Nov 9. It might not be perfect, but a storm of some sort is brewing

–As treasuries flirt with new high yields, the price of oil is going in the opposite direction, having completely erased the year’s rally.  On Dec 29,2017 the front contract closed at 60.42.  Late yesterday CLZ8 was 60.57, having plunged from a high of over $76 in early October, and as of this writing it’s below 60.  Yesterday the ten year closed up 2 bp at 323.2.  The eurodollar curve flattened from reds back, with reds/blues at a new low -5.125 and reds/golds at a new recent low of -2.125.
–The dollar index is moving toward a new high for the year this morning.  I hate the ‘perfect storm’ analogy, but here we have a huge drop in the price of the most important commodity in the world, and new highs in USD, both deflationary.  At the same time the curve is flattening as the Fed signals continued stringency.  However, yields at the long end are also near new highs (though treasury futures are modestly higher this morning).  Stocks are easing from the bounce seen since the end of October; SHCOMP -1.4% and Hang Seng -2.4% this morning.  I would say that this backdrop is quite negative for equities unless the Fed signals an end to balance sheet normalization or a pause in the hiking schedule; neither seems to be forthcoming.  Fed funds indicate near certainty of a Dec hike,and front end ED contracts have no bounce.  We’re already seeing weakness in housing.  Yesterday the Nat’l Assn of Home Builders said their housing affordability rating in Q3 is at a ten year low, the lowest since mid-2008.  At least one player seems to be strapping in for a bumpy ride, loading up on long February TY calls, taking advantage of low vols which were exacerbated by the post-election drubbing.  Feb 118.5 and 119 calls have been heavily bought with OI 73k and 51k.  Yesterday there was a seller of 60k Jan 119c at 6, likely just taking in a bit of premium to offset the outlay in Feb.  Feb options expire January 25.  There have been a few trend changes recently right at the beginning of the new year.  Perhaps a play for that?
–News today includes PPI with Core YOY expected +2.3%.  UofMich consumer and inflation expectations as well.
Posted on November 9, 2018 at 5:13 am by alexmanzara · Permalink
In: Eurodollar Options

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