Nov 2. FOMC day….

–Ten year note yield fell back to 2.00%, having been as high as 2.40 last week.  German and French stocks have fallen over 10% from the highs set last week, US stocks down about 6.5% over the same few days.
–New recent lows in many euro$ one-year calendar spreads, for example EDM2/M3 fell 2.5 to 4.5.  Red/green pack spread fell nearly 8 bps to just over 43.  Heavy buying of blue call spreads again.
–FOMC result today (and ADP data).  Dissent among the ranks isn’t just a european problem; there doesn’t appear to be much agreement within the Fed either, even though several have spoken about the need for further QE.  If my trading history is any guide, the Fed will probably announce a cut in reserve interest and that they are buying Italian debt three years and under…just the actions that would have bailed out MF before the blow-up…the move always happens just AFTER my options expire.
–A lesson from Keynes was that investment doesn’t necessarily equal intended investment.  That is, shocks could leave producers with unwanted inventories, leading to job cuts, which might not necessarily reverse as predicted by classical economists (so gov’t plugs the hole).  With up to the second technology on inventories, you would think that adjustments would be fairly smooth. But now, gov’t actions across the world almost act as a series of exogenous shocks, perhaps adding to uncertainty.  Everyone knows the problem is too much debt, now one must handicap global gov’t responses and lags.  A true exogenous shock like the earthquake/ Fukushima nuclear problem is almost ignored, even though it is flaring up again.  (I really can’t fathom how continuing nuclear disaster leads to a stronger yen). This uncertainty and malaise is evident in the term structure of rates, with US 5 year yield now at only 91 bps.

Posted on November 2, 2011 at 9:06 am by alexmanzara · Permalink
In: Eurodollar Options

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