June 27. Ants and grasshoppers

–In the grand scheme of things risk assets aren’t bouncing. Oil remains near its low following deep losses in the past two months. Gold and silver, which bounced higher Monday, gave those gains back yesterday. Copper is grinding lower and the euro remains under pressure. Grains are an exception, having surged higher in June. All of the liquidity inspired gains seen in metals, emerging market stocks, metals, etc, in the first three months or so of the year, have evaporated in the last two and a half months. Odds are that the next three months see even lower prices as deflationary psychology takes hold.
–Merkel said Europe would not share total debt liability “as long as I live”, The overwhelming theme that continues to course though global economies is how to share responsibility for vast public debts (that have in part been transferred from the private sector) and future commitments (health/pensions). In the US, Obama says the wealthy should contribute their “fair share”. Germany isn’t buying into that argument. On a smaller scale, the end result is Stockton, CA, which just declared bankruptcy…”suffering the combined effects of fiscal mismanagement over two decades, too much debt taken on in good times and generous pay and unsustainable benefits for city employees and retirees.”(Reuters). The global political gridlock caused by the ants (industrious savers) not wanting to bear more of the burden of their less industrious neighbors the grasshoppers, (over consuming, live for today) has cast a long shadow over economic performance as uncertainties about the strength of previously made promises grow. The result has been a larger role for central bankers/monetary policy, to “solve” these problems. But increased liquidity measures are losing their magic… as evidenced by the money driven sugar high in the first quarter that has reversed in Q2.

–Implied vol continues to contract in US rates as aggressive selling in TY strangles continues. TYU 131/136 strangle was sold from 39 to 36 on Monday, and yesterday another 7k were sold at 31 (20% decline in 2 days!) Also TYQ (august) 132/134.5 strangle was sold about 8k at 37.

Posted on June 27, 2012 at 5:38 am by alexmanzara · Permalink
In: Eurodollar Options

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