Oct 20, 2014. Negative rates cause economic paralysis, the opposite of stimulus

–Markets have generally settled in for a pause after last week’s wild moves.  Implied vol has been coming down since late Wednesday’s spike.  Ten year atm straddle (127.5) settled 1’53 Friday; the 129 strike traded as high as 2’49 when it was briefly the atm strike on Wed.  Ten year yield rose about 5 bps Friday to close near 220.  30-yr bonds remain just under 3%.
–From Saturday’s WSJ:  “Several global banks have begun charging large customers to deposit their money in euros, a rare move that could have costly implications for investors and companies that do business on the Continent.”  ECB expected to announce stress test results this weekend.   Perhaps there will be some jitters early in the week, and then a brief sigh of relief after actual results are posted.  Which will almost certainly be followed by acute stresses that weren’t captured in the models as peripheral sovereigns deteriorate.  I think that banks charging for euro deposits and a bund yield of just 85 bps tells a lot more about the state of the EU’s financial house than hypothetical tests.
–I filled up the car this weekend and was pleasantly surprised by lower fuel prices.  In the aggregate, lower energy costs are a boon to consumers.  Weighing against that positive is the global equity rout, which I personally think is the more dominant economic theme.  And of course, the ebola risk overshadows both, but there appears to be some progress on that front.
–There was an interesting clip on Zerohedge featuring Paul Tudor Jones being interviewed during the 1987 crash.  He said at that time he expected a government/central bank response to stabilize the situation.  What can the governments and central banks of the world do now?  Regulations have fragmented the financial industry in such a way that government jawboning may no longer find the same transmission mechanism, leading to overt gov’t intervention in equity markets.  A delay on the last leg of the tapering program (expected at month’s end), would probably do more harm than good.

Posted on October 20, 2014 at 5:24 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply