Market fissures?

July 8, 2019

–Small bounce in fixed income this morning, and a more solid rally in gold, after the NFP inspired sell off on Friday.  Payrolls increased 224k, sending the ten year yield hurtling 9 bps to 2.042%, and the red euro$ pack down 12.75 bps.  The curve flattened with 2/10 spread down 1.8 bps to a new recent low of 17.1.  The data finally dispelled notions of a 50 bp cut at the end of the month, with August Fed funds tumbling 6.5 bps, leaving the spread to July at almost exactly 1/4% (FFN 9761 and FFQ 9786.5).  A lot can happen in the next 3 1/2 weeks going into the FOMC meeting, but those who have been emboldened in calling for the Fed to stand pat will be disappointed (including Mester).  The market is comfortable with a cut of 25, and Powell has vowed to take ‘appropriate’ action.

–While US stocks recovered some of the early morning sell off on Friday, Asian shares are weaker this morning, with ShComp down 2.5% and Kospi -2.1%.  A strategy note from Morgan Stanley is now advising an underweight position in global equities.  Interestingly, a JPM piece is also warning against a bond shock given high durations and extremely low yields.  Sounds like these guys are expecting an earthquake of some sort… 

It was in April of 2015 with the German bund yield around the then unheard of low of around 19 bps when Bill Gross called bunds the short of a lifetime.  The yield immediately shot up to nearly 1%.  And here we now sit, at -37 bps.  In the US, the treasury auctions 2’s, 10’s and 30’s this week as Powell speaks.

–Speaking of shocks, Erdogan fired the head of Turkey’s central bank, sending the lira lower, while Trump keeps the pressure on Powell going into this week’s semi-annual testimony. Congressional testimony starts on Wednesday, although Powell also speaks tomorrow (Tuesday) on stress testing.  It was reported a couple of weeks ago by Reuters that Brainard has almost single-handedly stopped the Fed from loosening some of the regulations put in place post-crisis.  I’m no expert on regs, but it certainly does seem as if the US financial system is in much better shape and more solidly capitalized than european counterparts (as Deutsche sheds 20% of its workforce).   

Posted on July 8, 2019 at 5:11 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply