Nov 15. SF Fed warns of possible recession due to internat’l turbulence

Near eurodollar contracts continue to trade under pressure, but the back end of the curve rallied, bringing US ten year yield closer to 2% again.  Eurodollar curve remains quite flat with red/green pack spread at only 38 and red/gold at 176.  EDH12 contract settled 9930 or 70 bps.  Given the Fed’s pledge to keep rates low, this contract might seem “cheap”, but with continued financial uncertainties, the tendency to hoard near term liquidity comes into play, and pushes the spread higher. It’s probably more of a stigma than ever to turn to the lender of last resort for cheap financing. I would be wary of a waterfall in near contracts that could occur due to massive position exits, and there’s a lot less leniency for margin financing at this particular juncture, i.e. no one wants to let a position play out based on what we used to call “fundamentals”.
–I skimmed a couple of articles about recent downgrades to Hungary by the rating agencies.  The economy is only about 1/2 the size of Greece ($130 B), and, from what I’ve read, credit downgrades were priced in.  What I do find somewhat surprising is that Govt debt to GDP is only about 80%, which compares to 83-84% for Germany. Probably more important is that Moody’s put CS on negative review, a reminder of a trend toward less risk appetite.  And if that’s not enough, the SF Fed also put out a note: “…the odds are greater than 50% that we will experience a recession sometime early in 2012. Because the international odds of recession are more imprecisely estimated, one must be careful with a strict interpretation of this result. But the message is clear. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic.”

Posted on November 21, 2011 at 12:39 pm by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply