It’s a hi-tech world, but still all about oil
April 20, 2020
–The news today is about oil, where the expiring May WTI (CLK0) trades below $14/bbl, with June around 23 and July around 28. The implosion of demand has sated storage facilities, where inventories will eventually be worked off. It’s a stark reminder of lessened demand across industries, many of which will have to curtail output by shrinking, even after the re-opening. The other dominant piece of news is that the government is close to passing another $400 billion in small business aid. Stocks futures are modestly lower, treasuries have a small bid. One of our market makers noted a jump in call skew in USM Friday, with 50 delta RR moving from around flat to 5 or 6 for call.
–Curve steepened on Friday with twos nearly unchanged (+0.3 bp) while tens rose 1.9 to 65.4. Same general trend in dollars with reds -0.75, greens -1.375, blues -2.75 and golds -4.5.
–The big trade in eurodollar options Friday was a buy of 75k EDH0 9975/9950/9925 put fly for 3.5. Yet another trade which targets the 9950 strike. EDM0 settled Friday at 9955. The spread between FFQ0 and EDM0, a rough lib/ois proxy settled at 38.0, with more compression expected. This curve is like oil….all the pressure in the front, which eases over time as we find places to store bad libor loans (in government “coffers” or shall we say, coffins). It’s the same all over. For example, EDM0/EDM1 calendar settled Friday at -17.5. It has rallied from a recent low of -31 as pressure gradually eases on the front end of the curve, while back contracts have already priced a stagnant, low rate world consistent with sub $30/bbl oil. In euribor June/June is -16.0 and in Sterling -13.0. The one year calendars starting in M21, i.e. M21/M22 are +8.0 in dollars, +2.5 in bor and +5.0 in sterling.
–AAPL downgraded by Goldman last week, as i-phone demand is expected to slide. Closed slightly lower at 282.80 and this morning looks to open a couple of bucks lower, though not below Friday’s low of 276.86. Chgo Fed National Activity today. this usually hovers around zero and was +0.16 last. Today expected to plunge to -3.0. The low in GFC was -4.76.
–It’s 420 somewhere…today is where the pot stocks shine.
Back month dollars floating on air
April 19, 2020 – Weekly Comment
The low in the US 2y yield was made in 2011 at 15.5 bps. This week it traded 19.9, essentially revisiting that low. At the time in 2011, the five year was around 77 (it made a new low of just over 50 bps in 2012; now 36.4) and the ten year was 175 (now 65.4). Also in 2011 was when gold made its high over 1900. Gold ended this week at 1682. The dollar index in 2011 was around 73, now it’s just under 100. Partially because of USD strength, in other currencies gold has easily surpassed the 2011 highs. What is somewhat interesting is that SPX priced in gold is still nearly 3x higher than it was in 2011, and that’s with the BBB spread to treasuries currently near the same level as in 2011, though in late March the BBB spread easily crested 2011 (but not 2009). In fact, LQD, the Investment Grade bond etf, nearly made a new all-time high this week, closing at 130.56 having plunged to 105.5 on March 19. The all-time high at the beginning of March was 134.27.
The rally in SPX this week leaves it down only 15% from all-time highs in Feb, but when priced in gold, it’s down 21%, and down 30% against the high in 2018.
In general, the last decade has been the triumph of financial assets versus hard assets. The fact that SPXGLD remains starkly below the low made in 2018 signals that this time the Fed may not be able to engender a similar episode of paper prosperity. However, Friday’s stock surge on hopes that Gilead’s drug showed promise in defeating COVID opens the possibility to another outcome. With the unprecedented amount of fiscal and monetary stimuus in the pipeline, if there was an immediate medical breakthrough, stocks would likely briefly spike well through this year’s highs.
What is awfully hard to reconcile in this environment is the level of deferred eurodollar contracts. While the two year note is just AT the previous low yield of 2011, eurodollars have made lower yields/higher prices. The second red, now EDU21, settled at 9972.0 or 28 bps on Friday. The all-time high in 2012 was 9963.5. The second green, now EDU22, settled Friday 9961.5 and topped at 9945 in 2012. For blue EDU23, the top in 2012 was 9911.5 and it settled 9946.0. This at a time when SX7E, the EuroSTOXX bank sector, is 51.27, just half of its value at the high in mid-Feb. KBE, the US S&P Bank ETF is down 40% from February. JPM is tightening lending standards for households, requiring hihger credit scores and downpayments for mortgages and suspending new HELOC lending. In spite of Federal assistance, downgrades by rating agencies and actual bankruptcies are expected to explode. If there is still any sort of a credit aspect embedded in ED contracts, they shouldn’t be this high.
The numbers relating to loss of income and output are staggering to the point of being incomprehensible. Over 20 million US jobs lost in a month. China Q1 GDP -6.8%. US estimates for Q2 GDP range from -20% to -35%. There appears to be a large disconnect between the relative strength in financial assets and what is occurring in the real economy. Almost certainly this comment by Kyle Bass is seeping in, “…the misery that China has brought to the rest of the world with this virus has really been shining a disinfecting light on global supply chains reliance.” What will follow is less global trade, and a cushion build-up of inventories across many businesses. At the same time, the plunge in commodities led by oil, and other prices will almost certainly reach bottom in Q2. Year over year comparisons by the middle of 2021 should begin to show significant increases, no matter how the actual economy is doing.
| 4/9/2020 | 4/17/2020 | chg | ||
| UST 2Y | 22.3 | 20.4 | -1.9 | |
| UST 5Y | 40.8 | 36.4 | -4.4 | |
| UST 10Y | 72.2 | 65.4 | -6.8 | |
| UST 30Y | 134.8 | 127.4 | -7.4 | |
| GERM 2Y | -62.0 | -67.9 | -5.9 | |
| GERM 10Y | -34.7 | -47.2 | -12.5 | |
| JPN 30Y | 44.9 | 49.6 | 4.7 | |
| EURO$ M0/M1 | -26.0 | -17.5 | 8.5 | |
| EURO$ M1/M2 | 12.5 | 8.0 | -4.5 | |
| EUR | 109.43 | 108.75 | -0.68 | |
| CRUDE (1st cont) | 28.82 | 25.03 | -3.79 | |
| SPX | 2789.82 | 2874.56 | 84.74 | 3.0% |
| VIX | 41.67 | 38.15 | -3.52 | |
Snow in April in Chicago. Normal
April 17, 2020
–Stock futures jumped to new highs shortly after the close yesterday evening as Trump announced re-open plans and a drug from Gilead apparently showed promise of rapid virus relief. ESM made a high of 2885, up nearly 100 from settle. On the other hand, China released Q1 GDP down 6.8%.
–Curve continued to flatten yesterday with twos unchanged at 20.1 bps and tens -2.6 to 60.9. In dollars red pack fell 0.375 to 99.7125 while golds rose 1.75 to 99.30. Notable trade in July puts (EDU0 underlying). EDN0 9962/9950p 1×2 -0.75 paid for 50k and EDN0 9975/9962/9950/9937p condor 4.25 paid for 50k. Open interest in July puts increased 335k, expire July 10. Settles from 9975 down, 13.5, 7.5, 4.25, 2.5 vs EDU 9964.5. So the 1×2 settled -1.0 and the condor 4.25. Neither of these trades wants to see EDU0 much below 9950 at expiration, and that with current libor at 113 bps. A note by Pozsar suggested a continued drop in lib/ois which may have been impetus for these trades. On the other hand, a magic bullet drug combined with sloshing stimulus might make things look a lot more ‘normal’ by late summer.
–Vol firmed quite a bit in dollars. EDM0 9950^ settled 20.5 having been as low as 18.5 earlier in week. On Wednesday, 0EU 9975^ settled 16.0, yesterday at 18.5. 2EU 9962^ went from 23.5 to 27.5 and 3EU 9950^ from 32.5 to 35.5. The red/green eurodollar pack spread posted a new low of just 11 bps yesterday, but it seems to me that the midcurve straddle curve continues to suggest a much steeper curve in the near future.
What’s your dirt doin’ in Boss Kean’s ditch?
April 16, 2020
–Retail Sales yesterday were dismal at -8.7% with Empire St Mfg -78.2. Philly Fed today expected -30 to -40, but if it’s anything like Empire, which easily took out the GFC low, then Philly could be -60 or lower. Jobless Claims again expected in the millions. The main feature yesterday was a massive bull flattener. The two year yield fell 2 bps to 20.1 as it nears the lower bound, while tens sank 11.5 bps to 63.5. The 2/10 spread thus closed 43.4 with good support 36/38 and a cap at 53/55. Red/gold euro$ pack spread closed 43.25, down just over 12 bps. The weakest contract of the day was EDZ20 which closed +1 at 99.66. Reds +3.125, greens +8.25, blues +12.625 and golds +15.25. EDM0 closed +4.5 at 99.565 in another sign of easing libor strains (3m libor set 1.135 yesterday). There was large buying of EDK 9950/9962 c 1×2 for 4.5 to 5.0 and an early seller of EDM0 9962/9975cs vs 9912/9887ps, paying 3 for ps.
–Implied vol firmed directionally with the rally in the long end, with TYM outperforming TYK vol. TYK/M 139 straddle spread closed 1’02 having been more like 0’61 early in the morning.
–While government support of the economy has been staggering, as we slowly move towards re-opening there will still be many companies with revenues nowhere near previous levels. It strikes me that some sectors of the stock market have rallied a bit too hard given the new realities. Last Sept, Nasdaq was around 8200, now 8400. SPX was 3000 now 2800 and Russell 1600, now 1200. Flows into big tech are overdone.
–3EH 99.375^ settled 53.5 vs EDH24 9939.5. Expires in 331 days. The 99.375p settled 25.75. The long dated EDM22 9962.5 straddle settled 55.5 vs 9965.5. Expires in 789 days. So the 9962.5 put settled 26.25. More than twice the amount of time left than 3EH put, but of course closer on the curve by 1.75 years. Should these two puts be the same price?
A to Z
April 15, 2020
–AMZN new all-time high yesterday. So I guess everything’s fixed, from A to Z. Let’s just start with A: AA is Alcoa, and it’s down 64% from the high of this year. Close to Z is X, US Steel, which is down 41% from the start of year high. Z is Zillow…down 16% from the start of the year but down but down 40% from the high close in late February. The flow into AMZN isn’t that surprising in the Stay at Home environment, but other big tech stocks are a search for relative safety. In any case, stocks overnight are giving away gains with ESM currently 50 lower. Trump cut funding for WHO (reminds me of the Abbott and Costello routine ‘WHO’s on first’). There’s also a headline in the FT ‘Coronavirus shortages prompt Australia to bring manufacturing home.’ All over the world, countries will likely pay extra to manufacture domestic supplies of all types of goods. The US signaling further withdrawal from international institutions is likely to accentuate this trend.
–Eurodollar curve continues to show signs of healing. EDM0 was 9953 bid late in the day as the Fed’s CPFF was implemented. The EDM0 9950 straddle settled 18.5… and now all atm ED straddles are successively higher in premium further out the curve. It had been that the front EDM straddle was higher than the EDU 9962.5 (a sign of stress) but not any more. EDM0 9950^ 18.5, EDU0 9962^ 19.5, EDZ0 9962.5^ 23.5 and EDH0 9975^ 24.0. Little net movement in rates yesterday. In dollars, reds through golds closed +1 to +2. Ten year yield essentially unchanged as TYM hasn’t strayed far from the 138 strike in five sessions. TYM 138 straddle settled 1’60 yesterday from 2’10 one week ago. However, this morning TYM prints 138-25 having settled at 138-07 yesterday as stocks fade from yesterday’s high.
–Would have been tax day today, with funds flowing into the US treasury. Now it’s just an avalanche of t-bill sales to make up for lost revenue.
Wrench in the V-shape
April 14, 2020
–Tens (TYM0) have been in a relatively tight range for the past four sessions bouncing around 138-00 (yesterday settled 138-025) and today looks no different. Yield at futures close yesterday was 74.6 bps. Premium selling on the front end of the curve portends more normal conditions, with EDM0 9950 straddle settling 20.0 vs 9948 vs 22.0 on Thursday. The atm TYM straddle also eased, to 1’61 from 2’06 with vol pretty much at pre-crisis level of 5.4. The market clearly expects the libor setting to continue falling given the Fed’s heroic efforts to save everyone. Stocks are taking a similar view. While SPX was slightly lower, Nasdaq eked out a gain. BBG had a headline, ‘NFLX throws a wrench in V-shaped recovery’. I didn’t read it, but the fact that NFLX (+7%) and AMZN (+6%) are posting new highs indicates that home work and entertainment are expected to dominate the future, and that’s not exactly good news for a return to a more social world. Contrasted against these winners are results from Softbank, whose WeWork fiasco signaled the beginning of the end. From Almost Daily Grant’s: Softbank projects an operating loss of $12.5 billion; its in-house Vision Fund lost $16.6 billion, “no small portion of the fund’s $100 b aum.” Funding for tech start-ups will be hard to come by. https://www.grantspub.com/almostDailyHTML.cfm
–Another aspect of yesterday’s trade worth mention is gold. GCM0 jumped another $8.6 to close just under $1763/oz. It’s up 300 since the middle of March. Barrick (ABX +7%) and Newmont (NEM +4.6%) jumped to new highs.
The Unexpectable
April 12, 2020- Weekly Comment
Early Thursday morning prior to expiration, April 3-month eurodollar, EDJ0, was trading 98.72 or 1.28%. Then, three-month Libor set at 1.21888%, down nine bps from the previous day’s setting, so the EDJ0 contract settled at 98.7811. There were 549,312 contracts open in EDJ0, so a 6 bp move equates to a transfer of $82,396,800 from shorts to longs. Within a couple of hours of expiry, the Fed announced a series of massive measures to stabilize markets.
In the big picture, $82 million is a drop in the bucket. Indeed, the June euro$ (EDM0) which has three times more open interest than April had, rose 8 bps on the day. It would appear that those banks setting the libor rate had a pretty good idea of the upcoming Fed announcement. It’s not really worth the effort to launch into a discussion of market integrity and libor-rigging. My point a couple of weeks ago was that a decline in the libor/ois spread to more reasonable levels would be a key metric to determine whether markets were on the mend. So here’s a graph of the midpoint of the FF target (FDTRMID <index>) with three month libor. The amber line is the midpoint of FF and the white line is 3m libor. The lower panel shows the spread. Slow improvement.
You can see from the above chart that the low in three month libor after the first hike was 74.050 bps on March 12. The high was at the very end of the quarter on March 31 at 1.45050%, exactly 71 bps higher, which occurred after the Fed slashed to a target of zero to 25 bps. In many ways, this price action underscores why the Fed may not want to pursue negative rates; just going to zero produces many market distortions, clearly reflected by the jump in libor. In any case, the Fed’s unlimited support for munis, corporates, small business etc announced on Thursday should continue to force the libor rate lower. On Thursday, the May ED contract settled 99.265 or 73.5 bps, essentially matching the March 12 low setting on libor. The EDM0 contract, which posted a low of 99.305 last week on Wednesday, and a previous low on March 19 of 99.27 should hold these levels going forward, and will likely trade above 9950 given the Fed’s extraordinary support measures.
Forward euro$ straddles indicate
the same thing, perhaps with more complacency than is prudent. For example EDU0 99.625^ settled 21.5 vs
99.605 and EDZ0 99.625^ settled 25.0 vs 99.635.
The market is comfortably projecting 3m libor around 35 to 40 bps. Dec 31 this year is on Thursday, so the turn
will be four days. There will likely be
a fair amount of demand for EDZ0 puts, which are currently cheap in my opinion.
CPI released on Friday showed a monthly decline of -0.4%. No surprise, implosion of demand should
clearly lead to lower prices over the short term. I don’t know how the BLS
adjusts for a given level of rent on commercial space when a significant
percentage of lessees have stopped paying.
I suppose there’s a lag as prices adjust lower over time. Many
prices are likely to decline as supply and demand factors (eventually) determine
a clearing price. This process may take
a year. But even if the general price
level is lower in one year, forward prices will impact inflation. Over time, pressures on the long end of the
market should be unmistakable both due to supply and due to general increases
in the level of prices, which will, of course, come from a lower base. The Fed will clearly be the lender to the
treasury.
Powell repeatedly said on Thursday that the Fed’s actions were “loans”, that the Fed cannot buy assets. And in a BBG interview Danial Tarullo, formerly on the Fed board, said that in the GFC the Fed lost no money on loans. While some had failed, the interest paid on others completely absorbed the smaller losses. It’s very hard to believe that will be the same case this time around. The Fed is backstopped by the treasury. The treasury is backstopped by the power of taxation. The government was already running a huge deficit which is now simply gargantuan. Current taxation wasn’t close to closing the gap prior to the pandemic, now the hole is a gaping abyss. Additionally, the rest of the world is also deficit spending to buffer the virus crisis. Who will buy the additional trillions in debt? The Fed. But don’t worry, the Fed is backstopped by the Treasury. The entire system has become circularly meaningless.
It was previous actions by the Fed and Federal government that spurred the public to warmly embrace risk and financial engineering without regard to possible consequences. Now the panels have convened to save financial markets because those markets now ARE the economy, as much as Powell tried (early on) to separate the two. Nothing is new. I always refer back to Reminiscences of a Stock Operator to assure myself of that. The background of the passage I quote below relates to Lawrence Livingston’s WW1 coffee position, in which he had amassed a large long position at prices that were below the pre-war levels. “I was and am as keen as anybody against the profiteer in the necessities of life, but at the time the Price Fixing Committee made their ruling on coffee, all other commodities were selling from 250 to 400 per cent above pre-war prices while raw coffee was actually below the average prevailing for some years before the war… The price was bound to advance; and the reason for that was not the operations of conscienceless speculators, but the dwindling surplus for which the diminishing importations were responsible…”
Coming sure and fast, that profit of millions! But it never reached me. No; it wasn’t sidetracked by a sudden change in conditions. The market did not experience an abrupt reversal of form. Coffee did not pour into the country. What happened? The unexpectable! What had never happened in anybody’s experience; what I therefore had no reason to guard against. I added a new one to the long list of hazards of speculation that I must always keep before me. It was simply that the fellows who had sold me the coffee, the shorts, knew what was in store for them, and in their efforts to squirm out of the position into which they had sold themselves, devised a new way of welshing. They rushed to Washington for help, and got it.
See crude oil.
| 4/3/2020 | 4/9/2020 | chg | ||
| UST 2Y | 20.9 | 22.3 | 1.4 | |
| UST 5Y | 36.4 | 40.8 | 4.4 | |
| UST 10Y | 59.0 | 72.2 | 13.2 | |
| UST 30Y | 122.0 | 134.8 | 12.8 | |
| GERM 2Y | -66.2 | -62.0 | 4.2 | |
| GERM 10Y | -44.1 | -34.7 | 9.4 | |
| JPN 30Y | 38.6 | 44.9 | 6.3 | |
| EURO$ M0/M1 | -24.0 | -26.0 | -2.0 | |
| EURO$ M1/M2 | 8.5 | 12.5 | 4.0 | |
| EUR | 108.10 | 109.43 | 1.33 | |
| CRUDE (1st cont) | 28.34 | 22.76 | -5.58 | |
| SPX | 2488.65 | 2789.82 | 301.17 | 12.1% |
| VIX | 46.80 | 41.67 | -5.13 | |
https://www.trendfollowing.com/whitepaper/Edwin_LeFevre_Reminiscences_of_a_Stock_Operator.pdf
Powell, Financing the World
April 9, 2020
–Powell speaks today at 10:00 EST. FT runs the headline: Bank of England to directly finance extra government spending. (Might as well just overtly announce it, since it’s happening the world over). The US treasury has been busy auctioning t-bills at an average over $100 billion per day (according to a ZH article $569B last week and $369B in the first three days of this week). My title today is Financing the World, or FTW, which just points up how backwards things are…
–Yesterday the front end of the dollar curve reacted to both supply and to the stubborn 3m libor rate which refuses to decline in a meaningful way. EDM0 closed -3.0 at 99.37, weakest contract on the dollar curve, having traded as low as 99.305 early in the session. EDJ0 expires today and was trading 98.72 or 1.28% just before being taken off the board. Therefore EDM0 (now 99.36) still trades at an approx 64 bp premium in price to libor. The EDM0 9937.5^ settled 26.0 yesterday. While EDM0 was the weakest contract at -3.0, the reds (2nd year out) were the strongest performers, closing +3.0. From there the curve steepened, with greens +1.75, blues -0.25 and golds -2.0. Treasury curve reflects the same dynamics, with twos -2.8 at 25.2 bps and tens +3.0 at 76.3. There is more talk about a possible future increase in inflation, even though the immediate result has been disinflationary due to lack of economic activity. Against this thought, which would cause the curve to steepen, is the counter-argument that the Fed is going to engage in Yield Curve Control, thus capping long term rates. Ten year inflation-indexed note to treasury spread is creeping ever so slightly higher, at 119 bps yesterday.
–Jobless Claims today expected to be, well, big. Gold (GCM0 is trading 1706 this morning, up over $21/oz. A close above 1700 portends a quick move above 1800.
–April euro$ midcurves expire today. The last couple of days TY vol was 5% or a bit lower which has now defined a base. I marked TYM at 5.6 at the close. Exchange is closed tomorrow.
No evidence of systemic crisis?
April 8, 2020
–The initial move yesterday in stocks evaporated at the end of the day, and bonds retraced some of their losses. At the 3:00pm futures close I marked tens at 73.3 bps, up 5.8 on the day. Curve was slightly steeper with 2/10 up 4 bps to 37.5. Gold traded above the important 1708 level but then failed with a settle of 1683.70 (GCM0).
–From the Feb high to March low, NQM0 fell 3151 points. At yesterday’s high the retracement was 1674 points or 53%. Same in ESM0: fell 1166 points and rallied 576 to yesterday’s high or 49%. In the Russell 2k future, the same move off the bottom was only 32%. With all of the administration’s moves targeting small business, I would have thought RTYM0 would have done better. The smaller business economy doesn’t seem as hopeful about a V shaped recovery.
–CLK0 (May WTI) settled 23.63, down 2.45, while the June contract settled down only 1.29 at 28.69. Large oil etf said to be rolling positions, which appears to have put additional pressure on the front contract. Over time storage issues will hopefully come back into balance.
–While April ED contract was essentially unchanged at 98.7275 going into Thursday’s expiration, EDM0 fell 4.5 to 99.40, having traded over 99.50 on Friday (still an extraordinarily wide spread of -67.25 in J0/M0). Partially this is related to expected roll down as the 3-month libor setting hasn’t come down particularly aggressively. Perhaps the implementation of CPFF (Commercial Paper Funding Facility) next week will help. Also worth noting, the the head of the FHFA, Mark Calabria, said Fannie and Freddie were unlikely to aid mortgage companies as he saw no evidence of systemic crisis. One source suggested this was posturing, intended to force the Treasury or Fed to take the lead role to support these businesses. Many smaller mortgage firms are likely to go under; I don’t know if federal programs enacted thus far to help people make payments will go directly toward rent and mortgage. In any case, this is another important uncertainty which contributes to funding pressure. –Fed minutes today will likely be interesting as a case study in crisis management. 30 year auction.
Signs of improvement
April 6, 2020
–Stocks starting off the week with ESM up nearly 100 currently 2578. Big level above is 2635. While WTI is currently down 78 cents at 27.56, for the most part it seems to be absorbing the delay in the OPEC+ meeting due to renewed fissures between Russia and the Saudis. Rate futures are pretty much hovering around last week’s lows. Today the treasury auctions 3’s, followed by tens tomorrow and thirties on Wednesday in this holiday shortened week.
–Story on Reuters says xccy basis indicates that dollar funding costs have fallen dramatically for euro and sterling as the Fed’s fx swap lines have alleviated pressure. https://www.reuters.com/article/us-health-coronavirus-dollar-funding/dollar-borrowing-costs-drop-to-lowest-in-decade-in-fx-swap-markets-idUSKBN21O0TJ
–While eurodollar futures are down across the board, EDJ0 which expires to 3 month-libor this week is currently unch’d at 98.7325, suggesting a lower libor fix today. Additionally, the continued implosion of implied vol across rate contracts on Friday is a sign that normalcy may begin to return across markets. The atm TYM 139 straddle settled Friday at 2’07. On the previous Friday the atm 138.5^ was 2’31. 2EZ 9850 straddle settled Friday at 35, down from 39.5 the previous Friday.
