that the Fed feels forced to provide, and relish the extra kicker from a US/China deal that needs to be teed up and then extended for election purposes.  The Fed is helping Trump, but I’m sure even Dudley would say, they have no choice.  It’s the institutionalization of future destabilizing factors.

–From Cass transportation which tracks shipping: “…we repeat our message from the previous five months, the shipments index has gone from “warning of a potential slowdown” to “signaling an economic contraction.”  Of course, it’s really hard to gauge how important that could possibly be, because these shipments are just of ‘things’ and not of the important economic stuff like ‘data’.  I’ll just leave you with another snippet that I learned on the elevator monitor as I was going to work yesterday (all the BEST news is in the elevator). And it relates to the morally green outrage of our youth… “in a typical year, gamers in the US alone use about 33-34 terawatt-hours of energy.  Breaking it down into easier terms for those of us who aren’t electricians, that’s 2.4% of all electricity in residential areas, which makes the CO2 output greater than 5 million cars.” [I did not try to check the veracity of the gamer thing.  It was in the elevator.  It has to be true]  Yes, I’m outraged too.  But I productively channel it.  In a bar.      

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

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