June 15. Let’s fake it

–FOMC today, though Brexit issues have overshadowed all else in the markets.  Obviously, there will be some snap-back if the UK chooses to remain (and there appears to be some stabilization this morning).  But as of yesterday’s settle, new lows in: red/gold euro$ pack spread at just 58; 2/10 just above 89; near one-yr euro$ calendar spreads with Dec’16/Dec’17 at just 18 bps. Implied vol everywhere has become elevated, though yesterday morning’s surge was met with selling in treasuries.  For example, TYQ 132 straddle opened trading 2’04, but came back to 1’59/1’61 by the end of the day.  Heavy liquidation yesterday of TYN 132c, open interest fell by 23.5k.
–Though Brexit is the dominant theme, it’s worth mention that the big US equity market sell off in August was spurred by China’s devaluation, and the yuan is making new lows, having traded 6.60 today, as the MSCI declined to add China to the benchmark EM basket.  Coincidentally AliBaba CEO Jack Ma says that fake products are often better than the real thing.  “It’s not the fake products that destroy them, it’s the new business models.”  On a side note, the new Central Bank business models are likewise destroying the markets…
–The pounding of European banking shares probably is also partially Brexit related as negative yields destroy the transmission mechanism, but there was also weakness yesterday in US credit card companies, as a firm called Synchrony Financial (mostly private label cards) warned of increased delinquencies and charge offs.  It might seem like a trivial piece of information, but American Express and Discover (AXP, DFS) were both down 4% on the news. Interesting in that yesterday’s Retail Sales were solid at 0.5%, and Consumer Credit surged a couple of months ago.
–The point is, that even if the worst fears of Brexit are avoided, trouble is lurking in Asia and, perhaps more importantly in the US household sector (which Yellen specifically pointed to as a forward risk).
–Outside of FOMC, PPI today expected +0.3 and +0.2 Core.  NY Empire survey (which has been negative 8 out of last ten times) expected -3.5.  Industrial production expected -0.1.

Posted on June 15, 2016 at 5:25 am by alexmanzara · Permalink
In: Eurodollar Options

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