June 9. Central banks losing their magic

–The edifice of central banking is crumbling.  It’s a theme that’s been covered before, but the myriad of recent signals is breathing new life into the threat.  Yesterday, the precious metals had a nice bounce, and bitcoin closed near the recent high of its breathtaking rally, around 581.  OK, those are pretty minor clues.  But the transmission of CB policy runs through the banks, and the revolt is gaining traction.  For example, BTMU is dropping its primary dealer status:  “Bank of Tokyo-Mitsubishi UFJ is preparing to relinquish its role as a primary dealer of Japanese government bonds as negative interest rates turn the instruments into larger risks, a fallout from massive monetary easing measures by the Bank of Japan.”  And this from Reuters yesterday, “Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euros in vaults rather than paying a penalty charge for parking it with the ECB, according to sources familiar with the matter.” And this from Japan’s opposition party: “The Democratic Party wants to call for the withdrawal of negative interest rates. Negative interest rates shift the burden onto savers.”  And this from Deutsche Bank, “Already it is clear that lower and lower interest rates and ever larger purchases are confronting the law of decreasing returns. What is more, the ECB has lost credibility within markets and more worryingly among the public.”
–The implications are a massive flight to safety, which may just be in the starting stage (with bunds holding just above zero…)  And of course, splashy headlines this morning proclaim that Soros is back, with trades reflecting economic turmoil.
—-Quiet session in US rates yesterday, with a solid ten year auction.  30 yr bond auction today.  Continuation of recent trades: TYU 134c bought covered another 8k with open interest now up to 35k. In dollars, there is a continued bid for EDM7, EDU7, EDZ7 100 c strip, 4.0 paid covered 9906.0 in EDM7.  Open interest is 104k, 46k and 47k respectively.  Could these be the turmoil trades of which you speak?
–By the way, stocks of US banks have generally been rising, with most charts mimicking the crude oil rebound.  Oil has come a long way towards normalizing, as shown on the attached chart.  The spread between the near contracts and one year forward showed a discount of nearly $10 at the start of the year and is now only $1.50 with all prices higher.  Credit spreads have also come in.  US banks have probably gotten just about all they can from these tailwinds.

oil one year spread June 2016

Posted on June 9, 2016 at 5:29 am by alexmanzara · Permalink
In: Eurodollar Options

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