Oct 12. Friday summary. Hi yield portends lower stocks.

–In spite of continued weakness in equity markets, interest rate futures were little changed.  Five year yield fell 1 bp to 156.  Tens were essentially unchanged at 230.  In terms of the eurodollar curve, calendar spreads edged a bit lower.  The near one-year calendars that had made new highs in early October (associated with the huge long liquidation in reds), collapsed to new lows Friday.  As an example, the peak one year spread which is now EDU15/EDU16, made a new high of 113 on Oct 3.  Just one week later it fell to 102.5, down 1 bp on the day.  The other spread worth noting is high yield to treasury, which tacked on about 4-5 bps on Friday to a new recent high.  (See charts on www.chartpoint.com ).  In eurodollars there is constant accumulation of long dated straddles, and there are some buys of wings in treasuries, for example +10k TYZ 135c for 1/64th.  At approximately 12.5 bps per 1 point in the futures, the 135 strike is over 100 bps away.
–In terms of stocks, Nasdaq fell 2.3%, Russell -1.4 and SPX 1.15.  A colleague noted that SPX broke its 200 day moving average, and said that the last time that happened was a brief spike late in 2012, which was followed by a strong non-stop rally (this one).   I thought that fact was worth taking a closer look at…  In late 2012 SPX was around 1400, versus 1900 now, so the market is 35% higher.  At the end of Q3 2012, market cap to GDP was 90% compared to around 120% now.  The ten year yield was around 1.75% versus 2.3% now.  The spread of high yield to treasuries was about 100 bps lower.  GDP was 16.4T versus 17.0 now, a change of around 4%.  Does it really make sense to expect another rally from this “pull back” when valuations are obviously so much richer?  Are there not headwinds to earnings growth, such as a slowing global economy and increased funding rates?  The guys on CNBC aren’t wavering from the “stocks for the long haul/buy the dip” pitch.  But I’m not sure that the central bankers of the world can pull a rabbit out of this hat.

Posted on October 12, 2014 at 11:52 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply