Nov 16. Attack on civilization

As of Monday morning, the reaction to the horrific attacks in Paris were muted.  US equities trading well above late Friday levels as of Monday morning.  Not much response in EUR.

Japan has relapsed into recession, another cautionary signal for the Fed as it contemplates lift off.  FOMC minutes are out on Wednesday.


Below comments are from Sunday.

Though there were some notable market moves and soft economic data surprises during the week, the horrendous attacks in Paris overwhelm all other considerations on a human scale. I will still jot down some themes, but the dominant thought will be one of ‘risk off’ and volatility in both financial markets and global geopolitics.

Before Friday’s attacks, there were already signs of risk off, and US economic data showing weak retail sales and negative PPI reduced the certainty of Fed lift-off. US stocks closed on the lows of the week, with SPX down 1.1% on the day and 3.6% on the week. SPX, Nasdaq and DJIA are all around the levels that preceded the cascade in late August, and look similarly vulnerable. VIX surged 40% on the week and closed back above 20. Commodities, notably oil, were hit hard this week. While previous sentiment seemed to tilt toward the idea of the worst being over, I think this week smothered any optimism on that score. For example, high yield ETFs HYG and JNK are again setting up to test October lows and are through lows related to the August equity market sell off. Ironically, one of the catalysts for the August plunge was the Chinese devaluation, while now the IMF is giving the green light to include the yuan in its SDR basket (case). However, looming concerns about asset deflation won’t dissipate. While many note that weakness in high yield is energy related, the damage is becoming more widespread. For example, in the ag sector, Cargill is reportedly cutting 4000 jobs or 2.5% of its workforce. Though Cargill is private, weakness is reflected in public companies as well. ADM was 53 in May and is now 38, a loss of 28%. In retail, Nordstrom, Macy’s, Target and the Gap are all at new lows for the year. Cracks are even more evident with Icarus-like tech stocks. Twitter closed at 25.18, down over 50% from its high in April. As noted previously Square cut its IPO price to a level below its last round of private financing (slated for IPO Monday*). And Fidelity marked down the value of its investment in Snapchat by 25%. Clearly there has been amazing strength in GOOG, AMZN, FB and even MSFT. But undercurrents of weakness must give rise to caution.

There is an extremely interesting post on ZeroHedge citing JPM research, with this passage:

Over the past year, macro momentum trades increased exposure to various liquid assets in anticipation of a rise in US rates. Example trades include going long USD and Developed Markets, and short Commodities and Emerging Markets. These macro trends have also percolated into equity long-short momentum trades which are currently short Energy, Materials and Industrials, and Long Health Care and Consumer Discretionary sectors. Several of these macro and stock trends are relying on an anticipated Fed tightening that would boost the USD and further weaken commodities and EM assets. The risk of this increasingly one dimensional positioning across CTAs, Macro and some of Equity Long-Short managers is that these trends don’t materialize and trades become too crowded. The result could be a sharp reversion as positions are exited.

I know a lot of people don’t care for ZeroHedge but the passages from JPM are interesting in that analysis of direction is model driven and JPM breaks down flows from option hedging, CTA trend followers, and risk parity strategies. Well worth reading. Here’s another snippet.

Summarizing technical flows from option hedges, volatility targeting, CTA and Risk Parity funds, we believe that these strategies largely re-levered to pre August crash levels. This was a significant driver of the S&P 500 performance in October and hence poses some downside risks.


Given the events from Friday, my thoughts are that Fed tightening is again questionable, that the ECB will lean toward more accommodation than previously thought. The USD will almost certainly be the recipient of safe haven flows. I would think spreads like the Schatz vs US 2 year note, which ended the week at a new high near 123 bps, having been in the mid-80s in October, will have to come in though there will likely be volatile adjustments across asset classes this week.


In terms of trades, the huge buyer (280k open interest) of January 9950 calls for 1-1.25 bp certainly looks prescient. EDH6 settled 9940.0.

I tend to think that US vol is too cheap at 10.2% with 20 day historical just under 10. As is well known swap spreads are quite negative; a prolonged risk off period could spark widening.


Net changes in selected markets below:

11/6/2015 11/6/2015 chg
UST 2Y 88.6 85.5 -3.1
UST 5Y 173.7 166.8 -6.9
UST 10Y 232.9 228.0 -4.9
UST 30Y 308.9 305.8 -3.1
GERM 2Y -29.1 -37.0 -7.9
GERM 10Y 69.3 55.8 -13.5
EURO$ H6/H7 69.0 64.0 -5.0
EURO$ H7/H8 57.0 51.5 -5.5
EUR 107.42 107.74 0.32
CRUDE (1st cont) 45.47 42.00 -3.47
SPX 2099.20 2023.04 -76.16
VIX 14.33 20.08 5.75


Posted on November 16, 2015 at 5:04 am by alexmanzara · Permalink
In: Eurodollar Options

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