March 10. Monday’s bounce in stocks is over as the dollar soars

–Both bonds and stocks staged modest bounces from Friday’s sell off.  However, the dollar index edged to a new high with the euro essentially unchanged on the day.  Ten year yield eased 4 bps to 219.5.  The curve flattened slightly with 2/10 down 1.5 bps to 150.   Volume was quite light.
–This morning the dollar has powered higher with the euro moving closer to parity at 107.50 (-1.10).  $/yen has risen above 122 and USD/BRL has sliced through 3.00, highlighting emerging market fault lines.  S&P’s are currently 2067, testing Friday’s low.  Treasuries are only slightly higher, as EM weakness perhaps leads to selling of dollar reserves.  Additionally, treasury auctions 3 years today, followed by tens and bonds Wednesday and Thursday.
–Other news today includes NIFB Small Business Optimism, which had been on a fairly strong uptrend until last month, and JOLTS data.
–One interesting trade relating to expected Fed action was a seller of EDZ5 9925c at 11 covered EDU5 9939 with 40 delta.  If the Fed hikes in June, then odds for a Fed hike in September will likely be 60-80%.  EDU5 price would then probably trade 9930 to 9935, not much lower than the current level, but the calls will have lost time value.  On the upside, when just looking at the forward contracts in EDM and EDU calls, it looks like a small winner.  Certainly an increase in the EDU5/EDZ5 spread helps the trade, the futures calendar saw fairly heavy volume yesterday 23.5 to 24.5.  With the Fed supposedly near a hiking cycle it seems like a three month spread should probably trade north of 1/4%.   But it doesn’t, yesterday’s settle 23.5.

Posted on March 10, 2015 at 5:09 am by alexmanzara · Permalink
In: Eurodollar Options

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