May 9. Overarching theme…NO RISK

–A couple of themes yesterday.  First was the implied volatility crush.  Almost every news service trumpeted the fact that VIX is on top of the low from 1993.  It’s the same theme in treasuries, where vol is at new recent lows.  I marked FVM at just 2.5 and TYM at 3.9 at yesterday’s settle.  The USM straddle closed at just 2’08 with 2 and a half weeks to go.  The bond contract can move two points on a sneeze.   Second is the continued compression in libor/ois.  Recall that going into money market reforms last October, this spread had blown out significantly as non-gov’t money market funds for institutions were allowed to float (break the buck).  That risk, like many others across the financial landscape, has receded into the nether regions.  Another observation, which I highlighted yesterday and is related to the themes above, is that financial conditions have, by and large, eased over the last two Fed hikes.

–Another broader topic of discussion has been the migration to passive investing, and its implications.  A large factor in the lower vol environment?  Or an investment strategy that divorces the idea of underlying value from money flows?  Discuss amongst yourselves.

–Interesting note from Gundlach yesterday.  He said he favors emerging market stocks over US, noting that US stock market capitalization as a percentage of global equity market cap is around 50%, while US GDP as a % of the world is around 25%.  I’m not sure that’s compelling, given the fact that many countries don’t have developed capital markets, but it’s certainly an interesting tidbit.

–Stories about China are becoming more prevalent in the financial news, as many connect weakness in industrial commodities with credit tightness in China. Several note that the Party Convention is in September (thanks PR) and that China will avoid big changes before then (though perhaps SHCOMP hasn’t gotten the memo, as it’s made new lows for the year).

–Today’s US news includes the three year auction, NFIB small business optimism and JOLTS.

Posted on May 9, 2017 at 5:28 am by alexmanzara · Permalink
In: Eurodollar Options

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