July 7. Eurodollar curve continues to extend the timing, and compress the trajectory of rate hikes

–It’s a “risk-off” environment due to Greece and China.  I know it, you know it.  The treasury market knows it, with the ten year yield sinking below 230.  Crude oil knows it, having plunged over $4 bbl yesterday.  As do junk bond etfs, copper, iron ore, the Mexican peso, etc.  The only market that doesn’t seem to know it is US equities, up again this morning.  But what US stocks appear to find comfort in is the idea that central bank liquidity measures are likely to continue.  Regardless of tomorrow’s minutes, Yellen’s speech on Friday is almost certain to be dovish, given the global landscape.
–US tens closed 228.7, down approximately 5 bps from Friday (using futures as a proxy) and 10 bps from Thursday.  Crude was down 4.15 late to 52.78 (down 10% in one week), with the March lows of the August contract having been 48.71.  Copper has taken a tumble in the last couple of days as well, having been as high as 2.93 in May, now around 2.50, a decline of 15% in 2 months (and closing in on the year’s low set in Feb). Near eurodollar calendar spreads made new lows, with the peak one-year spread, which has now shifted to March’16/March’17, falling 5 bps from Thursday’s settle to just 80 bps.  While near spreads collapse, deferred spreads are holding ground, leading to a decline in butterflies.  For example, ED Sept’15/Sept’16/Sept’17 closed barely positive at just 0.5, having been around 13.0 a couple of weeks ago. January 2016 Fed funds closed at 99.675, a spread of just 19 bps to the front July contract, indicating that odds of just one 25 bp hike this year continue to diminish.
–Greek negotiations are continuing, though Juncker said a deal will not be reached today.  China’s Shanghai Comp again closed lower despite gov’t attempts to prop it up.  In the US, news includes International Trade, expected $42.7b deficit, JOLTS and the three year auction, to be followed by 10’s and 30’s Wed and Thursday.

Posted on July 7, 2015 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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