Jan 17. Rallies fizzle

–Tuesday started with a mad grab for stocks, but the party fizzled later in the session.  Bitcoin mania has cooled for now, holding just above 10000 this morning, about half the level from the high at which the CME futures contract debuted last month.

–The curve flattened with 5/30 treasury spread closing at a new low of 48 bps.  Ten year yield was nearly unch’d at 254.1 (-0.9).  In spite of large liquidation of EDH8 9825 puts (45k), EDH8 settled 9814 and remains there this morning.  EDH8 9812.5p trades 2.0 with 62 days until expiration, and the FOMC meeting 2 days later.  A hike at that meeting is priced over 85% odds.  Similarly, EDM8 9787.5p traded 2.25 ref 9795.0.  There continues to be buyers of 9787/9775/9762 p fly for 2.0; open interest in EDM8 9787p is over 950k.  High confidence of a March hike and growing confidence of another in June, yet the markets see almost no chance of an overshoot…

–While EDH8/EDH9 spread closed unchanged at 49.0, the Jan’18/Jan’19 FF spread settled at a new high of 61.25.  I am viewing this spread as indicating certainty of at least 2 hikes and 50/50 for a 3rd in 2018.

–Davos is a week away, and Trump will be there, mingling with the elites and touting the virtues of global trade.  Well, he will be there anyway.  Interestingly, ZH has a story citing WSJ about a possible US/China trade war.  This story compares the late 1980’s trade tensions with Japan versus China now, indicating that it’s unclear who has the upper hand currently (as opposed to a much smaller Japan in the 80’s).  Impact of monetary policy is unclear; at the margin a trade war is both inflationary and a weight on growth.

Posted on January 17, 2018 at 5:23 am by alexmanzara · Permalink
In: Eurodollar Options

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