June 30. Implied vol sinks…no worries

–Yesterday began with a surprising end-of-month bid in the long end of the market, but ended on a weak note as yields pushed higher at the end of the day, in part due to a $14b bond deal by ORCL.  While the ten year treasury yield was only up 1 bp at the floor close to 149,  it’s 153 this morning, as risk assets continue to rally from the Brexit plunge.  A BBG article today features Soros continuing to warn about Brexit’s impact: “Continental Europe’s banking system hasn’t recovered from the financial crisis and will now be “severely tested.,” Soros said. …And, “This has been unfolding in slow motion, but Brexit will accelerate it. It is likely to reinforce the deflationary trends that were already prevalent”  http://www.bloomberg.com/news/articles/2016-06-30/soros-says-brexit-has-unleashed-a-financial-markets-crisis

–The US banking system was given a clean bill of health in Fed stress tests, with only DB and Santander failing.  As a result, an avalanche of “shareholder friendly” dividend increases and stock buybacks were announced.  Wouldn’t it be ironic if the smartest bank guys in the room announced buybacks just at the peak of the post-Brexit bounce?  And wouldn’t it be even more ironic if a banking crisis was sparked in the heart of the EU, with DB?  From an IMF report: “Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC and Credit Suisse.”
–In any case, the absolute implosion in interest rate implied volatility was stunning yesterday.  “The futures went down, but at least my puts performed, right?”  The answer to that is, not so much.  For example, FVU fell 4/32’s but the atm Sept put (FVU 122p) was up 0.5/64.  EDU9 fell 2.5 bps to 9883.5, but 3EU 9887.5p was unchanged at 17.5.  Straddles came in by several bps, leaving Sept TY vol at 5.2, after having surged above 6% last week.  So, while warnings about financial stresses still abound, implied vol suggests the market is handcuffed.
–In terms of deflationary winds, there’s this from Reuters: “China’s yuan sank to a six-month low against the dollar in offshore trade on Thursday and the Australian dollar fell almost one percent after Reuters reported the People’s Bank of China is willing to let the Chinese currency weaken to 6.80 per dollar.”  Taiwan cut rates this morning by 12.5 bps to 1.375.  Finally, a diamond of 1109 carats called Lesedi la Rona failed to sell at auction, not having met the reserve price.  “Prices for rough diamonds slumped 18 percent last year, the most since the financial crisis in 2008, amid lower demand and an industrywide credit crunch.”  http://www.bloomberg.com/news/articles/2016-06-29/biggest-diamond-in-more-than-a-century-fails-to-sell-in-london

Posted on June 30, 2016 at 5:15 am by alexmanzara · Permalink
In: Eurodollar Options

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