Oct 2. Of gods and central banks

Ray when someone asks you if you're a God you say Yes

–“And just like Hercules confronting the Hydra, it sometimes seems as though just as we defeat one challenge, such as the sovereign debt crisis, two new challenges spring up, such as low inflation and a weak recovery,” [Draghi] said.  ECB meeting this morning, and I think Draghi could have cited a few more heads on the hydra, including ebola, geopolitical tensions, weakness in the banking system, and the slowdown in China.  The market is going to clamor for full scale QE, but it won’t yet be delivered.
–This morning Crude is at a new low, sub 90, down $1.  Volatility has come back with a vengeance in some markets, and it is starting to develop the feel of forced action.  Fairly well controlled so far, but we might be nearing the point where regulators (and the equity investing public) scratch their heads and wonder where the liquidity went, not that they have anything to do with it… I marked the yield spread between high yield etfs and US fives as 408 bps, up 25bps yesterday.
–It was a huge volume day coupled with large ranges in interest rate futures.  Ten year yield plunged 10 bps to 240.   Red/gold pack spread down 5.5 to a new low of 171.  USZ (30 yr bond) had a range of 2 points.  Open interest in red eurodollars continues to plummet.  Even with yesterday’s rally: EDZ5 -40k, H6 -92k, M6 -24k and U6 -22k.  Total loss of OI in dollars was 184k, most of which of course, was in reds.  Short Dec puts were down 76k in open interest as long put holders exited.  Same in Short March puts, -71k. Massive volume in EDZ5 of over 750k and in EDZ6 over 525k, as traders who have keyed on these contracts with respect to the Fed “dots” were compelled to adjust their outlook.   There was heavy buying of 9962.5 calls in EDM5 and EDU5 representing new bets for the Fed to stay on hold through next year.  Pretty obvious now that the Fed dots and Fed models are irrelevant to the market.  By pulling back the curtain and opting for full transparency, the market has seen that the Great Oz is (or was) projecting power that it sadly doesn’t possess.  It’s like the scene in The Man Who Would be King, when Sean Connery sheds drops of blood and the conquered tribes realize he’s not a god.  Or the scene from Ghostbusters.   Winston Zeddemore: Ray, when someone asks you if you’re a god, you say “YES”!

Posted on October 2, 2014 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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