Precious metals jump as USD dives
July 27.2020
–Gold and silver are exploding with the former at an all-time high $1940. Silver is above $24/oz; it’s all-time high was near $50 in April 2011. Bitcoin has vaulted above 10,000. The dollar index (DXY) is at a new low for the year sub-94; hasn’t seen this level since 2018. Stocks also staging a rebound from Friday’s close. Bonds are lower of course, right? No, that would be wrong. Bonds are edging close to new low yields, with tens at just 57 bps, down 1.7 from Friday. The low in March is 54.3.
–Big earnings reports this week: Visa, Tuesday post-close. Shopify Wednesday, pre-open, FB Wed-post, P&G Thursday-pre, AAPL, AMZN, GOOGL all Thursday post. Wednesday also features the FOMC meeting, with Thursday’s Q2 GDP expected -35% and Friday’s PCE deflator yoy expected +0.2.
–The White House and Senate republicans have agreed to a package at 70% of wages to replace the $600/week, to be unveiled later today. Pelosi says Congress won’t leave for August break until a deal is resolved. Chicago violent crimes and homicides are up 75 to 78% year over year. The same move in silver would put it over $28/oz rather than the current 24.
In: Eurodollar Options
Party like it’s 1999
July 26, 2020 – Weekly comment
“All generalizations are dangerous, even this one.” – Alexandre Dumas (b.24 July 1802)
On Monday, I saw a tweet by Ed Bradford, @Fullcarry “Starting to feel a bit 1999 ish.”And I responded, “a bit”? Gundlach has also referred to 1999. Maybe he heard it from Bradford first. So I started to think about 1999. It’s 21 years ago. An overarching concern in 1999 was dependence on technology and the Y2K issue. The fear was that the banking system might freeze up, that air traffic would cease, that all the systems which relied on code were at risk. I’m sure there were preppers before that time, but Y2K gave that particular movement an honest kick in the ass, just as COVID has now. The Robinhooders of today were between 3 and 15 years of age at that time. So I am dusting off the ECNC story that I wrote a long time ago which captured a bit of the frenzied trading environment of that time (I’ve changed the names). It’s a lot easier than trying to come up with something clever to write about in the zero rate framework that we find ourselves in today.
First, here is a quick backdrop for 1999. CPI accelerated from 1.5 to 1.6 on a yoy basis in Q4 1998, up to 2.6-2.7 in Q4 1999, then to a peak of 3.8% in March 2000, settling back to around 3.4 in Q4 2000. The Fed therefore was in a hiking mode, raising from 4.75% to 5.0 in June’99 and continuing to hike, reaching 6.0 in March 2000, before finally putting the final flourish of a 50 bp dollop in May 2000, even after Nasdaq had topped. Unsurprisingly, the US dollar was generally firming throughout this period. The 2/10 spread was fairly stable through late 1999, ranging between 20 and 40, but inverted in Feb 2000 as tightening bit. It was the increase to 6% in March that popped the Nasdaq bubble. However, the imagery of the word “popped” is that the air was instantaneously expelled, never to be put back in again. But it was messier than that. From Sept of 1999 to the peak of 4816 in March 2000, Nasdaq had doubled. By the time of the June hike, it had dropped nearly 40% from the high to just under 3000, but then it rallied to nearly 4100 by July. The real damage occurred from Sept 2000 to April 2001, a decline of 67% (4150 to 1350). It’s worth noting that SPX had nearly matched its March high by September, and then fell only 27% by March.
There have been a lot of crazy rallies in tech stocks since the low in March of this year. But from then until this month’s high the move in NDX is 63%, and that’s at a time when the Fed has eased, not tightened, and is promising to keep rates near zero for years. The dollar is beginning to move south. The 2/10 treasury spread had inverted briefly in Aug 2019, but more recently has been between +42 and 52. There are a lot of charts that indicate stocks are more expensive than they were at the 2000 peak (see Mauldin ‘Valuation Inflation’ from this weekend). But maybe they SHOULD be. After all, in 2000, one can partially accuse the Fed of tightening too much as a catalyst for the crash. No hikes on the horizon now…
The implication for the 1999 comparisons is that we’re close to peak crazy, and that everyone who has recently said, “This can only end badly” will be able to take a somberly smug victory lap. In my opinion, it’s not overt action by the Fed that is the mostly likely culprit for a downward resumption in stocks, it’s the Federal Gov’t. The $600/weekly payout has caused the federal budget deficit to explode ($864b in June alone). It’s set to expire this week, and as of now has not been extended/replaced. The Federal Gov’t has carried the economy on its back this year, and by extension has pumped stocks. Of course, a huge amount of support has been provided by the Fed as well. The problem is that while both the Fed and the Federal Gov’t have done a yeoman’s job in manning the buckets to bail out a leaky boat, the minute they slow the pace, either by a stalled weekly payment package or by letting the balance sheet drift down, the boat is going to start to sink. It’s not proactive tightening, it’s passively slowing the pace of assistance.
The ECNC story
I was in the CME member breakroom at around 9:30. The breakroom was in the southeast corner of the building, with large windows looking out onto the corner of Wacker and Monroe, a small retreat from the cavernous, windowless trading room. There were a few CQG and newsfeed computers tucked just to the north, on the perimeter of the actual trading floor. That’s where the disheveled, elfin Indian clerk with long wavy black hair would run his charts and mutteringly dispense ideas to anyone that would listen, and I often did. For some reason there was a Quotron in the actual lounge and I was in line to get a couple of live stock quotes, with other people sitting around having a coffee or watching Sports Center. Behind me was MA, a filling pit broker in eurodollars, also waiting to get quotes on stocks…because this was the year 2000, at the height of Nasdaq mania, (but you still couldn’t just punch up an instant quote on your phone).
I had started at Refco just before the turn of the century, in late 1999. The Refco Eurodollar desk was on the east side of the floor, all the way at the top level of the tiered desks that surrounded the pit. Lehman was next to us, Chicago Capital was immediately below. There were about eight of us at the desk occupying three booths, probably 30 sq ft of floor space. Front month Eurodollars were directly in front, back months stretching to our left (south) and the ED option pit to our right. The shape of the connected pits was roughly a rectangle that spanned nearly a full city block, packed with order fillers, locals, and clerks, with back month dollars at the south end, then the 3rd and 4th contracts, then the second and then the front month, with the back months at a higher elevation to provide straight sightlines, down to ground level in the front months, and again slightly elevated at the north end, the option pit. On either side of this rectangle were desks, tiered up like a stadium.
Although the turn of the century was punctuated by concerns about Y2K computer problems and banks had curtailed trading activity because of possible computer system issues, the Nasdaq boom was in full force. In the year from March 1999 to March of 2000, Nasdaq went from just below 2000 to just above 4800. In the meantime, rates were increasing fairly aggressively. It was way back in 1996 when Greenspan had opined “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?” Though that line got widespread notice, it was a bull market that shrugged off warnings from Central Bankers and everything else.
From mid 1999 until May of 2000, the FF rate went from 4.75% to 6.5%. I know there’s a lot of talk of the ‘Greenspan put’ but compared to current CB policies designed to instantly countervail any ill winds that buffet the market, Greenspan used his power sparingly. I would simply note that the Fed kept the FF target at 6.5% from May 2000 to December 2000 when a LOT of air was rapidly coming out of the Nasdaq bubble. I recall one of my old clients from Bankers Trust (then at DB) telling me, “It doesn’t matter what rates do, these Nasdaq companies have no debt. It’s all equity. Higher rates don’t affect them. And I would say “I don’t think that’s quite right.” But he was long a ton of stock and was riding the Nasdaq bull. Hard. Just to think of it makes me smile, because I have a few stories about this individual, who embodied everything right and funny about this particular business. Those stories are for later, in a more extensive format.
OK, let’s get back to the Quotron line and MA. I’m in my grey mesh trading jacket and he’s in green. VO is snoring in the lounge chair next to us with vending machine wrappings in his lap, having filled a bazillion options in the last 2 hours. I punched up a couple of quotes and Mike says, ‘hey Alex, do you own any of this?’ And I said, ‘what?’ ECNC. Now this was in February of 2000. I said I didn’t. He replied, ‘Everyone on the floor owns this thing.’ So I wandered back to my trading desk, having jotted down my quotes on a trading card and having ECNC on my mind. And when I got to the desk, it wasn’t busy at all, and I said, “Hey, you guys ever hear of ECNC?” I think Scooter was first to say he owned some, and someone else said I have some, and Doyle, just a junior clerk at the time said “I own a couple thousand shares.” I, of course, was incredulous. How had I not heard of this? So I turned around and logged into my account and bought a few thousand shares myself, but it had already been moving. Just to give you a flavor of the time, I didn’t know what the company DID. I don’t think anyone at the desk knew. The name of the firm (I learned later) was actually E-connect.
I don’t recall the exact price, but I paid something like 1.60. It was then that I learned that our pit clerk in the third and fourth option (3rd and 4th contract months) owned something like 50k shares (his relative in NY at Merrill had given him the tip while it was still under $1). I learned that traders in the option pit were also loaded up. Crazily, within a few days, my shares had doubled. I think I sold out half at something like $4. And then it just kept running. In hindsight I thought this took a MUCH longer time, but literally within about another week the shares had doubled again. I sold the rest of mine at a price just below 10. And of course, I was happy… for about a day. But this thing had taken on a life of its own. Craig, the futures clerk who worked for UGG, was riding the whole position as I recall. Next thing I know the stock is around $14 and moving higher, ultimately shooting over 20. And I am saying to myself, “I am a F*$%&G idiot! Why didn’t I just hold out?” But I also remember thinking, unless these guys have cured cancer there is no reason this stock should be flying like this. In any case, my self-loathing was short lived, because the stock was halted in mid-March due to creative financials. It turned into a total loss for the guys that held it. In April, Fronz told me his story. He was a jovial clerk on the other side of the pit. He said he owned it while he had gone to Florida on a vacation with the family, and was checking the stock from there. He was having a grand old time, saying “So THIS is how the big guys do it, printing money while sitting on the beach drinking cocktails festooned with umbrellas.” He of course, returned home to a halted stock, worthless, but was laughing about it and enjoyed telling the tale.
So, how does the ECNC story tie in to today? While ECNC was one of many flame-out dotcom companies, its demise came just a couple of weeks prior to the ultimate Nasdaq top. People were just buying into the story of untapped potential, riding the wave without really thinking it through. Sound familiar?
Oh, by the way. When looking back and doing some ‘research’ for this piece, I found out what E-connect did. From a blog: Econnect Holdings in the spring of 2000 at $0.96 had a quizmo to attach to your computer that you could swipe your credit card through and pay for purchases on line. Seemed to be a good idea to me….kind of like Square.
| 7/17/2020 | 7/24/2020 | chg | ||
| UST 2Y | 14.3 | 14.7 | 0.4 | w/I 14.7 |
| UST 5Y | 27.9 | 27.2 | -0.7 | w/I 27.7 |
| UST 10Y | 62.5 | 58.7 | -3.8 | |
| UST 30Y | 132.7 | 123.6 | -9.1 | |
| GERM 2Y | -66.4 | -65.1 | 1.3 | |
| GERM 10Y | -44.7 | -44.8 | -0.1 | |
| JPN 30Y | 57.9 | 57.1 | -0.8 | |
| EURO$ U0/U1 | -7.5 | -6.0 | 1.5 | |
| EURO$ U1/U2 | 4.0 | 3.0 | -1.0 | |
| EURO$ U2/U3 | 13.0 | 11.5 | -1.5 | |
| EUR | 114.38 | 116.54 | 2.16 | |
| CRUDE (active) | 40.75 | 41.29 | 0.54 | |
| SPX | 3224.73 | 3215.63 | -9.10 | -0.3% |
| VIX | 25.68 | 25.84 | 0.16 | |
In: Eurodollar Options
Holding back liquidity
July 24, 2020
–Stocks retreated yesterday and are poised to start the US trading day lower, with deterioration in US/China relations said to be the main catalyst. A flattening bias has pushed 2/10 to a new recent low of 43.7 bps and 5/30 sub-100 at 98.3. Red/gold pack spread is 37.5, -1.375 on the day.
–August treasury options expire today with TYQ 139.5 straddle settling 12 vs 139-20. The high so far today is 139-25, so calls were 18 in the money, but the contract now prints 139-18. New Home Sales and Markit PMIs released today.
–Larry Kudlow was on with Maria Bartiromo yesterday morning talking about improvement in various data points, and concluded, “I still think we’re in a self-sustaining recovery.” Self-sustaining?!?!?!? I suppose that means the $600/wk being doled out by the Federal Gov’t no longer is needed, right? Same with the Fed buying every asset in hopes of propping up prices. As we draw nearer to the end of July and stocks remain pressured, some type of last minute extension bill on weekly benefits is likely to be passed. If not, watch out below.
–In August 2005, New Orleans was flooded by Katrina. A much bigger disaster looms if the Three Gorges Dam collapses. In the early part of 2005 tens were in a range of 4.00 to 4.60. From June into early August the yield went from 3.90 to 4.40, and then turned lower. As the flood hit, the yield fell from 4.17 to 4.00, bottoming on Aug 31, and then starting a run to new highs in 2006. From the end of April to early July China’s ten year has gone from 2.50 to 3.10 and now has begun to retrace, now 2.87. Shanghai Comp had a huge surge in early July but is now retracing, down 3.8% today. I’m not sure of market reaction to more extensive flooding in Wuhan, but it would probably temporarily ease US/China tensions due to the scale of humanitarian disaster. In any case, here’s a viral video of simulated flooding (at bottom of first link). By the way the height of the dam is 185 meters and the water level has reached 165 meters.
https://www.taiwannews.com.tw/en/news/3973169https://asiatimes.com/2020/07/yangtze-deluge-tests-limits-of-three-gorges-dam/
In: Eurodollar Options
Minutia
July 23, 2020
–Once again, a light volume trade in rates with a bias flatter. Tens fell 1.1 to 59.4 while 30s fell 2.2 to 1.29%. On the euro$ curve, marginal new lows were posted in spreads from reds to deferred, with the red/gold pack spread just under 39 bps. 2/10 notched a new low at 45.
–The ten yr inflation-indexed note equaled its all-time low from late 2012 at -91.7, having ended yesterday at -90.5. This of course, is helping to push USD to new lows, with DXY closing at its lowest level of the year, matching the spike low in March. “Investors” are thus pushed out the risk curve into can’t lose bets… like TSLA. However, these moves are having no effect on treasury vol, which remains under the blankets. With 30 days until expiration, atm TYU 139.5^ settled below one point at 62/64’s. The expiring August straddle settled at just 14. To give some small indication of compressed vol in the aftermath of the dislocations seen in March, note the following: At every treasury option expiry, there is a large buyer of wings to replace protection that is rolling off. Yesterday for example, there was a buyer of >60k FVU 123.75 puts for 1/64 (FVU settled 125-26). On April 21, FVM0 settled 125-17+, not all that far from the present level, but at that time he was paying 2 for 40k FVM 118.5 puts. I.e. he paid double for puts that were 5 points further out of the money. Also on April 21, he paid 2 for 50k TYM 131 puts ref 138-31. With futures now 139-18 (TYU), the 136 puts settled 2, three and a half points otm as opposed to eight. Of course, VIX was around 40 in mid-April as opposed to 24 now.
–Jobless claims today.
In: Eurodollar Options
10y tip says silver has room to run
July 22, 2020
–Stocks opened stronger yesterday on the back of an EU Recovery stimulus agreement, but sold off late in the day as McConnell said he doesn’t expect Congress to pass a relief extension bill by next week. Kicking the can with last minute deals. Business as usual, at least in governmental affairs. Fed nominee Judy Shelton was approved by the Senate Banking Committee. Some had been concerned about her views on Fed independence, but that ship has already sailed.
–Interest rate trading has become extremely quiet. Tens finished down 1.3 bps to 60.5. There was a new buyer of 30k 2EZ 9950p for 3.75 ref EDZ2 9974, but all other midcurve puts in front of 2EZ only traded 18k in total.
–The ten-year inflation-indexed note (real) yield dropped to -89.5, essentially equaling the 2012 all-time low of -91.7. Little wonder that precious metals are breaking out, with a sparkling surge by silver this week of nearly 20%.
–Since the real 10y yield is approximately equal to the all-time low of 2012, I thought it might be worth taking a look at where other markets were at that time. In late 2012 DXY was around 80, having rallied earlier in the year up to 84. Currently DXY is at its low of 95, having surged to 102 in late March. Gold was at $1800. It hasn’t been that high again…until now (1858 currently). Ten year yield was 1.50% vs 60 now. 5/30 was over 200 bps vs 104 now. Finally, SPX was less than half its current level at around 1400. By the way, silver was 35, vs 22.20 now.
In: Eurodollar Options
More
July 21, 2020
–EU deal for more stimulus was agreed upon today, sending stocks and precious metals to new highs for the move (or very close to new highs). However, rate trading is increasingly lethargic. To get a sense, look at the one month ranges in ED one-year calendar spreads: from Sept’21/Sept’22 at a current level of -7.5, to Sept’22/Sept’23 at a current level of 12.5. There is no spread with a monthly range larger than 3.5 bps and most have moved only 1.5 or 2. Large trade yesterday was buyer of 40k 0EZ0 100 calls for 3.0. This option has EDZ’21 as underlying contract, which settled 9979.5, so 20.5 away. It expires on 11-Dec of this year. This trade may be a spec for negative rates, or a stock crash play for post-election, but more likely is just to cap upside risk. There has been buying in various contracts of 9975/9987 call 1×2’s which leaves open-ended risk above 100. For example, yesterday there was a buyer of 20k 0EU 9975/9987 c 1×2 which settled 4.25 ref 9981.5.
–Once again, ten year inflation-indexed note made a new low yield, now at negative 86 bps. The breakeven for CPI inflation is 1.478, which is the difference between the tip yield and the regular ten year treasury at positive 61.8 bps.
–Chicago Fed National Activity Index today expected 3.2 from 2.61 last. August treasury options expire Friday with TYQ 139.5 straddle having settled 23 yesterday. The Sept version settled 1’03; we’re right back to atm TY straddles being around 1 point with one month to go.
In: Eurodollar Options
Vanity
July 18, 2020 – Weekly comment
“This attracted a large youtube following, with thousands of views. Young men were particularly attracted to his message, which promised a new order, and a rejection of the suits who ran investment funds.”
I know. It sounds a little bit like Portnoy. But the actual quote refers to a date long ago. There is no shortage of historical periods of upheaval where a disenfranchised public succumbs to a message in which the old symbols and rules are excommunicated. In this case, 1497.
Savonarola spent the early 1490s working crowds in Florence, introducing into his preaching set apocalyptic prophecies and fiery exhortations for listeners to free themselves from the burden of sin. This attracted large crowds, who regularly attended his sermons. Young men were particularly attracted to his theology, which promised a new world order and a rejection of the old men who ran the city.
Savonarola Preaching Against Prodigality
The city was Florence. The Dominican friar was Girolamo Savonarola. The message was righteous indignation with the trappings of social excess and privilege: artwork, sculptures, tapestries, ancient books and poetry, musical instruments, fine clothing and cosmetics. His followers, known as the Piagnoni (weepers), collected these items from the public, including paintings by Sandro Botticelli, and on February 7, 1497, a pyre was constructed in the Piazza della Signoria and all was set ablaze. The Bonfire of the Vanities.
Interestingly, Lorenzo de’Medici was one of Savonarola’s original benefactors, but in 1494 mobs inspired by the friar burned down the Medici’s bank and the family fled the city. (Sound familiar?) Shortly after the Bonfire, in May 1497, Pope Alexander VI excommunicated Savonarola, and in another year he was executed, burned to death on a cross in the same piazza.
Now the righteous indignation is leveled against all perceived transgressions past and future. I am just going to touch upon the vanity of the Fed in thinking it can save the world, while in reality the heavy hooded robes of that sanctified institution are muffling the sounds of capitalistic cues.
Here’s a tweet from David Rosenberg: “Core retail sales are up while 14M jobs and $726B in wages have been lost. How? Personal income has RISEN at a 12% annual rate in 2020 (a $933B surge) – gov’t transfers have ballooned at a 229% annual rate (by $2T), funded by the Fed. It may be “money” but it’s not “income”. Big difference.”
That, I think, is the core problem. As Dire Straits would put it, “That ain’t workin’ that’s the way you do it/Money for nothin’ and chicks for free.” There is a difference in how money is earned, and what sectors of the economy attract flows, thus creating further productive investment. It’s the core of what constitutes a healthy economy with organic growth rather than one riddled with malinvestment. Chicks AREN’T free.
Some might say there’s no difference at all. Wealthy flight from formerly cosmopolitan and cultured cities to suburbs? Sure, it results in economic transactions, but is it positive? Expanded employment benefits filtering into stocks through Robinhood accounts? Sure, it helps boost ‘the market’ but is it a positive? Guns and ammo all out of stock. Sure, it represents consumer demand, but is it positive? It might seem great for the guy that was making $400 a week part-time now hanging out at home and getting $600/week, but the guy who is still working making $800 a week feels like a sap. Low interest and/or forgivable loans to maintain employees are surely a benefit, but it can’t simply go on forever. Or can it?
Here are a couple of excerpts of Lael Brainard’s speech last week along with my bracketed comments:
Several measures of default probabilities are somewhat elevated. It remains vitally important to make our emergency credit facilities as broadly accessible as we can in order to avoid the costly insolvencies of otherwise viable employers and the associated hardship from permanent layoffs.[viable or zombie?]
And with inflation exhibiting low sensitivity to labor market tightness, policy should not preemptively withdraw support based on a historically steeper Phillips curve that is not currently in evidence. Instead, policy should seek to achieve employment outcomes with the kind of breadth and depth that were only achieved late in the previous recovery.[credibly irresponsible?]
With the policy rate constrained by the effective lower bound, forward guidance constitutes a vital way to provide the necessary accommodation. For instance, research suggests that refraining from liftoff until inflation reaches 2 percent could lead to some modest temporary overshooting, which would help offset the previous underperformance. [forward guidance with inflation make-up]
Tim Duy wrote a BBG piece saying Brainard’s speech represents a major policy shift, and that the Fed will now choose to let the economy ‘run hot’. “Brainard is saying the Fed should not tighten policy until actual inflation reaches 2%. Policy lags — the time between the Fed’s actions and the resulting economic outcomes – mean inflation will subsequently rise above 2%. The Fed would thus overshoot the inflation target and then return to the target from above.” How realistic is that?
This to me seems like a move towards the self-righteous Paul Krugman *shudder*. In 1998 he argued that when a central bank (in this case BoJ) hits the zero-bound in a slump “the central bank needs to credibly promise to be irresponsible”. This theme was later expanded upon by Michael Woodford in a 2003 paper and alluded to by Bernanke in 2002 and 2003, and then echoed by Paul McCulley. The “piagnoni”. “Bernanke recognized that such a policy could unmoor long-term inflation expectations, creating a deleterious rise in long-term interest rates. But in his view, this was a risk worth taking…”
The markets have responded to the promise of undammed liquidity with flows being channeled into the quest for wealth of the damned. Gold and silver are making new highs. Stocks have responded. Yields are at rock bottom lows to encourage leveraged consumption. Real yields have descended to…you know… lower. On Friday the ten-year inflation-indexed note made a new low of -84.6. The lowest level in 2012 was -91; closing in. The thirty year tip is at a new record low of -28.7 bps. The five year is -108 bps. That’s well away from the 2013 low of -177, but it’s rapidly moving in that direction. Since the Fed’s aggressive response to the virus, the U of M survey of inflation expectations surged higher and hasn’t pulled back, in spite of every Fed official weeping about the possibility of deflation taking hold. The one-year expectation reported Friday was 3.1% with the 5-10 year at 2.7%.
The Fed’s core purpose is to foster maximum employment and price stability, with the vow to be a lender of last resort to viable entities. The embodiment of narrow and trusted responsibility. The leadership is now abandoning those core values like the Medicis fleeing Florence. Markets have sniffed out the initial ramifications: higher prices for financial assets, higher prices for commodities, risks being shunted aside for the shiny promise of quick returns associated with malinvestment. But risks have a way of flaring up like an out of control bonfire.
“I am the hailstorm that shall break the heads of those who do not take shelter.” –Girolamo Savonarola
OTHER MARKET/ TRADE THOUGHTS
As mentioned last week, “It has been sheer folly to bet against SPX or Nasdaq in the face of gigantic amounts of monetary and fiscal stimulus.” However, I thought NFIB optimism might push towards 90. It didn’t, coming out stronger than expected 100.6. I also though congressional dithering on an extension of benefits would cast a negative pall on the markets. It didn’t. Therefore, the ES end-of-month July 3000/2750/2500 put fly which I touted for 14.0 settled 5.95. I suppose that means the USU 175/172 put spread for 21 worked out then, right? Not really, it settled 17. But the inflationary push from the Fed should work to weaken the long end further.
Volumes have been light. Treasury vol is near historic lows. Gold and silver are breaking out to the upside. The dollar index closed the week below 96, poised to make a run for the March crisis low of 94.65. As the dollar declines, a lot of assets priced in dollars rise.
| 7/10/2020 | 7/17/2020 | chg | ||
| UST 2Y | 15.3 | 14.3 | -1.0 | |
| UST 5Y | 29.6 | 27.9 | -1.7 | |
| UST 10Y | 63.2 | 62.5 | -0.7 | |
| UST 30Y | 132.3 | 132.7 | 0.4 | |
| GERM 2Y | -68.9 | -66.4 | 2.5 | |
| GERM 10Y | -46.5 | -44.7 | 1.8 | |
| JPN 30Y | 55.6 | 57.9 | 2.3 | |
| EURO$ U0/U1 | -8.0 | -7.5 | 0.5 | |
| EURO$ U1/U2 | 5.5 | 4.0 | -1.5 | |
| EURO$ U2/U3 | 14.5 | 13.0 | -1.5 | |
| EUR | 113.01 | 114.38 | 1.37 | |
| CRUDE (active) | 40.76 | 40.75 | -0.01 | |
| SPX | 3185.05 | 3224.73 | 39.68 | 1.2% |
| VIX | 27.29 | 25.68 | -1.61 | |
In: Eurodollar Options
Smith Wesson and me
July 17, 2020
–Once again, yields little changed on light volume with tens down 1,5 to 61.2. The thirty year mortgage rate fell below 3% for the first time (2.98%) aiding the flow of urban dwellers to the suburbs. In eurodollars, back calendar spreads are grinding to new recent lows. Red/gold pack spread fell 1.75 bps to 40.25. Vol remains lethargic; new seller of 7k TYU 138/141 strangle at 18 (settled there). However, there was a notable new bottom fishing buyer of 7500 USU 180p at 1’49 covered 180-08 causing the straddle to settle at that same level, 3’50, up 6/64 on the day.
–The Fed’s balance sheet is back over $7 trillion, having started the year at an already substantial level of $4.17t. Stocks only go up because the Fed’s balance sheet only goes up. The message isn’t lost on the home builders. All above 200 day moving averages with some at or near all-time highs, Lennar (LEN) DR Horton (DHI) and LGI Homes (LGIH), the latter having tripled off the March low like a rocket. Get outta Dodge with a cheap mortgage and a new Ford Bronco. And you thought only the gun stocks were doing well… SWBI (Smith and Wesson) up over 4x from March low).
–One other small note, the short sterling curve looking suspiciously like the US Fed fund curve, with red sterling contracts trading 100 or slightly above and the front Sept’20/Sept’21 closing at a new low -12.5 yesterday.
In: Eurodollar Options
Low vol
July 16, 2020
–Once again, little movement in rates with tens up 1.3 to 62.7 bps. Euro$’s down 0.5 to 1.5 out to five years. Attached to this note is Five Year treasury vol. I marked FVU0 atm straddle at just 1.45 vol yesterday. That’s around the historically low level in late 2012, after Draghi’s “whatever it takes” line, but before Bernanke’s May 2013 taper tantrum. Unfortunately, it doesn’t seem like any tantrums are around the corner currently, except at the social level. On the other hand, it’s crazy to sell vol here. In the other direction was a new block buyer of 35k 2EZ 9950p for 4.5 covered 9967.5, 5d ref 9972.5 (4.25 synthetic). This put settled 3.75 vs 9974.0 in EDZ’22.
–Today’s news includes Retail Sales expected +5%, Philly Fed which had snapped back to 27.5 on its last release, which was higher than all readings in 2019, but expected to pull back to 20. Jobless Claims 1.250 million.
–China reported GDP +3.2% for Q2, however the Shanghai Comp fell 4.5% on profit taking after an explosive rally in the beginning of July. Looks sort of like TSLA, which would be at 1475 on a 4.5% pull back. In any case, US stock futures are also seeing early weakness.
–Wall St Journal headline notes ‘Surging Copper signals optimism on global growth’. From the March low to this month’s high (~212 to 294 in HGU0) copper has jumped nearly 40%. Lumber has doubled off the March low. Certainly it’s a bright spot, and infrastructure projects are sure to be instituted, but it’s a long way from cheering for organic growth. Interesting ZH article ‘Father of credit risk modeling’ has ominous warning over “insolvent” companies piling up debt. There’s not a lot of new info, as articles about zombie firms saved by central banks have been quite frequent. However, this piece does mention that a record $2.1 trillion bonds have been issued by global firms this year, about half from US companies. A lot depends on the Fed staying ultra-loose, which of course, several officials have promised in the past few days. A lot also depends on a new fiscal package.
https://www.zerohedge.com/markets/father-credit-risk-modeling-has-ominous-warning-over-insolvent-companies-piling-debt
In: Eurodollar Options
The fight is against downside risks. Period
July 15, 2020
–Both stocks and bonds rallied yesterday with tens down 2.4 to 61.4 bps. CPI higher than expected 0.6 with yoy Core 1.2% and NFIB was much stronger than expected at 100.6. However, Fed officials continue to focus on downside risks. For example, Bullard said the Fed will keep rates low for the foreseeable future and Kaplan noted more aid to states and municipalities will be needed. Brainard fully outlined the Fed’s mindset in a speech yesterday which further boosted stocks. She noted that downside risks predominate, and echoed that theme at least four times. No mention of a risk that asset prices get over their skis. No mention of David Portnoy. Just more accommodation until we are sure covid risks have vanished.
Excerpts:
“With a dense fog of COVID-related uncertainty shrouding the outlook, the recovery likely will face headwinds for some time, calling for a sustained commitment to accommodation, along with additional fiscal support.”
“Given the downside risks to the outlook, there may come a time when it is helpful to reinforce the credibility of forward guidance and lessen the burden on the balance sheet with the addition of targets on the short-to-medium end of the yield curve.
“The Federal Reserve remains actively committed to supporting the flow of credit to households and businesses and providing a backstop if downside risks materialize. “
“…policy should seek to achieve employment outcomes with the kind of breadth and depth that were only achieved late in the previous recovery.”
–Stocks continue to move higher on a promising COVID test. UK issued three year notes at a negative yield. AAPL won its tax case with an EU Court and has avoided having to pay $14.6 billion to Ireland. Dollar index is currently testing the low in June and is closing in on the March low (current 9595 with March low 9465). EUR high in March was 1.1495 and is now 1.1431.
–Industrial Production expected 4.3%. Beige book in the afternoon.
In: Eurodollar Options
