March 22. Hey… any catalysts for this?

–Risk off.  There are many reasons for yesterday’s sell off in stocks, but the fact is that they have been lurking in the background for some time, and finally coalesced into a ‘correction’.  SPX -1.25%, Nasdaq -1.8, Russell -2.7, KBW bank etf -3.9, and KBW regional banks -5.5%.  The Trump rally has run into political headwinds with the Healthcare vote looming; N Korea plans to pursue nuclear capabilities, punctuated by a failed missile launch; Rosengren warned about potential problems from Commercial Real Estate; Kaplan and Evans talked about more rate hikes; crude oil continues to sell off (CLK as of this writing 47.59, -0.65, at new low for the year); problems with auto loans are getting increased press; and going into quarter end there was a large portfolio re-balancing need.

–Was it a one-day event?  Probably not.  VIX futures contracts had lower lows early in the session, then outside ranges with closes on the highs.  Yields fell with the curve flattening slightly.  2/10 treasury spread eased 1.6 bps to 116.2 as the ten year yield fell 4 bps to 243.  Red/gold eurodollar pack spread fell 3.5 bps to 69.625.  Implied vol firmed slightly in treasuries.  Moves since the election have been pretty powerful.  Yesterday’s activity was an engraved invitation to lock in some profits and pare back positions, though many want to stay at the party.  A friend of mine mentioned that he had bought some cocktail napkins  that had this caption printed on them: “They won’t leave… time to put a Yoko Ono album on.”

–Though not quite at new lows, one-year eurodollar spreads are all below 1/2% with EDM7/EDM8 dropping 1.5 to 49.5.  EDM8/EDM9 is just 3/8% at 37.5.  The more deferred spreads are at low risk buy levels.  A change in Fed rhetoric if stocks continue to press lower could see reds outperforming on the curve.

Posted on March 22, 2017 at 5:28 am by alexmanzara · Permalink
In: Eurodollar Options

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