March 13. Weekly summary

Last week I noted the commodity resurgence and how it was beginning to spill over into the US curve, for example in one-year euro$ spreads.  This theme has continued, with near one-year Eurodollar calendars posting new monthly highs.  However, the peak spread of June’16 to June’17 is still only 35 bps, up just 5.5 on the week, so it’s hard to make the claim that the market is pricing for a much more aggressive Fed (in front of Wednesday’s FOMC and dot plot).

The big event of last week was the ECB meeting on Thursday.  Certainly one goal of that meeting was to help the banks, and that part may have been deemed successful with many European bank stocks closing at one month highs.  On Friday Banco Popular gained 12.7%, UniCredit 9.5%, etc.  The other important goal of the central bank is to weaken the currency.  That did not occur.  EUR closed just above 110, right around the midpoint of the past year’s sideway range of 105 to 115. The ECB has to weaken the euro to provide stimulus.  Even EURJPY  (near 127) closed at the high of the last 18 sessions.

In the US the struggle is for growth and inflation.  In terms of the latter, the tide appears to be shifting, with a slightly weaker dollar and incipient turn in commodities.  However, the 2/10 treasury spread, while having closed at the high of the week just above 102, barely changed from the previous Friday.  Treasury yields all ended the week higher, but are well within technical parameters from the beginning of the year (or longer).  For example, the five year note has been in a range from about 185 to 115 for the past thirty months.  The move from the late Dec high of 179 to the mid-Feb low of 112 captured nearly this entire longer term range.  On Friday the yield was 148, just between the 50 and 61.8% retracement levels.  The ten year yield is exactly at the 50% retracement of the year’s move from 230 to 166 (198), and the 30 year is just shy of halfway back. [Ten year yield chart below]


ten year yield March 2016

So, current levels don’t provide much of an “edge” unless one thinks there have truly been catalysts for trend change.  On Thursday, I thought the conditions for a turn might be in place, with 1) continued commodity gains, 2) ECB measures and 3) a Reuters report on China: “China’s central bank is preparing regulations that would allow commercial lenders to swap non-performing loans of companies for stakes in those firms… The new rules would reduce commercial banks’ non-performing loan (NPL) ratios, and free up cash for fresh lending for investment in a new wave of infrastructure products and factory upgrades that the government hopes will rejuvenate the world’s second-largest economy.” I.e. stabilization in oil and other commodities along with central bank stimulus.

However, as mentioned, the Euro isn’t weakening.  And on Saturday Bloomberg had this quote: “Excessive monetary policy stimulus isn’t necessary to achieve the target,” [PBoC Governor] Zhou said at a press conference in Beijing, referring to China’s plan for at least 6.5 percent growth over the next five years. “If there isn’t any big economic or financial turmoil, we’ll keep prudent monetary policy.”  On Saturday Moody’s downgraded its outlook for Hong Kong from “stable” to “negative.”  It appears that China continues to flounder.  Money is still fleeing the country.  From BBG: “Blackstone Group LP agreed to sell Strategic Hotels & Resorts Inc. to China’s Anbang Insurance Group Co. for about $6.5 billion, just three months after it purchased the U.S. luxury-resort company, according to people with knowledge of the matter.”  Sort of reminds me of when the Japanese bought Pebble Beach Golf Course in the ‘deal of the year’, September 1990. (When the Nikkei was at 39000). From a 1990 NY Times article: In recent years, Japanese interests have taken control of New York’s Rockefeller Center, Columbia Pictures, CBS Records and several prestigious United States hotels.*

With regard to stimulus measures, equities were glad to accept the message and run with it.  SPX gained 1% on the week and closed at a 2 ½ month high.  But earnings are declining, and Business Insider (citing Chas Schwab) reports that one of the main drivers for stock strength, company buybacks, has slowed significantly.  As I mentioned during the week, the Fed’s Flow of Funds Z.1 report showed deceleration in Consumer, Mortgage, Corporate and State/Local Gov’t borrowing over the past three quarters.  This does NOT bode well for forward growth.  Additionally there was this interesting note from AMZN’s chief tech officer:  “The startup world is radically different today than it was ten years ago. A typical investment ten years ago, to be able to get a business off the ground that needs to scale in one way or another, was around $5 million. Today, for $50,000-$100,000, you can get yourself a pretty good businesses started … the rise of the whole startup culture is largely driven by cloud.” *  Andreessen has said the same thing.  Sort of makes one think that sky-high tech valuations need to come down.  Barriers to entry have crumbled.  My Nasdaq target is 3800-4000 by the end of Q3, so about 15% lower than current levels.

If you want to buy stocks based on Central Bank largesse, have at it.  But keep in mind that the Fed’s bias toward higher inflation appears to have some support currently, and in spite of tepid growth, the Fed leans toward financial restraint.  This week’s FOMC isn’t likely to reveal major changes, though I’d guess that nearer term dot averages will decline somewhat.  If anything, there might be a surprise uptick in the 2016 inflation projection.

Aside from the Fed, the BoJ announcement is early Tuesday.  PPI and Retail Sales also Tuesday.  CPI, IP and the FOMC on Wednesday.  Philly Fed and JOLTS Thursday.


3/4/2016 3/11/2016 chg
UST 2Y 87.0 95.3 8.3
UST 5Y 138.1 148.1 10.0
UST 10Y 189.2 197.5 8.3
UST 30Y 270.7 274.7 4.0
GERM 2Y -54.0 -46.6 7.4
GERM 10Y 23.8 27.1 3.3
EURO$ M6/M7 29.5 35.0 5.5
EURO$ M7/M8 29.0 31.5 2.5
EUR 110.06 111.51 1.45
CRUDE (1st cont) 35.92 40.09 4.17
SPX 1999.99 2022.19 22.20
VIX 16.86 16.50 -0.36


Posted on March 13, 2016 at 3:09 pm by alexmanzara · Permalink
In: Eurodollar Options

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