(not) Out of Reach
April 22, 2021
–New all-time low 3 month libor at 0.17288. EDM1 settled 9981.5 or 18.5. The rest of the eurodollar curve was modestly lower, down 0.5 to -1.5. Treasuries also nearly unchanged.
–While lumber pulled back from stratospheric heights on Tuesday, other commodities had upside runs yesterday. For example, June Palladium made a new all-time high closing over 2875. Platinum is still well below the ath made in 2008 just above 2300 (now at 1212) but that’s not to say that your catalytic converter won’t be sawn off. Gold is well off the ath made earlier this year at 2075 (now 1795) but it’s perking up. Grains are on fire, with May beans near 1500…which compares to a high in 2008 of 1663 and in 2012 of 1795. May Corn is at a new high 625 vs 765 in 2008 and 845 in 2012. I will bet we eclipse those highs this year. C Z1 700c settled 16 ½ and 800c settled 8,ref 536 1/2, so it’s not crazy cheap to express that view. In my younger days I might have suggested buying that 1×2 for 0. Now, if my younger self suggested that to my older self, I’d slap him. A friend of mine says he’s heard reports that farmers have sold a significant percentage of new crop already to lock these prices; beware when the sellers have exhausted their supply into a rising market.
–Bank of Canada announced a taper which was as expected, but they also expressed confidence in the economy, with the market moving up timing on actual hikes. For example June 22 vs June 23 BA calendar rose 4 bps on the day to 70.5, with the former down 2.5 at 9935.5 and the latter down 6.5 at 9865. By comparison, June 23 eurodollar is 9936 as Powell sleepwalks the market into an inevitable inflationary disaster. Or, maybe not. After all, we can still buy Steven Seagal’s Scottsdale home for just $3.4 million. That’s not out of reach; a fully financed jumbo mortgage at 2.5% is just $13.5k a month. Can probably get that for a long weekend as an AirBnB. And if you find that you’re Under Siege, it has bulletproof glass.
Paring back shorts in interest rate futures
April 21, 2021
–SPX was down 0.7% yesterday, continuing a modest pullback from last week’s all-time-high. SPAK, the Defiance SPAC etf, was down 2.5% yesterday, and is off more than 30% from the high set in February. The Defiance website says it is “Democratizing and Disrupting the IPO market” but it is now near the low of its short existence. How’s that for democracy? You can all lose together.
–In the rate market, yields continued to ease, with the general theme appearing to be capping risk on shorts. Tens fell 3.5 bps to 1.56%. Once again, the near eurodollar one-year calendars slipped to new recent lows with the first four quarterlies unchanged while every contract thereafter sloped higher in price. EDU21/EDU22 settled at 11.5. It’s worth noting the steepness further out: EDU22/EDU23 is 52.5 and EDU23/EDU24 is 60.5. One interesting aspect of the day, according to preliminary figures, was the large decline in open interest. The eurodollar strip lost 380k contracts. While 187k of that was due to the expiration of the April serial, a drop of 200k combined with a decline of 28k ten year futures suggests short covering. One year after the historic plunge to negative $40/barrel oil, there was a notable buyer of negative rate calls: EDH22 100.0625 call 0.5 paid for 15k. A modest trade in the big picture, but still symbolic.
–Inflation continues to be a dominant theme, with a Powell letter to Senator Rick Scott being made public yesterday indicating the Fed would limit any overshoot.https://www.reuters.com/article/us-usa-fed-powell-exclusive/exclusive-fed-will-limit-any-overshoot-of-inflation-target-powell-says-idUSKBN2C729X
A google trends search shows that “inflation” made a new high in the beginning of March, with data going back to 2004.
@carlquintanilla: Some other companies making recent price-hike announcements: (thanks AOK)
P&G
Coca-Cola
Kimberly Clark
Shake Shack
Mohawk
Waste Mgmt
Owens Corning
McKesson
Boston Beer
It’s 420. Chill
April 20, 2021
–New lows in near one-year eurodollar calendars as reds and the first two greens outperformed. A couple of examples: EDU21/EDU22 fell 1 bp to 12, having been as high as 22 in the beginning of April. EDH22/EDH23 settled 28 down 1.5, with an early April high of 42. While EDH23 and EDM23 were the strongest contracts on the board at +2, 9949.5 and 9936 respectively, net changes tailed off after that with golds (5th year forward) closing -2 on the day. The market may be reflecting the idea that if the Fed is going to taper first, it will take a while before the actual funds rate is raised (thereby supporting reds). The previous episode of tapering was announced in September 2017, with implementation beginning in October 2017 at $10 billion per month, $6b treasuries and $4b in MBS. Every three months thereafter the amount was raised by $10 billion. By the beginning of October 2018, the Fed taper was up to $50 billion per month. Of course, the FF target was being increased throughout the same period. It was in the beginning of October that Powell said “we’re nowhere near neutral”, and my personal opinion is that the incremental change in taper to $50b, along with verbalization of continued rate hikes is what sent stocks into a tailspin in Q4 2018. In any case, it was fifteen months of taper, and this time the Fed says taper first, hike later. Could the Fed announce implementation of taper in September? Would that correspond to rate hikes somewhere in early 2023?
–Bitcoin was shellacked over the weekend and the April future trades $55k as of this writing, having printed over $65k last week. On the other hand, July soybeans are 1455/bushel this morning, a new high for the move, having been around 1050 six months ago. Lumber is, of course, at a new high with LBK1 1326, having been 450 six months ago.
–As indicated above, the curve steepened, with 2/10 +3 bps and tens +2.7 to 1.596%. Modest steepening has continued this morning. TYM is gravitating toward the 132 strike as May options expire Friday.
–Florida’s governor DeSantis signed an anti-riot bill into law (no bail until court appearance if you riot), while Illinois’ gov Pritzker is sending the National Guard into Chicago for another round of peaceful protests, as beleaguered businesses again board up storefronts. No wonder lumber is in hot demand.
Inflation
April 19, 2021
–On Friday, I pasted out a clip from Cass Transportation, just a couple of lines including this one: “For truckload linehaul rates, shippers paid an average of 10.1% higher than a year ago, causing that index to also reach a new all-time high.”
I don’t usually get a lot of response but this one struck a nerve with a few people. Here’s one:
“On a personal note for inflation, last month I purchased a ge refrigerator it took two months for delivery and cost $2400 !! Last week my hot water heater went out it was 10 years old [at that time] I paid $850.00 all in. The new one $2100… I asked the union plumber who I have used for 25 years why so expensive he said it all about the parts inside that have skyrocketed and his union wages are $182 an hour (I am in the wrong business). He then said he has 2 left and won’t be able to restock for another month or so because there is a big shortage. Needless to say I wrote a check.”
This one is like the joke where the client says, I’m not making that kind of money and I’m a neurosurgeon! And the plumber replies, “Yeah, I wasn’t making that much when I was a neurosurgeon either.”
Of course the best response was from a friend who trades energies, who simply said, “We just sold some RBOB Aug 2.35 calls for 0.80 over value” as if any idiot (that would be me) can make the connection between blistering demand for gasoline calls and inflation. I still don’t know whether this inflation is sustainable, but I absolutely know it’s here now.
–Yields rebounded a bit Friday from Thursday’s plunge, with tens up 4 to 157. As mentioned on the weekend, China’s Huarong CDS exploded higher Wednesday and Thursday, corresponding to the tumble in US treasury yields, and eased Friday (ditto). China’s financial regulator apparently said the company has adequate liquidity.
–A seven year old girl, Jaslyn Adams was shot multiple times and killed at a McDonald’s drive-thru on Chicago’s west side yesterday afternoon. Her father was also shot but still alive. This is likely the only time you’ll ever hear of Jaslyn Adams, but stories of children being shot is depressingly common in Chicago. Earlier this month, an eight year old boy and ten year old girl were shot at a Saturday afternoon baby shower in Chicago’s Englewood neighborhood. “Police reportedly had no suspects in custody as of Saturday evening. Police spokesman Anthony Guglielmi tweeted that ‘individuals on scene are not being cooperative with detectives.'” Maxine Waters is urging protestors to “get more confrontational” if Derek Chauvin isn’t convicted of murdering George Floyd. Completely irresponsible. There are huge gang problems in some of the major urban areas. Make the connection.
MADoff Market
April 18, 2021 – Weekly comment
____________________________________
This week I start with the standard Federal Reserve disclaimer: …before I begin my commentary, I am obliged to remind you that the views I express are my own and do not necessarily reflect the views of my colleagues at RJO or within the RJO group of companies and affiliates.
Bernie Madoff, who ran the biggest Ponzi investment scheme ever, at least in his time, died in prison last week. Madoff’s secretive fund was brought down by Harry Markopolos, the account of which is in his book, No One Would Listen.
To commemorate the passing of this great man, SPX, in the month of April, has consistently rallied with very little variation. Since April Fool’s day it has gone up about 5%.
The reason Markopolos began looking into Madoff’s activities was because the returns were invariably consistent without drawdowns. From the book:
After going through my work [examining returns on a basket of 35 stocks using a split-stock conversion strategy] Dan told us that whatever Madoof, as he referred to him, was doing, he was not getting his results from the market. Pointing to the 6 percent correlation and the 45 degree return line, he said “That doesn’t look like it came from a finance distribution. We don’t have those kinds of charts in finance.” I was right, he agreed. Madoff’s strategy description claimed his returns were market-driven, yet his correlation coefficient was only 6 percent to the market and his performance line certainly wasn’t coming from the stock market. Volatility is a natural part of the market.
Madoff’s written material said he used OEX options for collars, but Markopolos noted there was absolutely no evidence that trades of the size required by Madoff’s fund had occurred; they would have left a footprint even if they had been done over-the-counter. The book presents a scathing indictment of the SEC, who Markopolos had contacted with his mathematical evidence several times, only to be brushed off.
How did Madoff do it? He paid feeder funds lavish fees (stimulus checks). Many investors thought that he was front-running his own brokerage arm, but they still happily accepted the juice (Robinhooders). New investors (the Fed) were streaming in funds to provide the returns to existing clients. The philanthropic lifestyle of a knowing patriarch who had held leadership roles like Chairman of Nasdaq (Biden) set people’s minds at ease. Now I’m not saying the US equity market resembles a giant Ponzi scheme, just pointing out a couple of coincidental similarities. At this point the Fed and the Treasury and the SEC know exactly what they’re doing. Right?
On a side note, at least not ALL is lost. Morgan Stanley is still in the process of recovering collateral.
The economic and inflation data continue to surprise on the upside, but the bond market absorbed it all in stride. Some year-over-year US data snippets from last week: CPI +2.6%, Real Avg Weekly Earnings +3.9%, Import Price Index +6.9%, Export Price Index +9.1%. U Mich 1-year Inflation 3.7%, with 5-10yr 2.7%. Retail Sales were up 9.8% in March. The thirty year bond yield FELL 8.2 bps on the week to 2.26%, while the ten year dropped nearly 10 bps to 1.57%. The curve flattened with 2/10 down just over 10 bps to 140.8. Yields don’t exactly seem to be compensating for rising prices. In fact, Fed speakers are going to great lengths to convince the public that any rise in inflation is simply a figment of their imagination, I mean, temporary. For example, new Fed Governor Christopher Waller said on Friday, that “whatever temporary surge in inflation we see right now is not going to last.” Might as well say, “If I whack you in the head with this shovel, the pain will eventually subside.” You know, and I know, that this has nothing to do with inflation, but it’s worth a cursory mention that the Bloomberg Commodity Index is up 40% in the past year.
It’s also worth noting that the 10 year Bund ended the week at -26 bps, just 10 off the high since the middle of 2019, which was set in January 2020 at -16 bps. A downward sloping trendline since the high yield in 2008 (4.68%) has been broken. Perhaps some of the strength in US fixed income is coming from flows out of other markets due to geopolitical concerns. On that note, consider China…
Doug Noland of Credit Bubble Bulletin outlines the issues with China’s Huarong Asset Mgmt, citing the spike in CDS. Between June 2020 and March 2021, China Huarong International Holdings, Ltd 5y CDS ranged between 200 and 115 bps. On April 1st, 187. On April 16th 1466 bps, ending the week at 956 (BBG). Noland includes this clip from Bloomberg, which I find somewhat amusing:
April 14 – Bloomberg (Richard Frost): “Market turmoil surrounding China Huarong Asset Management Co. intensified on Wednesday as investors interpreted government silence on the embattled firm as a lack of official support. The Communist Party has yet to comment on the distressed-debt manager, which is controlled by the finance ministry, even as concern about a potential restructuring sent its dollar bonds plunging to distressed levels. China’s State Council, the country’s top administrative body, instead reinforced the idea that struggling state-backed companies shouldn’t rely on government support. In a statement late Tuesday, the State Council urged local government financing vehicles to restructure or enter liquidation if they can’t repay their debts. While it’s unclear if the comments were meant to send a veiled message about China Huarong, they added to the perception that the government is taking a tough stance on reining in risks to the financial system.”
Huarong was set up by the State as a bad bank to buy non-performing loans in the 1990s. It apparently ran a bit wild and accumulated a lot of distressed debt, and the Chairman was executed in January for taking bribes. Who would have thought that a “distressed-debt manager” would see its bonds trade at distressed levels? Isn’t there any value in diversification? Noland estimates debt between $162 and $209 billion. Now the CCP Finance Ministry is going to have to set up a bad bank to absorb bad banks. Maybe the Fed can help with funding by setting up an SPV.
| 4/9/2021 | 4/16/2021 | chg | ||
| UST 2Y | 15.5 | 16.1 | 0.6 | |
| UST 5Y | 86.8 | 81.9 | -4.9 | |
| UST 10Y | 166.7 | 156.9 | -9.8 | |
| UST 30Y | 234.2 | 226.0 | -8.2 | |
| GERM 2Y | -70.2 | -69.0 | 1.2 | |
| GERM 10Y | -30.3 | -26.2 | 4.1 | |
| JPN 30Y | 67.6 | 65.3 | -2.3 | |
| CHINA 10Y | 321.0 | 316.0 | -5.0 | |
| EURO$ M1/M2 | 10.0 | 8.0 | -2.0 | |
| EURO$ M2/M3 | 44.0 | 39.0 | -5.0 | |
| EURO$ M3/M4 | 73.0 | 67.0 | -6.0 | |
| EUR | 119.02 | 119.86 | 0.84 | |
| CRUDE (active) | 59.32 | 63.19 | 3.87 | |
| SPX | 4128.80 | 4185.47 | 56.67 | 1.4% |
| VIX | 16.69 | 16.25 | -0.44 | |
http://creditbubblebulletin.blogspot.com/
Rope-a-dope
April 16, 2021
–New all-time highs in stocks yesterday as retail sales blew past expectations, up 9.8%. China’s GDP was released at +18.3%. Good thing the Fed is keeping rates at zero and buying $120 billion in treasuries and MBS a month.
–Yields collapsed yesterday as the bond market has recently absorbed high inflation and high growth body blows like Ali’s rope-a-dope. At futures settle, 10y was down 10.2 bps at 1.53% and bonds down 11 bps at 2.21%. The curve flattened with nearly all one-year eurodollar calendars making new monthly lows. The highest one-yr calendar on the strip is EDM23/EDM24 which settled 64.5; it peaked at 78 at the end of March. White euro$ pack was unch’d, reds +2.875, greens +8.625, blues +12.875 and golds +14.375. Over the first five years of the strip, the lowest contract is, of course, the last gold, EDH’26, at a price of 9800.5, so nothing in the first five years has a yield over 2%. The low in that contract has been 9760; it has been a pretty spiffy short cover rally. USM settled at 159-00 at 3:00pm, but in the next couple of hours it sank close to 158, where it sits this morning. One trade of note, a new buyer of 20k 4EU 9750p for 8.0 (settled 8.25 ref 9817.0).
–2/10 treasury spread plunged 9.5 bps to 137.5, while 5/30 eased 4.5 to 141.7, the latter did not make a new recent low,, having held 139.
Coinbase or Corn
April 15, 2021
–Yields edged slightly higher yesterday but the 132 strike seems to have a gravitational effect on TY, now just back above that level at 132-04 vs a settle of 131-295 (1.632% in cash). Retail Sales is the big release today, expected +5.8% and +6.4% ex-auto and gas. Some estimates are higher due to stimulus checks. Powell yesterday said that a reduction in asset purchases would occur prior to rates being raised, but given massive deficits that the Fed has helped monetize, any tapering will probably be a slow and delicate process. I would also suspect that the curve will stay relatively steep if short rates are held at zero while inflationary pressures continue to build.
–Other releases today includes Jobless Claims expected 700k from 744k last, and Philly Fed at 41.2 from 51.8 last.
–EDZ1 9975 straddle continues to settle at 7.5 with futures 9974.0. The level of 7.5 exactly equals the Sept/Dec calendar spread, EDU1 9981.5 and EDZ1 9974, while EDZ1/EDH2 is negative 3.5. There is obviously a turn priced into the December contract, which option sellers must think is almost exactly right, even though there are 242 days until expiration.
–May Corn is at a new high above $6 this morning, having been around $3.50 in August. In April of 1986, the Chernobyl nuclear accident occurred in Ukraine, 35 years ago this month. At the time, grain prices jumped with concerns about contaminated food. I’m not saying that Japan’s decision to release radioactve water into the ocean has anything AT ALL to do with the price of corn, but food security and scarcity are powerful themes. On a related note, the Arab spring was 10 years ago, partially sparked by high food prices (which in my opinion were tangentially related to the Fed’s QE2 program which started in November 2010). Maybe the cutting edge investment theme isn’t going to be digital currency and social media going forward, maybe it will boil down to basic human necessity.
The $64000 Question
April 14, 2021
“The $64000 Question” was a tv game show which aired from 1955 to 1958. “The first four questions were provided by an IBM sorter, a cutting edge technology of the day. The machine was used to create the impression that questions were picked randomly, when in fact all questions were pre-selected.” (I guess the Biden team was able to secure that same ‘cutting-edge’ machine for press conferences).
–I bring up the $64k question because bitcoin is trading just above $64000 as Coinbase goes public. New crypto records by the day… One publicized aspect of the digital yuan project is the idea of an ‘expiration date’, that the authorities can use to fine-tune consumer demand; spend it or lose it. Clearly, it’s a form of government control, and negates the ‘store-of-value’ feature of true currencies. Just the thought of government control should destroy the concept of state-sponsored crypto and drive people into bitcoin, ethereum, etc. Is it a coincidence that bitcoin is at new all-times highs? That’s the $64000 question.
–Richmond Fed President Barkin with this bullet point yesterday: *BARKIN: EXPECATION WOULD BE FED MOVES ON ASSET BUYS BEFORE RATES. One of the Fed’s recent mistakes was tapering and raising target ff rates at the same time. The market currently seems to think tapering should come first this time, with comments like Barkin’s solidifying the idea. What if the curve re-steepens? Would it perhaps make more sense to adjust short-term rates first? Just a thought… QE has been associated with equity market rallies; tapering will likely spark the opposite effect.
–In any case, 2/10 flattened to a new recent low yesterday at 146 bps, with the ten year yield falling over 6 bps to 1.62% while two eased just 1 bp to 16. Rally across interest rate futures, with vol subserviently falling with yields. CPI yoy was 2.6% yesterday, but the bond market continues to absorb strong economic data relating to both prices and activity. Oil (WTI) is back above $61/bbl this morning. An Ambrose Evans-Pritchard piece yesterday had the following advice “It [the Fed] is funding a third of the $3 trillion budget deficit with pure QE. It is accommodating the most radical fiscal experiment ever attempted in peace time with the most radical monetary experiment to match. To modify a market dictum, don’t fight the Treasury and the Fed at the same time.” The point of this article was to advise that even though the stock rally has been fierce, investors should stick with it, based on the support of the authorities. Does this sort of thinking also lead to a sneaky bid for crypto?
–A couple of large trades to highlight, both Dec midcurves, expiring on 10-Dec 2021, the end of this year. One, a buy of 25k 0EZ 9962/9937/9912p fly for 4.0. Settled 3.75 vs 9955.5 in EDZ22. This trade looks for the market to price in 2 hikes by the end of next year. (From open interest it might have actually been a roll of short 9962p into the 9937p). The other trade was a buy of 40k 2EZ 9925/9937/9950/9962 c condor for 2.25. This is based on EDZ23 which settled at 9893. Max profit occurs between the middle two strikes, between 9937 and 9950. Obviously this trade looks for a roll higher in price over time. When considered together, both of these trades target the same futures level… could EDZ2/EDZ3 calendar spread move towards flat? Currently EDZ2/Z3 is 62.5.
https://www.pbs.org/wgbh/americanexperience/features/quizshow-64000-question/
We can finance it… over time
April 13, 2021
–Little reaction to three and ten year auctions, the latter of which came at 1.68% with bid to cover 2.36. Today features NFIB small business optimism, expected to rise to 98.3 from 95.8 last. CPI expected yoy Core of 1.5% from 1.3. Thirty year auction, with a small concession being built in this morning.
–NFIB and the Russell 2000 index were correlated in terms of overall direction through the Trump years, however since the election, NFIB was fallen from 104 to 95 while small caps have ramped higher due to stimulus. I had held the idea that core catalysts for small caps were lower taxes and regulations which spurred growth and business confidence. However, the surge in R2K currently seems more related to outright government stimulus. In that regard, it is interesting to glance through the US Gov’t budget release. March of 2021 compared to March 2020: Receipts, $268 billion vs $237b, an increase of 13%. That’s positive, right? Outlays, $927b vs $356b, an increase of $571 billion or 161%. GO BIG. A deficit of $500 billion used to big… FOR A YEAR! And you wonder why there is a move into crypto? The aftermath of the GFC housing bust was quaintly summarized as private debt being transferred to the balance sheet of the Federal Government. Now it’s not just some unsightly debt being swept under the carpet, the government’s influence has become pervasive. Still want to bid for 30’s today?
Lane change
April 11, 2021 – Weekly Comment
*****
The snippet below is from Tyler Neville of Blockworks:
Here are the speaking events for the Fed next week.
This is an absolute CLOWN show.
For 12 years, the Fed ignored any signs that QE was causing a gap in inequality between capital and labor.
Now, all of a sudden they are experts on inequality and systemic racism?
In many Congressional appearances, especially during the Trump years, Powell constantly reminded his audience that the Fed “stays in its lane” with regard to monetary policy, concentrating on the dual mandates of full employment and low inflation. Just this week, four of the twelve regional Fed Presidents will be discussing racism and economic equality/inclusion. Not included on the list above is Kaplan’s appearance on the 16th at a Virtual Climate Change Symposium.
The late 1970’s were the most equal years regarding wealth and income distribution. That was also a period of high inflation. Clearly, the institutional thinking of the central bank has shifted to the idea that higher inflation results in more equality with respect to economic outcomes. However, they’re working overtime (time-and-a-half) to convince the public that price increases are transitory. Markets aren’t so sure.
On August 27 of last year, Powell announced the change in the Fed’s policy framework to incorporate FAIT, flexible average inflation targeting. On the employment side, the Fed would henceforth assess “shortfalls” from maximum employment rather than “deviations”. In a Jan 31, 2021 speech, Brainard explained it this way:
In other words, the new framework calls for policy to address employment when it falls short of its maximum level, whereas the previous framework called for policy to react when employment was judged to be too high as well as too low.
Markets noticed. As the chart below of the 2/10 treasury spread reveals, the curve has been steepening ever since the change in framework. The Fed succeeded in changing market sentiment regarding inflation, a sentiment which has now been reinforced by the huge fiscal and monetary response to the covid crisis, (which has now turned the corner). The public’s mentality is now buy and hoard.
Over the past week, the curve flattened a bit as yields retreated from highs set the previous week. The five year yield dropped 10.6 bps to 87, while tens fell over 5 bps to 166.6. This, in spite of a record high Service ISM release of 63.7, a huge Consumer Credit number of $27.5 billion, and yoy PPI of 4.2%. When a market absorbs bearish news without going lower, it is often a bullish sign. However, this week will bring further challenges in the form of supply, with 3s and 10s auctioned on Monday, followed by 30s on Tuesday. According to TBAC, auctions this week will raise $59 billion in new cash. In the following couple of weeks, the 20y will be auctioned on 4/21, 5y TIPS on 4/22 and 2s, 5s, 7s on April 26 and 27. These auctions are raising $130 billion in new cash. Even with the Fed buying $80 billion in treasuries per month, this increase of $190 billion of new cash could cause a bit of indigestion.
On top of that, BofA is expecting a monster retail sales number of 11% on Thursday as outlined on ZH. CPI is released on Tuesday, expected 2.5% yoy with Core at a tame 1.5%.
Powell is appearing on 60 Minutes this evening, where he will likely parrot the mantra of transitory inflation due to base effects and one-off changes in consumer preferences. However, he will almost certainly swerve into economic equality lanes and use the climate change ramp to take other detours which weren’t overtly mentioned in the Fed’s framework change, but have now been included, notwithstanding. Will markets conclude the Fed is trying to do too much?
OTHER MARKET THOUGHTS/ TRADES
There were a couple of large trades worth note. On Friday, a new buyer of 7250 long Green pack 100 call strip for 17.0 up to 19.0 EDM3 100c settled 3.0, U3 at 4.0, Z3 at 4.5 and H4 at 5.5, so the strip settled 17.0. These options expire with the underlying futures, i.e. EDM3 100c has 798 days until expiry on June 19, 2023. It’s all vol. Both EDH3 and EDM3 have huge open interest in 9975 and 9987.5 c strikes (H3 9975c 400k and 9987.5c 200k, EDM3 9975c 102k and 9987.5c 155k) so these 100c buys might just be the start of an upside cap of risk. If the trade were more of a forecast of impending disaster, the long red pack 100c strip would be the better bet, settling at 5.25 (M2 1.0, U2 1.25, Z2 1.25 and H3 1.75).
A much larger trade was a buy on Friday of 200k July VIX 25/40 call spreads for 2-2.15. Said to be greater than $40 million in premium. While spot VIX has eased down to 16.69, July VIX futures closed 23.16, with the 25c at 3.50 and 40c 1.37. For the sake of comparison, June VIX futures are 22.23, the June 25c at 2.65 and 40c at 1.05, so 1.60 in the call spread vs 2.13 for July.
BABA was fined $2.8 billion for antitrust violations by the Chinese government. As one twitter commentator noted, that’s almost 5% of top line revenue. While this action is almost certainly just a specific clampdown targeting Jack Ma, governments worldwide are likely hearing an echo of Willie Sutton’s reply when asked by a journalist why he robbed banks: “because that’s where the money is.”
The risk is that a sudden reversal of fortunes in big tech could cause an abrupt halt to the rise in treasury yields. It’s instructive to look back at 1987. From January to October of 1987, the ten year yield went from 7% to 10.25%. From the start of 1987 until late August (when stocks topped, having taken notice of rising yields), SPX rose 39%. From the start of September in 2020, the low in the 10y yield following the Fed’s framework change was 64 bps. Seven months later, at the start of April, it reached 1.74%. Still low, but on a percentage basis it’s a MUCH larger move than 1987. Stocks have yet to take notice and SPX since a dip in last September is up 28%. There’s probably more life in major stock indices. Which likely means that yields will again push to new highs.
| 4/2/2021 | 4/9/2021 | chg | ||
| UST 2Y | 18.4 | 15.5 | -2.9 | |
| UST 5Y | 97.4 | 86.8 | -10.6 | |
| UST 10Y | 172.0 | 166.6 | -5.4 | w/I 166.7 |
| UST 30Y | 236.3 | 233.9 | -2.4 | w/I 234.2 |
| GERM 2Y | -70.8 | -70.2 | 0.6 | |
| GERM 10Y | -32.8 | -30.3 | 2.5 | |
| JPN 30Y | 69.3 | 67.6 | -1.7 | |
| CHINA 10Y | 319.9 | 321.0 | 1.1 | |
| EURO$ M1/M2 | 14.5 | 10.0 | -4.5 | |
| EURO$ M2/M3 | 52.5 | 44.0 | -8.5 | |
| EURO$ M3/M4 | 77.0 | 73.0 | -4.0 | |
| EUR | 117.60 | 119.02 | 1.42 | |
| CRUDE (active) | 61.48 | 59.32 | -2.16 | |
| SPX | 4019.87 | 4128.80 | 108.93 | 2.7% |
| VIX | 17.33 | 16.69 | -0.64 | |
https://home.treasury.gov/system/files/221/TBACRecommendedFinancingTableQ22021-02032021.pdf
https://www.zerohedge.com/economics/stimmy-bonanza-here-comes-another-blockbuster-retail-sales-print
