Nov 29. Well played

–The optics are that Trump bullied Powell into changing his stance on forward tightening.  It can easily be argued that Trump DID change Powell’s mind, by damaging values of other markets.  Was it the Fed’s tightening or Trump’s trade policies that caused a big stock sell -off?  Was it tighter US monetary policy that knee-capped oil?  Or was it Trump’s sanctions?  If it’s a game, one could say that Powell played it this way: “OK. I’ll indicate a change in trajectory on hikes.  We’ll get a short lived rally in stocks.  Vulnerabilities in corporate balance sheets remain and Trump will do something again to undercut investor confidence.  Then I can say, ‘It wasn’t the Fed.  We stopped hiking.'”  On the other hand Trump might think Powell is trying to outmaneuver him. ‘He thinks I’ll blow it with China and the world will blame me for the ensuing stock sell-off.  So I’ll cut a deal with China and look like the genius I am.’
–In any case, Powell’s ‘far from neutral’ comment on Oct 3 occurred when SPX was 2930 and WTI crude oil was $76/bbl.  Not too surprising that he’d flip to a ‘just under neutral’ epiphany with SPX having traded down to 2630. Oil this morning is below $50/bbl.  Clarida floated the data-dependence shift, and new home sales were down nearly 9%.
–The change in tone yesterday was a curve steepener.  5/30 treasury spread posted a new high of 47.6.  The five year yield fell 2.2 bps and 30y bonds rose 2 bps.  Ten year was down 0.5 in yield to 3.05% at futures close, but tests 3% this morning.  On the eurodollar curve, reds were the strongest performers, with EDH0 and EDM0 up 5 bps.  By comparison, the golds (5th year) were +2.875.  All near ED calendar spread closed at new lows.  EDZ8/EDZ9 dropped 4 to close at exactly one-quarter pct. EDH19/H20 also down 4 to 17.5.  However, there wasn’t a mad scramble for calls.  Vol declined as perception of easier financial conditions alleviates pressures.
–Issues remain.  DB is close to new lows again as headlines abound with new investigations into dealings.  The US sailed the Taiwan Straits, testing the core one-China resolve.  It’s not all about trade.
SPX with Powell’s change of heart
Posted on November 29, 2018 at 5:13 am by alexmanzara · Permalink
In: Eurodollar Options

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