July 14. A stronger dollar and weaker oil
–Yields edged slightly higher on the back of the Greek deal with tens up 1 to 242.5. EUR closed on its low near 110. It looks like what Germany “won” will be a lower currency to keep its export machine humming, with Draghi having to continue the ECB’s un-austere policies to counter fiscal headwinds. Stocks rallied and VIX was crushed, having traded 20 last week and closing yesterday at just 13.9.
–A deal was also inked with Iran, pushing oil prices lower. Canada dollar making a new low this morning. Treasuries trade like a bear market, but with lower oil and a stronger dollar leading to cheaper imports, we’re not likely to see much of a boost in inflation. Perhaps wage growth will be the catalyst due to tighter labor markets. But if there’s another soft job report, a hike this year will go out the window, despite what Yellen said Friday and what she might say tomorrow.
–Retail sales today expected +0.3, and +0.4 ex-autos and gas. Last month the retail data was released on June 11 and was stronger than expected +1.2%. On that day fives and tens made new lows on the move but then closed higher with outside range days. A modest rally ensued for the next couple of weeks.
–Good buying the past few days in Short Sept midcurve puts (EDU6 underlying). yesterday 30k 0EU 9875p were bought for 7.5 (new position) when futures were 9884.5. The market continues to trade bearishly, but from the standpoint of Fed policy, one has to be comfortable with the idea of fed funds being at a perceived target of 1% or higher to make these puts play. However, for the sake of portfolio protection, put buys still make sense.
WEEKLY SUMMARY: China Greece and Oil
THEMES:
- SPX closed just below 200 day ma both Wed and Thursday, but bounced on the deal Friday. SHCOMP also hit its 200 day and rebounded.
- Fixed income closes on lows of the week; curve steepens
- Crude oil indicates global economic fragility
- Yellen signals rate hike but doesn’t mention China
- Back month vol bid
——————————————————————————————————————————-
Week to week changes in selected prices (Thursday July 2 to Friday July 10):
| 7/2/2015 | 7/10/2015 | chg | |
| UST 2Y | 63.3 | 64.9 | 1.6 |
| UST 5Y | 164.3 | 167.3 | 3.0 |
| UST 10Y | 239.0 | 241.4 | 2.4 |
| UST 30Y | 319.2 | 320.7 | 1.5 |
| *new 2 & 5 yr | |||
| GERM 2Y | -24.8 | -21.0 | 3.8 |
| GERM 10Y | 84.5 | 89.8 | 5.3 |
| EURO$ Z5/Z6 | 84.0 | 83.5 | -0.5 |
| EURO$ Z6/Z7 | 69.0 | 69.0 | 0.0 |
| EUR | 110.84 | 111.56 | 0.72 |
| CRUDE (1st cont) | 56.88 | 52.74 | -4.14 |
| SPX | 2076.78 | 2076.62 | -0.16 |
| VIX | 16.79 | 16.87 | 0.08 |
You can see that there was little change in many prices above, but the week was quite volatile, finishing with a solid rally in stocks on the supposed Greek deal. Note that on Thursday, AAPL (with its $700 billion market cap, had nearly touched its 200 day moving average at 119, but bounced to close at 123.28 on Friday. SPX index had also traded slightly through the 200 day, but closed near the top of the week’s range. The VIX traded as high as 20 Thursday, but pulled back to just under 17 to close out the week. Interestingly the Shanghai Composite is another index that traded to its 200 day ma on Thursday, just below 3500, but it too bounced (with overt gov’t interference), and closed at 3877.
Fixed income in the US closed at the highest yields of the week. Yellen’s speech on Friday was generally dovish in terms of her discussion of labor markets and productivity however she did say, “Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” The curve is near the steepest levels of the year, with 2/10 over 176 bps and 5/30 over 153. The 2/10 spread is just over the 38% retrace from the high of 262 at the end of 2013 to the low of 119 in January of this year.
The big change in the above price table is in energy, with August Crude Oil down over $4/bbl on the week, a decline of 7%, and down 11% since the end of June. This is probably the biggest tell for the state of the global economy.
While Yellen mentioned Greece “…the situation in Greece remains unresolved”, she did not mention China at all. Clearly, the issue with Greece is one of contagion and the existential threat to the euro. I would just mention a couple of data points regarding Greece. In 2007-09, GDP was over $300 billion, it’s now just $240. In 2007-09 debt to GDP was just a bit over 100%, now it’s 175%. Clearly, there’s a need for structural reforms; gov’t spending as a % of GDP is 49%. (However, it’s 57% in France and 51% in Italy). But I would say that what is needed is growth, and higher taxes probably are not the optimum solution.
As of this writing Sunday morning, the situation is still “unresolved”, with Schaeuble calling for a five year “time-out”. The repeated theme is one of distrust and credibility. Now the Greeks have sacrificed Varoufakis, and backtracked on the referendum vote and it’s the Germans saying nein. It’s over.
So the situation in Greece and the destruction of its banking sector will again roil markets this week, though the absolute amounts of proposed new lending aren’t particularly huge, €50-75 billion. What is interesting about Yellen’s speech Friday was that she didn’t mention China, where stocks had plunged some 30% off the highs in a month, a change of $3 trillion. In terms of risks to the economic outlook of the US, I would think China is one of the big factors, and the decline in oil, along with persistent weakness in copper and iron ore are probably indicative of underlying fragility. Perhaps Yellen will touch upon China in her congressional testimony this week.
While overall vol has been fairly subdued, I would note a consistent bid in long dated green straddles. For example, EDM18 9775 straddle closed Friday at 127.75, having traded during the day at 128.5. On Monday that same straddle settled 122.75. The pit community is trying to defend the short, but there is underlying demand. Probably worth noting with respect to FV and TY vol traders. In fact there was decent activity in October TY options Friday, notably a buyer of TYV 123/121.5 put spreads from 19 to 21 (ref 126-00/01 in TYU; settled 21 vs 125-235).
July 9. Where do I go for safety?
–Weakness in Asian stocks spilled over into the US yesterday, as troubles in Greece, continued sell off in Shanghai, and renewed concerns about energy markets were simply too much for US stocks to fight against. This morning there’s been a rebound, as China banned shareholders with large stakes from selling. No gentle nudging into risky assets with expansive monetary policy, like the rest of the world does it. Just an order to STOP SELLING. There. Problem solved.
–Additionally, with yesterday’s computer “glitches” grounding flights at United Airlines, halting trade at the NYSE, and (gasp) taking down the WSJ website, there were conspiracy theories floating around that hackers are coordinating attacks on US infrastructure.
–In any event, there was flight to quality buying, most notably a buyer of about 30k TYQ 128c for 25/64’s as TYU was trading around 127-06. The 128 strike represents a yield of around 212. The ten year (9yr and 10 month auctioned yesterday) closed at 221.5, a bit thru the 222.5 auction yield. 30’s today. New lows once again in near euro$ calendar spreads, with the peak on-year calendar, EDH6/EDH7 at just 78 bps, down 1.5 yesterday and 7 from last Thursday.
–Today’s news includes Jobless Claims, expected 276k. Also there are several Fed speakers including Esther George in the afternoon on monetary policy; yesterday Williams said the China market meltdown isn’t a huge issue for the US. However, the Fed has to be wary of global financial turbulence…certain to be a topic at Yellen’s speech in Cleveland on Friday. In fact, from February’s semi-annual testimony there was this paragraph warning of foreign challenges:
Foreign economic developments, however, could pose risks to the outlook for U.S. economic growth. Although the pace of growth abroad appears to have stepped up slightly in the second half of last year, foreign economies are confronting a number of challenges that could restrain economic activity. In China, economic growth could slow more than anticipated as policymakers address financial vulnerabilities and manage the desired transition to less reliance on exports and investment as sources of growth. In the euro area, recovery remains slow, and inflation has fallen to very low levels; although highly accommodative monetary policy should help boost economic growth and inflation there, downside risks to economic activity in the region remain. The uncertainty surrounding the foreign outlook, however, does not exclusively reflect downside risks. We could see economic activity respond to the policy stimulus now being provided by foreign central banks more strongly than we currently anticipate, and the recent decline in world oil prices could boost overall global economic growth more than we expect.
July 8. Shanghaied
–China down another 6% this morning, Nikkei down 3%. Remember when we thought Greece was the big problem?
–Though treasury futures closed well off their highs yesterday, yields were still lower on the day, with tens down 4.7 bps to 224, and 30 yr bonds -5.6 to 302.7. Ten year auction today, followed by 30’s tomorrow. FOMC minutes this afternoon, though given international developments, value of the minutes has been diminished. To zero. The Fed’s emphasis on the importance of its communication to guide global markets rings a bit hollow these days.
–New lows in near euro$ calendar spreads. January Fed Funds settled 99.695, just 17.5 bps below near contracts…odds of just 70% for only one hike by the end of the year.
–A couple of quotes from Reuters (China shares): “I’ve never seen this kind of slump before. I don’t think anyone has. Liquidity is totally depleted,” said Du Changchun, an analyst at Northeast Securities.
“Originally, many wanted to hold blue chips. But since so many small caps are suspended from trading, the only way to reduce risk exposure is to sell blue chips.”
–When things really start unraveling, that’s how it works: You sell what you CAN, not what you WANT to sell. Shanghai shares suspended? Then raise some money in Hong Kong (HSI down 5.8%). How’s the commodity financing play working out? Iron ore made a new low for the year yesterday. As did silver. Ditto copper. Crude is down about 15% in the past 11 sessions. By the way Du (short for the Dude, or Duderino…) we HAVE seen this kind of slump before. In 2008. And many times, in many markets before this.
–Back to Greece: “The discussion took place in a positive climate,” [Tsipras] said. “The process will be extremely fast. It starts in the coming hours, with the aim to conclude by the end of the week at the latest.” I love this guy…we’re going to shoot for the end of the week… In the same Reuters piece, European Council President Tusk said this: “The stark reality is that we have only five days left … Until now I have avoided talking about deadlines, but tonight I have to say loud and clear that the final deadline ends this week.” When is a deadline not a deadline? “Iran and major powers gave themselves at least until Friday to negotiate an agreement on the Iranian nuclear program, but a source from one of the powers said on Tuesday they had to wrap up in the next 48 hours.”
–Finally, just to show that there still is karmic justice in the world I saw this headline: “Man who was struck and killed by lightning ‘was carrying selfie stick.’
Alex Manzara
July 7. Eurodollar curve continues to extend the timing, and compress the trajectory of rate hikes
–It’s a “risk-off” environment due to Greece and China. I know it, you know it. The treasury market knows it, with the ten year yield sinking below 230. Crude oil knows it, having plunged over $4 bbl yesterday. As do junk bond etfs, copper, iron ore, the Mexican peso, etc. The only market that doesn’t seem to know it is US equities, up again this morning. But what US stocks appear to find comfort in is the idea that central bank liquidity measures are likely to continue. Regardless of tomorrow’s minutes, Yellen’s speech on Friday is almost certain to be dovish, given the global landscape.
–US tens closed 228.7, down approximately 5 bps from Friday (using futures as a proxy) and 10 bps from Thursday. Crude was down 4.15 late to 52.78 (down 10% in one week), with the March lows of the August contract having been 48.71. Copper has taken a tumble in the last couple of days as well, having been as high as 2.93 in May, now around 2.50, a decline of 15% in 2 months (and closing in on the year’s low set in Feb). Near eurodollar calendar spreads made new lows, with the peak one-year spread, which has now shifted to March’16/March’17, falling 5 bps from Thursday’s settle to just 80 bps. While near spreads collapse, deferred spreads are holding ground, leading to a decline in butterflies. For example, ED Sept’15/Sept’16/Sept’17 closed barely positive at just 0.5, having been around 13.0 a couple of weeks ago. January 2016 Fed funds closed at 99.675, a spread of just 19 bps to the front July contract, indicating that odds of just one 25 bp hike this year continue to diminish.
–Greek negotiations are continuing, though Juncker said a deal will not be reached today. China’s Shanghai Comp again closed lower despite gov’t attempts to prop it up. In the US, news includes International Trade, expected $42.7b deficit, JOLTS and the three year auction, to be followed by 10’s and 30’s Wed and Thursday.
July 3. Risk on?
–Weaker than expected payroll report sent yields lower, with tens falling 2.6 bps to 239. the curve steepened, with the five year note yield -5.7 to 164.3, but the 30 year bond down only a fraction of a bp from 319.5 to 319.2. Thus, 5/30 yield spread made a new high of 155 as the market pares back odds of Fed hikes this year. Red/gold euro$ pack spread gained 2.25 bps to 151.5.
–There was a new late buyer of 25k TYQ 130c for 3 and 4 prior to this weekend’s vote in Greece. ZeroHedge cites the IMF as calling the debt dynamics “unsustainable”. That has been the question all along, when are bad debts finally recognized for what they are, with creditor losses? And, how much should current citizens have to pay for the sins of previous politicians? The City of Chicago has just introduced a 9% tax on streaming web services like Netflix, which I’m sure will go a long way towards righting the ship and pulling it out of junk bond status…
–There is a general sentiment that a “yes” vote in Greece will lead to risk-on, though I don’t think that’s the case. The ability to kick the can down the road is reaching the end line with the question of sustainability coming into sharper focus. And not just in Europe, but in Puerto Rico, Illinois and even in the corporate world, as debt downgrades increase. Another interesting post on ZH notes that in hi-yield, “…the upgrade/downgrade ratio has tumbled to its lowest since the crisis.”
http://www.zerohedge.com/news/2015-07-02/last-time-happened-credit-bernanke-unleashed-qe3
–China’s stocks continue to plunge, now about 30% off the high set last month, but still up on the year. Crude oil also trading lower, now below $57/bbl, the lowest in 2 1/2 months.
July 2. Employment data today; risk skewed to higher rates at the long end of the curve
–A substantial amount of the Greek referendum and bank holiday rally in treasuries had evaporated by late Wednesday. The ten year yield was up 8 bps to 241.6 yesterday, right where it was last Thursday (the high Friday was just under 249). Implied vol pulled back as interest rate futures sold off. The market now believes that some sort of deal will be accomplished to keep Greece in the euro, though it’s likely to be a messy process.
–An MNI article by Steve Beckner got some play yesterday, in which St Louis Fed’s Bullard said a flight to quality due to Greece could push US rates lower… “so I see the US as being the likely beneficiary of the situation in Greece. It’s not that I take joy in that, but that is the way the global macroeconomy tends to work. And so to the extent we have interest rates lower than they would otherwise be, that would be good for the US economy.” Huh??
–ADP was 237k and NFP today expected 233k with Avg Hourly Earnings expected +0.2. A strong number should absolutely annihilate the long end of the US curve, while this week’s highs should cap even a weak release. Targets in tens are around the low in TYU from June 11, 124-145. That should equate to around 255 yield. In the 30 yr bond the 0.618 retracement from the 2014 high yield to 2015 low is 330, also around 10 bps higher than the cash yield floor close of 319.5. USU should target the area of 146-16 around the 330 yield.
–Interesting trade late yesterday was purchase of a 100 call strip (the zero percent strike), the first 16 quarterlies. A small amount traded at 12, then 13.5, 15 and primarily at 18, in total 1900 contracts of each call. This strip goes out 4 years, the last call being June of 2019. Risk cap trade…
July 1. Worry beads
–Not much change in interest rate futures as Greece missed the IMF payment. Various news headlines were flying around throughout the day about possible deals, making it seem as if even the weekend referendum isn’t etched in stone.
–On Monday, some of the financials were hit, for example DB fell from around 32 to 30, and JPM, GS both gapped lower. However, fears of financial contagion appear to be fairly muted; there’s still plenty of faith in “the authorities” that it will all turn out ok. What is sort of interesting is the parallel financial crisis going on with Puerto Rico, where the Governor is saying there’s not enough money to pay creditors. Stocks like MBIA and AMBAC (bond insurers) were crushed, reminiscent of the subprime mortgage crisis, with MBI dropping from 9 to 6 in four sessions, and AMBAC plunging from 24 to 16.64 in the same time frame. Now THAT’S concern, a move of 1/3 in a few days… In other financial stress news, Chicago is barely squeaking out a payment of $634 million to the Chicago Public Schools pension system, leading to what’s known in the CPS as ostierity.
–Strong rally in grains due to the crop report (where in the hell is Beeks?). Corn has had a moonshot 20% rally from 3.65 to 4.35 in a couple of weeks. Enough to make you stand up and take notice.
–Bill Gross’ Janus missive was out, another voice in the chorus of warnings bemoaning lack of liquidity. “While private equity and hedge funds have built-in “gates” to prevent an overnight exit, mutual funds and ETFs do not.” It’s fairly clear that liquidity has been lost in the thirty year bond future. Late in the day yesterday there was volume of 293k vs 1.632m in tens. Size in the bonds is often only 100 a side. When I was first in the bond room at the CBOT we used to routinely say that size was at least 100 up, and that’s when the notional coupon was 8% and the price was well below par…
–Today’s news includes ADP expected 220k, Mfg ISM expected 53.2 from 52.8 and Construction spending which has been accelerating for the past several months.
June 30. Just one hike…
–Even as the Euro rebounded to close up on the day at 112.41, from a low of 109.55, US stocks sold off. The curve bull flattened, with the ten year yield down 14.4 bps at 233, while 2’s fell 7.5 to 63.3 and 5’s down 13 to 162.3. There was a heavy buyer of 30k FVU 117.75 puts (11.5s, 18 delta, adding). There was also an aggressive seller on blocks of 65k EDU5 at 9961.5 to 9962.0; open interest increased by 31k. EDU5/EDZ5 3 month calendar closed at a new low of just 16.5 bps.
–I suppose if Greeks vote to accept the program, (saving deposits but further cutting pensions) there will be a new gov’t. I’m not so sure that’s bullish for the euro. However, it would probably keep the Fed on track to tighten in September. Uncertainty about the amount of Fed action has increased, with barely one hike priced for the rest of the year. For example, January 2016, Fed Funds settled 9965.5, just 21 bps higher than the current July contract. And EDZ5 settled 9946.5, essentially 1/4% higher in yield than the June eurodollar contract that expired earlier this month.
–From the floor open, there was some selling of TY vol, the Aug 126^ for example, was 148/150 before the floor open at 126-05, was immediately sold down to 143 but came back to close 149/50 at the end of the day, right where it had opened. New high recent closes in treasury vol. ATM USU straddle settled 5’62 on Friday but 6’26 yesterday (of course, the contract was up 3-11). VIX had a nice push higher to 18.85 (+4.83 on the day) but it’s worth noting that the October swoon took the VIX on a spike high to over 30, and the December re-test saw a brief blip to 25. Both the Dow Transports and Composite closed at their lowest levels since last October, though there’s a good deal of distance to the actual October lows. For example, COMP closed at 6092, vs Oct interday spike low of 5667. The SPX (-2.1%) is nowhere near the year’s low at 1980, however it is right at the 200d ma at 2053, and bouncing this morning.
June 28. Complacency meets reality
COMPLACENCY MEETS REALITY
Themes
- Greece Plan B
- Bear Steepening last week, bull flattener this week?
- China cuts
- Employment data (payrolls this week, FOMC minutes next, HH July 15)
- Everything hinges on theme #1
—————————————————————————————————————————————–
Week to week changes in selected prices:
| 6/19/2015 | 6/26/2015 | chg | |
| UST 2Y | 61.7 | 70.8 | 9.1 |
| UST 5Y | 157.4 | 175.3 | 17.9 |
| UST 10Y | 226.5 | 247.4 | 20.9 |
| UST 30Y | 305.7 | 324.7 | 19.0 |
| *new 2 & 5 yr | |||
| GERM 2Y | -20.4 | -19.1 | 1.3 |
| GERM 10Y | 75.2 | 92.2 | 17.0 |
| EURO$ Z5/Z6 | 81.0 | 88.0 | 7.0 |
| EURO$ Z6/Z7 | 63.5 | 71.5 | 8.0 |
| EUR | 113.52 | 111.67 | -1.85 |
| CRUDE (1st cont) | 59.61 | 59.63 | 0.02 |
| SPX | 2109.99 | 2101.49 | -8.50 |
| VIX | 13.96 | 14.02 | 0.06 |
Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.
— Pericles
It appears as if the situation in Greece was downgraded to default on Saturday, as Tsipras called for a surprise referendum to be put to voters, and the other 18 members of the Eurozone unanimously rejected extending aid beyond Tuesday’s IMF payment deadline.
From Reuters on Sunday: “The European Central Bank can no longer give emergency liquidity to Greek banks due to the breakdown of talks between Athens and its creditors and doubts over Greece remaining in the euro, former ECB board member Lorenzo Bini Smaghi said in remarks published on Sunday.”
It seems likely there will be a bank holiday and capital controls imposed.
From El-Erian: “As such, investors would be well advised to wait for further technical shakeouts before committing significant resources.” Huh? Don’t buy the dip?!?!
Guideposts: March 27, 2013 Cyprus imposes capital controls. January 15, 2015 the SNB drops the EUR peg.
In terms of market action, stocks should be lower and were already on somewhat shaky ground technically, with both DJ Transports and Composites essentially at new lows for the year last week. (Chinese cut could spark a rebound in shares there, more on that below). The Eurodollar market will certainly lessen the odds for near term rate hikes, and will probably take the chance of a September meeting down to around 1 in 3. However, given the relentless bear steepening last week, I would think that we’ll see flattening initially this week, and if that does occur then it’s probably tactically best to look for pull backs to put steepeners on. 2/10 jumped over 10 bps last week to 176.6. I wouldn’t be surprised if we revisit the previous week’s close around 165.
EURUSD was 111.67 Friday. Low from a month ago was 108.73 and from March just below 105. The ECB is likely to become the buyer of last resort for sovereign debt. [as of Thursday afternoon 109.85 in Asia according to Reuters]
LAST WEEK…
US rates rose pretty much throughout the week with relentless bear steepening. On the previous Friday (June 19), there was a flight to quality bid on Greek worries, but this week it was, ironically, the opposite, with the 30 yr bond closing at a new recent high yield of nearly 3.25% (up 19 bps on the week). The complacency engendered by an endless stream of “last second deals” is now shaken by the reality of unsustainability. The dollar strengthened, and the German bund yield also rose, closing up 17 bps on the week at 92. To give a sense of the steepening, the week to week changes in Euro$ packs were as follow: Reds (2nd year) -11 bps, Greens (3rd) -18, Blues (4th) -23 and Golds (5th) -26.
The domestic calendar this month has several important events: Employment on Thursday the 2nd, FOMC minutes the next week on the 8th and Yellen’s semi-annual congressional testimony on the 15th. There were also warnings of terrorist activity around the July 4th holiday. While we didn’t see a flight to quality bid in terms of lower treasury yields, vol for the ten year straddle expiring on Thursday was pretty well juiced by the end of the day Friday. Just before the electronic close at 3:55 CST, the 125^ was 1’08/1’10, around 9% if using 6 days (thanks ML). As a comparison, the TYN atm straddle that expired Friday was 0’55/0’56 on the previous Friday (with a week to go). So the employment straddle is 30% more premium, (which was clearly justified by Greece).
In terms of monetary policy, The Fed has become fixated on its communication to the markets, hewing to the message (this week it was Governor Powell) that it’s the path of rate increases, not the start date that matters. Powell also said he wasn’t concerned higher volatility will harm economy [I guess we’ll see], and that the Fed and markets are getting into closer alignment. It’s as if the Fed thinks its initial 25 bp hike in the funds target is the biggest shock the global markets could possibly experience. NEWSFLASH: Greece is defaulting, Chinese stocks have fallen 19% from the high and the US ten year yield was up nearly ¼% last WEEK. The US domestic data now takes a back seat to the interconnected financial dislocations in Europe.
One last note about China’s easing and the Shanghai Composite. In late 2005 SHCOM was at 1100. In two years it had rallied to 6100 (up 5.5x), and then took another year to collapse down to 1660. In the middle of 2014 the index was 2000. It has taken about one year to get to this cycle high of 5200 (an increase of 2.6x). If it was to have the same magnitude of the move in 2006-7 then it would run to 11000. From the high so far this year it’s down 19%. Note that on the big rally in 2005, there was a pull back of 23% in June 2007, and then a move to new highs. The US market hasn’t really moved much in sympathy with China, so I don’t think China’s ease can help global stocks at this point.
The Fed will be fearful of further roiling international markets with hawkish rhetoric (let alone an actual hike), while the ECB will have to pull out all stops in terms of financial largesse. Should eventually lead to further steepness in the back end.
