Nov 3. US/Russia election accusations

–Vol crushed across the curve yesterday as Powell was named Fed Chair in front of this morning’s post-hurricane jobs report.  NFP expected 310k with a rate of 4.2% and Avg Hourly Earnings +2.7% yoy.

–Almost all eurodollar straddles lost 1-2 bps.  For example, EDH8 9837^, M8 9825^, U8 9812^ strip settled 63.5 on Wednesday, but traded down to 60 yesterday and settled 60.5.  EDU8 9812 straddle was 29 on Wed and settled 27.5.  USZ (Dec bond) vol closed sub-7% at 6.9.  Premium of just over 2 points on atm 153.5^ represents around 10.5 bps.  Treasury curve sank to a new low with both 2/10 and 5/30 at the lowest levels since 2007.  I marked 2/10 at 73., down 2 on the day, and 5/30 at 82.9, down 1, but it was printing 82.5 late.

–A couple of straddle indications: one week ago on 25-Oct, EDH/M/U straddle strip was 68.0 (60.5s).  EDH9 9800^ was 44.5 settled 41.0.  0EU 9787.5^ was 46.5, settled 42.0.

–BOE historically raised rates, but the gilt yield unceremoniously fell 10 bps to 1.26%

–New record high in AAPL around $900 billion, or put another way, about 5% of US GDP.

–Get ready for a new set of accusations regarding US/Russia election meddling.  The other way.  Elena Berkova, a porn star from Murmansk, is running against Putin.  Article in the Daily Mail.

Oct 31. Sell vol, sell curve. Wash, rinse, repeat

Oct 26. ECB today

–ECB today expected to shave purchases from €60 billion month to €30.  Here’s a link from el-Erian describing challenges:

https://www.bloomberg.com/view/articles/2017-10-26/what-to-expect-from-the-ecb-meeting

–Ten year yield rose 3.3 bps to 243.9.  Durables were strong yesterday with Core Capital Goods +0.7 vs expected +0.1.  Red/gold euro$ pack spread closed at a new recent high of 50.75 bps, +1.875 on the day, but up 13 bps from the low last Tuesday.  As yields have moved higher, implied vol has as well, with all contracts posting marginal new highs in implied for the month (TYZ 4.3%).  Open interest building as rates increase as well, for example TY open interest +63k yesterday.  Sentiment in the market has more clearly shifted to concern about the downside.

–Near euro$ calendars posted new highs, with EDZ7/EDZ8 +2.5 to 44.5.  EDZ8/EDZ9 +0.5 to new high of 24.0.  Also note that Dec’7/June’8 is 26.5, up 2.0 bps; it appears that the market is comfortable with a hike in December (now priced at 85% by Jan Fed Funds) and certainty of another in the first half.  The spread of Feb/April FF settled at 10.5 indicating less than 50/50 odds of a hike at the March meeting.

–Trump appears to have dismissed Yellen as Fed chair candidate: “In one way, I’d have to say, you’d like to make your own mark, which is maybe one of the things she’s got a little bit against her.”  On the other hand, Trump’s agenda is completely dependent on low financing rates.  Speaking of which, Illinois was able to sell $4.5b 10y bonds yesterday at 3.74%, even though the state’s Comptroller isn’t really even sure of the size of the backlog of unpaid bills (approx $16 billion according to a BBG article).  So it seems as if capital is still recklessly willing to chase yield.

Oct 25. Rates behaving badly

–Rate futures continue to press lower. Indications of downside fear are gently creeping in. Volume favors downticks, implied vol is firming as market moves lower, euro$ calendar spreads are edging higher. This morning, greens, blues and golds are at new lows (-3.5, -5, -5.5). Curve has been extremely flat so there’s some room to run in calendars. Yesterday, reds to deferred all made new highs. For example, red/green pack spread rose 1 bp to a new recent high of 19.25. However, it has been stuck between 14 and 18 for a month. Red/gold rose 2.5 to 48.875; it’s a new monthly high, but barely 10 bps off the low. EDZ18/EDZ19 spread has seen consistent buying which has been associated with new open interest, settled 23.5 yesterday, also a new recent high.

–There were a couple of large trades yesterday. Most notably a seller on exit of 150k 0EZ 9812/9800ps at 6.5 (6.0s ref 9807), which was rolled into new longs of 75k each: EDM8 9812/9787ps for 5.0 (5.25s ref 9824.5) and EDU8 9800/9775ps for 5.5 (5.75s ref 9816.0). Also, decent two-way trade on EDZ7 9850 straddle at 6.5.

–Late report that Taylor had won a Senate ‘straw poll’ for Fed chief. Caused some selling in fixed income, but elicited little reaction in stocks. I doubt Taylor becomes Fed chair, and maybe that’s also the collective wisdom of stock index traders, but if the Fed DOES shift to a more hawkish central banker, then I would bet Dow 22000 is a lot more likely than 24000.

–Durables and New Home sales today. Five year note auction.

Oct 24. The mighty have fallen

Oct 23. Did the FED crash the neutral rate?

–Nikkei continues a powerful rally as Abe swept Japanese elections.  Just since the beginning of September the Nikkei is up around 12%!  Over the same time frame US rates have generally increased.  Not sure if there’s causation, but I certainly would not stand in the way of Japanese stocks.

–Yellen gave a swan song speech on Friday night, reviewing the Fed’s response to the crisis.  From the speech:

“….our unconventional policy tools will likely be needed again should some future economic downturn drive short-term interest rates back to their effective lower bound. Indeed, empirical analysis suggests that the neutral federal funds rate…is much lower than in previous decades. Consequently, the probability that short-term interest rates may need to be reduced to their effective lower bound at some point is uncomfortably high, even in the absence of a major financial and economic crisis.”

Yellen discusses several policy tools, one of them being forward guidance.  In some ways, the above snippet acts on its own as forward guidance.  What Yellen never addresses, and I think it’s a key question, is this: Were the Fed’s unconventional policy tools responsible to some degree for LOWERING the neutral rate???

–The last several speeches touch upon the idea of creating policy room for the next downturn.  It’s a fairly common underlying theme, and the seed that is planted (with all the subtlety of a Trump tweet), is that the Fed MAY HAVE TO BUY BONDS AND OTHER SECURITIES AGAIN.

–Friday saw rates close at the high of the week, with tens up 5.6 bps to 237.9.  The curve bounced back from lows of the year made in the early part of the week, with 2/10 closing above 80 bps, +3.1 on the day.  Heavy selling in EDZ7 9850 straddle which settled at 6.5 with 8 weeks to go!  Supply of 2,5 and 7 year notes starting Tuesday.

Oct 22. The Crash

I couldn’t help going back and looking back at my old original Oct 20, 1987 newspapers, from the day after Black Monday. Thirty years have now gone by, and I always sort of thought that the image of BLR looking up at the boards and holding his head in grim disbelief captured the essence of the day (although the beauty of the trading floor is that those emotions might be crystallized as a snapshot in time on almost any trading day).  The other headlines also hold nostalgic interest.  The US, like now, was entangled with Iran, having bombarded two armed Iranian oil platforms.  Iran, in an echo of N Korea, vowed a “crushing response” to the Reagan administration.  There was also news out of Japan, as Prime Minister Nakasone backed Noboru Takeshita  as his successor.  One of the other candidates was Shintaro Abe, father of the current leader of Japan, Shinzo Abe, whose Liberal Democratic Party just crushed opposition parties in Sunday’s election.  Plus ça change, plus c’est la même chose.

Actually though, I now prefer the picture of Pedro Sanchez, (the caption says ‘Clerk Pedro Sanchez expresses the prevailing attitude on the CME’).  Sanchez, holding his tie up over his head, is giving the universal floor symbol for being ‘hung’ on a trade.  And from his face, it looks like he’s saying “We’re hung” to whoever he is gesturing to.  Meaning, we haven’t executed the trade which we owe to the customer.  And in 1987, that put some people out of business.

There was a lot of emotion on the floor.  There was volatility.  There was action.

The markets don’t seem to exhibit the same sort of dynamism that prevailed going into the end of the last century!   The shift to ‘Passive Investing’ says it all.  However, we’re beginning to see glimmers of volatility in various markets.  Bitcoin is on a parabolic tear, soaring over $6000.  The Nikkei has also had a strong rally, to levels not seen since the 1990’s (Closed at 21458). US equity indexes are at new highs. The US two year note made a new high yield of 157.6, and the ten year is testing resistance at 240/242, with a close Friday of 238.

This week we’re likely to get an announcement naming the next Chairman of the Federal Reserve, and on Thursday, the anxiously awaited ECB meeting takes place.  We’ll just have to see how today’s crop of emotionally charged traders digests the new information:

In the week just passed, the curve made new lows early, with 2/10 testing 75 bps and the red/gold euro$ pack spread closing just below 38 on Tuesday.  However, there was a solid bounce going into Friday’s close, with 2/10 ending at 80.3 and red/gold at 45.875.  Although there were reports that Trump was favorably impressed by Taylor, a transition to a rules-based Fed, while perhaps providing more stability over the long term, is certainly too much of a constraint for Trump, who seems (only on occasion, mind you) to operate outside of shackled boundaries.  I’ll place my wager on Powell as the new Fed Chair. While Taylor or Warsh might be perceived as ‘tight’ policy advocates, Powell is seen as status quo.  A tight Fed would slow the economy and prevent long rates from moving higher.  With Powell at the helm, there won’t be as much resistance for longer rates to rise.

In Europe, ideals of political unity seem to be fraying.  Aside from Catalonia, there is a new leader in Austria and a new Czech prime minister.  In Italy, Lombardy and Veneto are holding referendums for greater autonomy.  The Euro is tracing out a possible head and shoulders top; a close below 1.1650 should target the area of 1.1275 to 1.13. (Chart below).

The biggest event of the week will probably be the ECB meeting.  Treasury supply on Tuesday, Wednesday and Thursday in the form of 2, 5 and 7 year notes.

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Oct 20. The Cubs bats are silent

–The weaker opening in stocks reversed Thursday and SP closed almost unchanged.  Curve wasn’t changed all that much at the futures close; reds were the strongest thing on the board +2.25, tapering down to golds at +1.0.  However, late in the day it was reported that Trump was leaning toward Powell as Fed Chair and tens were immediately bought from 12506 up to 12.  Late in the day reds were +5, greens +4.25, blues +3.25 and golds +2.0.

–The curve now seems to be finding buyers in either price direction as steepeners are covered.  One other small note is that red/green/blue pack butterfly closed +4 bps, highest I can recall recently.  (Red/green close 16.5 and green/blue 12.375).

Oct 18. New lows curve

–Curve again pressed to new lows, with 2/10 just above 75 bps (-1.5 on the day) and 5/30 at 85 bps (-2.50). Red/gold euro$ pack spread also at a new low, now just under 38 bps. These levels are all the lowest they’ve been since 2007. An expected Fed hike in December will bring the upper end of the FF target to 1.5% with a Fed effective of 1.41%, but the curve is tracing out a similar – though less aggressive- path as occurred during the hiking cycle of 2004 to 2006, when the Fed tightened by 1/4% at every meeting, ultimately taking the funds rate to 5.25%. Recall that particular cycle BEGAN with the FF target at 1%.

–Once again there was heavy buying of 0EZ 9787.5p for 2.0, ref 9807 in EDZ8. Over 125k bought; open interest up another 65k. This morning EDZ8 is printing a new low of 9803.5. 0EZ 9812/9800/9787p fly settled 3.0, with the 1×2 at 0.75 and 9787p 2.25. There was additional put buying further out the curve, for example, for 2EZ 9750p and 3EZ 9750p bought in size over 10k each (1.5s ref 9787.5 in EDZ9, and 3.0s ref 9777.0 in EDZ0). Red euro$ straddles rose 1-1.5 bps as the downside trend in prices continues. However, treasury vol remains pinned to recent lows; I marked USZ vol at just 7.0%. USD is firmer.

–News today includes housing starts expected 1175k and the Fed’s Beige Book summary in the afternoon.

Oct 17. The Taylor Put

-The short end of the market traded heavy throughout the day on Monday, with early weakness spurred by stronger than expected Empire State data. Put buyers were active; early buyer of 50k EDZ7 9837p for 0.25. A later example was +10k 2EH 9762.5p for 6.5 ref 9789.5, and then to top it off, a buyer of 125k 0EZ 9785.5p for 2.0 (ref 9807), as it was reported that Trump was favorably impressed by an interview with Taylor as a Fed Chair candidate. (Today Trump is reportedly meeting with Yellen). As mentioned during the day, EDZ8 has the most open interest of any contract aside from EDZ7, with a gain of 47k positions yesterday and total OI of 1.65 million.

–Reds were the weakest part of the curve, closing down 6.625 bps. On the euro$ curve, near spreads jumped to new highs, with the peak one-year calendar, EDZ7/EDZ8, up 5 on the day to 43.0. Dec/March rose 1.5 to close at a new high of 14.5. Further back, all measure of the curve plunged to new lows for the year. For example, red/gold pack spread closed at just 38 bps. 2/10 treasury spread at 76.7, (down 1.8 bps) and 5/30 closed 86.7, down 4 bps. Although industrial commodities were strong, with copper surging to a new high and oil holding on to the morning’s gains, the idea of an inflation premium is evaporating.

–There’s a function on Bloomberg, TAYL, that allows for an estimate of where the Taylor Rule would target Fed Funds. Currently it’s 3.75% as opposed to the upper end of the target currently, which is 1.25%. So while the old “Greenspan put” suggested that the Fed’s response to equity market weakness was the equivalent of massive put selling, the Taylor put is more straightforward: BUY PUTS ON THE SHORT END.

–Today’s news includes Industrial Production expected +0.2 with Capacity at 76.2.

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.

  The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.