Oct 5. Financial and physical transactions under a cloud

–Somewhat stronger non-farm payrolls than expected on Friday, with a rate of 5.9%, caused some selling pressure in shorter maturities.  Peak one year eurodollar calendar shifted from EDZ15/Z16 to EDU15/U16, so one might conclude that the market is pushing the timing of rate hikes slightly forward.  EDU15/16 closed at 113, a new high, +3.5 on the day.  However, the back end of the curve flattened to new lows.  Red/gold pack spread (2nd to 5th year) narrowed by 2.5 to a new low of just over 169.  In May of 2013 when Bernanke first hinted at the taper, this spread was just under 150.  By the end of 2013 it was above 300, and now it’s close to where it started.  I would say that inflation expectations have been squeezed out of the market, and indeed the CRB and RBOB gasoline breaking down to new lows (lowest since 2010 in gas) corroborates that viewpoint. Also consider a spread like EDZ16 to EDZ18.  It too, is down to a new low of just 95 bps…over TWO years.  EDZ16 is at a price of 97.82 or 2.18%.  That price is consistent with a funds rate of 1.75 to 2%.  Consider that against the most recent Fed dots.  For the end of 2016, there were 3 dots below 2% and 4 over 3.75%.  Toss those out and average the remaining 10 and the forecast is 2.68%, nearly 100 bps higher than the market.  I guess the Fed models don’t adjust for geopolitical strife…
–In terms of specifics in the futures market, open interest continues to drop in the reds due to long liquidation.  EDZ5 -25687 contracts and EDH6 -32106.  EDZ5 OI is down to 1.277 million from over 1.55m pre Gross departure from Pimco.  That’s down over 17%, still leaving it with the most open in any contract, which is not too surprising given that tightens are expected to start next year and the Fed dots favor end of year contracts. The huge new trade Friday was EDM5 9962c vs 9925p, sold puts at 0.5 and 0.0 vs bought calls.  Open interest there was +84k call and +92k puts to a whopping 584k in that put strike.  Recall there had been large buying of EDM5 9950/9925p 1×2, so there was already a large short in the 9925’s.  This trade on its own suggests that there will be no tightening by June, therefore EDM5 will naturally roll up through the 9962.5 strike.
–Interesting piece on Reuters suggests that the move to higher spreads between high yield and treasury is negative for stocks.  http://www.reuters.com/article/2014/10/04/us-markets-stocks-usa-weekahead-idUSKCN0HS20Z20141004
“The spread has since widened by more than 100 basis points, according to Bank of America-Merrill Lynch data. Previous spikes of this magnitude have preceded pullbacks in the S&P 500, and the greater the selloff in high-yield debt, the worse the outcome was for stocks.”
–Fairly quiet next week with 3, 10 and 30 year auctions.  FOMC minutes Wednesday.
–Physical transactions and financial transactions.  JPM says it was hacked, as were other institutions.  Financial transactions are almost all electronic, could these be impeded?  Could the spread of ebola impede physical transactions.  Are we on the verge of large changes in consumer behavior?

Posted on October 5, 2014 at 7:32 am by alexmanzara · Permalink
In: Eurodollar Options

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