July 28. Turnaround Tuesday (but only a brief respite)

–There was a decent amount of spillover from the sharp decline in Chinese shares Monday.  The sell off continued in the oil market and EM with new lows in EEM (the emerging mkt ETF), and the hi-yield ETFs JNK and HYG.  Several corporate bond deals were deferred due to turbulent market conditions.  The Russell 2000 (small caps) made a new recent low, closing right on the 200 day moving average, which it hasn’t been below since December.   Treasuries of course, were the beneficiaries of safe haven flows.  Ten year yield fell 4.4 bps to 222.7.  Some eurodollar calendar spreads made new recent lows.  For example, red/green eurodollar pack spread (2nd to 3rd year), fell 1.375 to a new low below 60 bps.  2/10 treasury spread edged to a new low under 158.

–This morning has seen stabilization after five straight days of losses in the SPX.  The FOMC announcement is tomorrow afternoon.  While some indices have held above the recent lows associated with Greece, both the Russell small caps and the Dow Jones Composite are at new lows, with the latter at a new low for 2015.  Any bounce will likely be shallow; perhaps the FOMC will take a step back from its messaging campaign to gradually remove accommodation and spark a brief relief rally.  However, the internals suggest deeper damage.

–I saw a research piece by UBS yesterday suggesting that lackluster capital spending in this recovery might be somewhat misleading, in that some of the capital spending is now actually showing up in consumer spending.  The idea being that relatively small but powerful technologies like cell phones, tablets and laptops are being purchased by smaller businesses with personal credit cards.  While that may be true, there are two related problems.  One, no barrier to entry, which typically means cutthroat competition and lower prices, and two, retail sales haven’t been particularly strong either.  I have heard both Mark Cuban and Marc Andreesen say that the cost of tech start-ups has become very low.  How can that NOT result in severe price competition with disinflationary overtones?

Posted on July 28, 2015 at 5:15 am by alexmanzara · Permalink
In: Eurodollar Options

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