Jan 8, 2019. The thrill is gone

–Rate futures continued to deflate as stocks added to Friday’s gains.  Bostic said he favors raising rates only once in 2019.  FFF0 (January 2020 Fed Funds) settled 9764.5, a rate just 4.5 bps below the current Fed Effective of 2.40%, so the market has, in the last month, shifted from a strong stance of probable rate hikes, to a panicked fear of rate cuts, and is now more or less on the fence.  The ten year rose 2.5 bps yesterday to 2.682%.

–A couple of innocuous clips from the news: first, unsurprisingly, Ocasio-Cortez wants to raise the highest marginal tax rate to 70%. Second, a headline from the FT says Softbank is cutting a planned investment in WeWork to $2 billion from $16 billion.  WeWork is one of the largest lessors of commercial real estate in the nation.  My initial thought is: higher taxes as the commercial real estate market deteriorates.  That’s just great.  Sort of the opposite of the Trump tax and repatriation surge that kicked off 2018.  This idea isn’t quantified, just sort of a qualitative snap conclusion… but let me try to tie it into euro$ futures.  In the last three quarters of 2017, total open interest in euro$ contracts averaged around 13.5 million.  In Q1 2018 it surged to nearly 18 million, as expected growth prospects spurred a need to hedge.  As of yesterday total euro$ OI has fallen all the way back to 12.8m.  One might conclude that there is no longer much demand to hedge forward rate risks.  I wonder how that might impact CME shares (I will do a bit more work on this; as a point of disclosure I am long a few puts).  

–In any case, much of the surge in OI at the start of 2018 was specific to the EDZ’19 contract, which on its own hit a record 2.2 million in April.  As of yesterday it has lost over 450k, with OI of 1.76 million.  However, there are still large option trades going thru, which mostly appear to be rolling up long put structures.  For example, a buyer of 50k EDZ9 9712.5/9700/9687.5 p fly for just under 1.5 (with a delta hedge) settled 1.25.  Also a buyer of 45k EDZ9 9737.5/9712.5/9662.5p fly for 3.0.  I suppose one could say that the latter looks for one hike and the former for one with a widening of lib/ois.–One other thought about the market being on the fence: euro$ option vol continues to seep out.  Straddles down 1.5 to 2 bps yesterday.  As BB King might say: ‘The thrill is gone.  The thrill is gone away.”  Play it Lucille.

Posted on January 8, 2019 at 5:17 am by alexmanzara · Permalink
In: Eurodollar Options

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