March 18. Instability…first the US, then Europe, now Asia?
–Quiet Monday, marked by slight pullbacks from Friday’s panicky trade. Back month eurodollars fell over 5 bps in price as the ten year note similarly rose 5 bps in yield near 270. However, option premium remained fairly well bid. TYM straddle slipped only 4/64’s from 210 to 206. Blue April 9750 straddle eased from 24 to 23.5. Stocks jumped.
–Domestic focus remains on the FOMC announcement and press conference tomorrow. Today’s news includes CPI expected +0.1 and Housing Starts at 910k. Several Fed members recently stressed that “financial stability” was one of the goals of monetary policy. But I saw at least 5 references this morning to possible China instability. Business Insider cited Lombard research, “China Bear Stearns Moment may Strike Any Time”, Telegraph…looming property default, FT… renminbi nears 6.20, and FT …concern by the central bank over shadow financing, and of course ZeroHedge. The question the Fed may face is, “what if a new round of financial instability is sparked by Asia?” For example, a dramatic unwind of yen carry trades (now 101.50). Or a cascading flood of corporate defaults in China. How can the Fed respond besides suspending the taper? It won’t happen at this Fed meeting, but perhaps by the end of April.
–As March contracts rolled off the board red/green/blue pack fly now starts with June, and settled yesterday at +8. Red/green pack spread is just barely over 100. High point of one year spreads still EDZ5/6 at 104, +2 on the day.
Alex Manzara 312 281 4424
links:
http://www.businessinsider.com/chinas-bear-stearns-moment-may-strike-2014-3
http://www.telegraph.co.uk/finance/china-business/10703990/Looming-property-default-in-China-raises-fears-of-broader-crisis.html
http://www.ft.com/intl/cms/s/0/e5590566-ae6c-11e3-aaa6-00144feab7de.html?siteedition=intl#axzz2wJ8jtFUA
http://www.zerohedge.com/news/2014-03-17/yuan-tumbles-11-month-lows-china-home-price-growth-slows
