Nov 20. Away from zero

–“In the relatively near future probably some major central banks will begin gradually moving away from near-zero interest rates,” Fischer said Thursday.  What?!  You mean the ECB is going even MORE negative?  Sure enough, Draghi today pledged “to do what we must” to attain 2% inflation, and the German 2 yr went to nearly -40 bps.  Yup, that’s getting away from zero.
–Of course, Fischer is talking about the US raising rates, and there were a couple of big trades yesterday trying to peg those hikes.  Buyer of EDM6 9925/9900/9875 p fly (6.0s) and EDM6 9912/9900/9887p fly (1.75s) and EDU6 9900/9875/9850p fly (4.25s) and U6 9887/9875/9862p fly (1.25s).  25k each of the wide ones and 50k each of the 12.5 flies.  So the targets are the middle strikes, which in Sept’16 is the 9875 strike or 1.25% goal for 3 month libor.  A fairly aggressive projection, in my opinion.  Without an official hike ever having occurred, back month spreads are making new lows.  For example, red/gold euro$ spread fell another 5 bps yesterday to just over 106 bps, a new recent low.   2/10 treasury spread also hit a new recent low at 136.2, down 3.4 on the day.  Way back ten years ago there was a conundrum because the curve was flattening and long rates weren’t going up on rate hikes.  BUT THAT WAS WHEN FUNDS WERE BEING RAISED TO 5%, not sitting at zero.
–In the meantime commodities continue to be pressured.  The Baltic Dry Freight Index made a record low and China ‘uncovered’ a $64 billion shadow bank designed to get money OUT of China.  Which suggests to me that the yuan should be moving even lower.  Which makes it even more imperative for the ECB to get the Euro down.  Which further reinforces a disinflationary pall.  And makes it less likely for that Chinese money seeking a home to find it in a US luxury condo project.
–But we’re not seeing disinflation in insurance rates.  United Health Group is threatening to pull out of Obamacare because the company is losing money there and can’t jack up the rates fast enough. “Every health plan I talk to tells me that they don’t expect their Obamacare business to be profitable even in 2016 after their big rate increases.”
–So what do the wealth managers advise? Buy stocks.  And, (and this is inside info…) there just might be some good opportunities in junk bonds.  Shhh.

Posted on November 20, 2015 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

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