Jan 20. Beware China’s New Year (of the horse). Possible domino contagion

–Fairly quiet session Friday, though new lows were eked out in red/gold pack spread to 280, 2/10 at 245 and 5/30 at just under 213. Red/green/blue pack fly +1.75 as greens continue to trade weak.  All green blue atm straddle spreads (100 bp difference in strikes) are 4 bps or lower with blues over.  Several weeks ago these spreads were more like 12-15.
–On Sunday morning I looked at ZeroHedge and unsurprisingly there were two posts warning of an imminent fall in stocks, from a technical (chart) perspective, one from Citi and one from United ICAP.  DoubleLine’s Gundlach just released a presentation where he suggests stocks are similar to the 2011 precious metals run up, just prior to the fall.  And this from Mauldin: “Not only does today’s Shiller P/E of 25.4x suggest a seriously overvalued market, but the rapid multiple expansion of the last few years, coupled with sluggish earnings growth, suggests that this market is also seriously overbought.”  We’re probably on the verge of a quick 10% run up!
–More seriously, DB announced a surprise €1.5 loss and shares sank 4%. China’s growth slowed from 7.8 to 7.7%.  But more importantly with regard to China is the potential default of a WMP (wealth mgmt product, China Credit Trust’s Credit Equals Gold #1) on Jan 31.  WMP’s are shadow banking instruments that have become much more prevalent. As BAML says, “The potential first default, even if it’s not CEQ1 on 31 JANUARY, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event.”  Like the MBS fund failures for Bear Stearns in the summer of 2007.

http://www.forbes.com/sites/gordonchang/2014/01/19/mega-default-in-china-scheduled-for-january-31/

http://www.zerohedge.com/news/2014-01-19/bank-america-actively-preparing-chinese-january-31-trust-default

 

Posted on January 20, 2014 at 5:57 am by alexmanzara · Permalink
In: Eurodollar Options

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