May 18. Political theater

–SPX fell 1.8%, Nasdaq dropped 2.6% and Russell 2.8% as the Trump agenda morphed from economic stimulus to a long parade of investigations and testimony.  There’s not much question that a big part of the equity market rally was predicated on tax cuts and growth, so it should be no surprise to see an unwinding of expectations.  As mentioned yesterday, some markets have already fully erased post-election gains (dollar index, 2/10 treasury, inflation measures).  SPX had been just below 2200 in the months before the election, and closed yesterday at 2357.  Many had expected a ‘crash’ if Trump was elected, which is to say a sell off from nearly 200 points lower than our current level.  That could still occur…

–The price of insurance suddenly went up.  For example, on Tuesday, USM atm straddle closed at 1’26 ref 151-09.  Yesterday the USM atm straddle (which shifted to the 154 line) settled at 1’50 as the future price rose 2-06.  While implied vol rose, it’s not particularly high, it’s just bouncing off a very low base.

–The peak one-year eurodollar calendar is EDZ17/EDZ18, now only 33 bps.  May FF to January’18 FF (FFK7/FFF8) closed at 29, just above 1/4%, indicating one more hike in 2017.  FFN7 closed up 3.5 at 9894.5, so the odds for a June hike have been shaved back to 62%.  It’s times like this where the Fed should probably show a bit of backbone and actually tighten even as asset prices give back some gains.  However, the 2/10 treasury spread made a new low of just 97.2 bps (-5.7 on the day) and financial stocks were hammered; another hike would likely cause further flattening.  Trump will probably pull Yellen aside and ask her to back off any tightening plans…

–Comey testimony next Wednesday, which will likely overshadow the release of the FOMC minutes from May later in the day.

–Today’s news includes leading Indicators, expected +0.3 and Philly Fed, expected 19.6 from 22.

Posted on May 18, 2017 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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