June 4. Calm after Italy’s storm

–Starting the day with the Russell at new ath.  Yields are a bit higher after having risen on Friday’s session, a result of the solid jobs report and buoyant stocks.  NFP better than expected 223k with the unemp rate at just 3.8% and yoy earnings +2.7%.  Today’s news includes Factory Orders expected -0.4%.  How can there be so many kids panhandling on every city block downtown Chicago with a 3.8% rate?

–Ten year yield +7 Friday to 289.1.  2/10 closed near new lows, at 42.6.  Green eurodollars were weakest on the curve, settling -8.875.
–During the turmoil at the start of last week, EDM9 traded as high as 9743.  It is now over 1/4% lower (in price), trading at 9717 this morning.  At one point I had a hard time selling 0EM 9712 puts at 0.5; they’re now around 3.  With just a week and a half in front of the FOMC meeting, it’s unlikely that anything can stop a hike.  The spread between FFN and FFV is 18, forecasting odds of another hike in Sept at about 3 in 4.  However, the June/Sept ED spread is only 13.5, which suggests that EDU8 is a bit rich.  Not much in the way of domestic news this week, which should contribute to some pressure on premium.

–Once again there is a ‘mini-inversion’ on the ED curve, as EDZ0/EDH1 settled -0.5.  As mentioned over the weekend, the Fed (Brainard) is somewhat dismissive of the flattening curve’s message.  They’re not killing the messenger, just choosing to explain it away.  The IOER tweak may not be enough to prevent a full-on inversion by year end if there are two more consecutive hikes.  On the other hand, non-US considerations including Italy and EM stress, may convince the market that the hike cycle will have run its course by year end, in which case long dated supply will become the dominant theme.

Posted on June 4, 2018 at 5:28 am by alexmanzara · Permalink
In: Eurodollar Options

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