Oct 28. Oxi day
–High gamma straddles hit as ECB stress test results lacked drama. TYZ 127 straddle settled 1’40 on Friday and 1’31 yesterday. USZ 142 straddle from 2’60 to 2’42. Green Nov 9825^ from 22.0 to 20.0. However longer dated midcurve straddles maintained a bid. For example there was a new buyer of 2k Green Sept 9775 straddle for 76.5, unchanged from Friday settle, and the last two blue straddles actually closed higher on the day. Yields were marginally lower across the curve, down 1-2 bps.
–Crude oil traded below $80/bbl early yesterday but rebounded to close at 81. Russian ruble makes a new low every day, which perhaps begins to raise fears of stability. Sweden’s Riksbank cut to zero. Vietnam also cut rates… slow global growth.
–Today’s news includes the recently volatile Durable Goods data, expected +0.9 and +0.5 ex trans. Consumer Confidence expected 86.8. Two year note auction today, followed by 5’s and 7’s. Treasuries are holding a fairly solid bid despite higher equity prices and the expected end of QE to be announced at tomorrow’s FOMC.
Oct 27. ECB stress tests over, Fed to announce culmination of taper. It’s all ok now
–Fairly quiet Friday, though implied vol was better bid in front of the weekend’s ECB stress test results. For example, Short (red) March 9900 straddle was sold down to 33 early in the week, but settled 34.5 Friday. Actual stress test results came out Sunday as advertised in leaks through the week, with 25 banks needing more capital, though apparently the aggregate is less than what had been feared. There is essentially no market reaction, with the euro edging higher this morning. Where there has been a market reaction is in Brazil, with the Bovespa index indicating a much lower open as Rousseff won re-election.
–The other feature Friday was a new recent high in red/gold euro$ pack spread at just under 186, having firmed from around 171 in the beginning of October. All one-year calendars remain below 100, with peak EDZ5/EDZ6 at 94.5 bps. However, green to blue spreads have been firming, for example, EDZ16/EDZ17 made a new high of 72.5. When the market was convinced of the onset of Fed hiking, red to green calendar spreads were well above 100 bps and green midcurve straddles were higher than blues on an absolute basis. Now, with prospects for actual rate increases further away in the hazy distance, blue midcurves are higher.
–While US stocks have had a strong rebound from the sell off a week and a half ago, some markets have failed to see any sort of meaningful bounce. For example, oil, and, by extension the GSCI index. EEM, the emerging markets index also appears poised to test the month’s lows.
–Wednesday brings the near certain announcement by the Fed ending this round of QE. Picture wile e coyote having overshot the turn and sped off the cliff, looking at the camera for a second of suspended animation…
Oct 23. Lesson for the day: Deliverable futures contracts are subject to supplies of the underlying
–Ten year treasury yield rose 2.5 bps to 223. Green and blue eurodollar packs both ended down 3 bps. Premium was under pressure for most of the day in interest rates. TYZ 127.5 straddle went from 145 at the open to 141 settle.
–News today includes Job Claims expected 285k. Chgo Fed Nat’l Activity Index, generally ignored by the market but the last reading was -0.21, the first negative print since Q1, and the 3mo moving average printed +0.07, the lowest since Q1. PMI expected 57.0 and Leading Indicators +0.6.
–The interesting trade of the day concerned June 2015 Bonds, USM. The contract traded 1639 contracts and settled up over 10 points on the day as the CME changed the basket eligible for delivery into the contract. From the CME: “After an extensive market assessment, CME Group is ready to announce which approach will be taken to address a five-year term-to-maturity gap in the delivery basket of U.S. Treasury Bond futures. (The gap was a result of the U.S. Treasury’s suspension of 30-year Treasury bond issuance between early 2001 – early 2006). ”
http://www.cmegroup.com/trading/interest-rates/us-tbond-futures-delivery-basket.html
“The first delivery month affected – the June 2015 delivery month — will be listed for trading on September 22, 2014, giving the marketplace ample time to make the necessary adjustments to trading systems.”
–I guarantee there are at least a few guys that didn’t feel as if they had “ample time” to make changes. Initial trades were 5 lots each at 141-23, 141-30, 142-15 and 144-00. The contract settled 151-15, and again, traded a total of 1639 contracts. So the first 5 lot cost someone about $50k, and the old strategy of averaging up didn’t quite work out this time.
–Another interesting note regards the passing of Nelson Bunker Hunt, who tried to corner the silver market in 1979/80, driving the price up to $50/oz. In early 1980 it collapsed to $10, wiping out much of the family fortune. With all the money printing and economic ups and downs since then, today silver is at $17, having recently tested the corner high around $50 in 2011.
–Side note, gold silver ratio is making a new recent high around 72 currently.
Oct 22. Earnings? Or the prospect of central bank support?
–There is a report this morning that 11 banks are about to fail ECB stress tests: http://www.businessinsider.com/report-11-banks-are-about-to-fail-europes-biggest-ever-stress-tests-2014-10#ixzz3GrdeGHhQ
Euro has weakened on this news, and stocks pulled back after yesterday’s scorching rally (Nasdaq gained 105.5, nearly 2.5% while SPX was up 2%).
–Ten year treasury yield rose 2.5 bps yesterday to 220.5. Front end of the curve was pretty much unchanged. Red/gold eurodollar pack spread rose 3 to just under 181. 5/30 treasury spread squeaked to a new recent high, +1.4 to 157.8.
–There was consistent premium buying yesterday, following the substantial retracement from last week’s explosion. Treasury straddles across the curve were up 0.2 to 0.3, with TYZ 127.5^ settling 1’46. Though not particularly large, one trade of interest appears to be an exit of long TYZ 127c, rolling into 131c. Some time ago, there had been a large buyer of 127c for 10 to 15/64’s, yesterday they settled at 1’13. Last week’s spike high in futures was around 130-16, with a yield of 185…so the 131 strike appears to be an aggressive target. There was also new buying of TYX 128c with USX 144c as a strip, settled 13 and 11. Official stress test results are to be released Sunday, November option expiration is Friday. One of the drivers of yesterday’s trade was talk of potential corporate bond purchases by the ECB. While TV pundits are self congratulatory for having seen through the correction that doesn’t really reflect the underlying dynamism of the US economy, the fact is that the only spark for stocks is the prospect of more central bank largesse. Oh, I almost forgot, there have been a few earnings reports that handily beat estimates.
–CPI today expected 0.0 with Core +0.1.
Oct 21. If stocks continue to rebound, then 5/30 should steepen
–Yesterday’s trade continued a reversion to “normalcy” after last week’s carnage. Stocks continued to rebound after early weakness related to IBM results. Implied vol was lower in interest rates, with TYZ 128 straddle back down to 1’44, around the same absolute level as before the fireworks. For example, on Friday Oct 10, the Dec atm straddle (126.5) in TY was 1’43 and FVZ 119.5^ was 0’63. Yesterday FVZ 120.25^ settled 0’63 from 1’05 Friday. Yields on the high yield ETF’s continued to edge lower on both an outright and spread basis. But while some measures indicate a return to complacency, treasury yields are grinding lower, with the ten year yield down 2 bps yesterday to just under 218. August 2015 Fed Fund contract settled at just 21 bps, 9979, up 3 on the day, as the market prices out possible Fed hikes. (There are 5 FOMC meetings in 2015 prior to the August contract). May 2015 FF are at 11.5 bps, 9988.5, +1.5, and there are three meeting prior to that contract. Similarly, the one year calendar spreads in dollars have compressed, with the peak, EDZ15/EDZ16 at just 89.5 bps, down 0.5 on the day.
–With Fed tightening being priced out of the market, one would think the longer end of the curve would steepen. However, 5/30 spread gained just 1.5 to 156.5; the one month high is 157.5. Apparently, the drop in inflation expectations is keeping a lid on the long end, with 30 yr bonds still below 3%.
–Business Insider yesterday cited Stanley Druckenmiller’s comments about a month ago that IBM was the “poster child” for financial paper games in the corporate sector, noting that it had taken on a large debt load, not for capital expenditures but to buy back stock. It looks like that strategy has finally run out of gas. At the same time, the regulator of Fannie and Freddie, Mel Watt, is pushing for less stringent mortgage requirements with just 3% down payment. Taking on higher debt loads is NOT the answer to fix stock or home prices.
Oct 20, 2014. Negative rates cause economic paralysis, the opposite of stimulus
–Markets have generally settled in for a pause after last week’s wild moves. Implied vol has been coming down since late Wednesday’s spike. Ten year atm straddle (127.5) settled 1’53 Friday; the 129 strike traded as high as 2’49 when it was briefly the atm strike on Wed. Ten year yield rose about 5 bps Friday to close near 220. 30-yr bonds remain just under 3%.
–From Saturday’s WSJ: “Several global banks have begun charging large customers to deposit their money in euros, a rare move that could have costly implications for investors and companies that do business on the Continent.” ECB expected to announce stress test results this weekend. Perhaps there will be some jitters early in the week, and then a brief sigh of relief after actual results are posted. Which will almost certainly be followed by acute stresses that weren’t captured in the models as peripheral sovereigns deteriorate. I think that banks charging for euro deposits and a bund yield of just 85 bps tells a lot more about the state of the EU’s financial house than hypothetical tests.
–I filled up the car this weekend and was pleasantly surprised by lower fuel prices. In the aggregate, lower energy costs are a boon to consumers. Weighing against that positive is the global equity rout, which I personally think is the more dominant economic theme. And of course, the ebola risk overshadows both, but there appears to be some progress on that front.
–There was an interesting clip on Zerohedge featuring Paul Tudor Jones being interviewed during the 1987 crash. He said at that time he expected a government/central bank response to stabilize the situation. What can the governments and central banks of the world do now? Regulations have fragmented the financial industry in such a way that government jawboning may no longer find the same transmission mechanism, leading to overt gov’t intervention in equity markets. A delay on the last leg of the tapering program (expected at month’s end), would probably do more harm than good.
Oct 17. The initial puke has run its course
–The last two days were a convulsing puke, with stocks and oil spiking lower and fixed income exploding higher, symptomatic of a violent change in perceived forward economic outcomes. European peripheral yields have surged, with Greece now around 9%, having just climbed to 7% yesterday. Japan’s Nikkei has plunged over 11% since the end of last month. Open interest in interest rate futures has declined, with euro$’s down another 315k yesterday. Implied vol spiked, but there are now notable sellers taking advantage of hugely elevated premiums.
–The worst of the re-adjustment has probably passed, as stocks are now bouncing, and oil has held support around $80/bbl. Nov Crude had an outside day yesterday, initially making a new low for the move, but then closing higher, an indication that selling pressure has, for now, run its course…and that’s probably true for equity markets as well. However, we are now in a bear market, where rallies should be sold.
–Bullard suggested yesterday that tapering be delayed, even though the market widely expects the bond buying program to end with the Oct 29 FOMC. The market has already heavily downgraded the odds for a hike in 2015. Tens between 2-2.25% suggest that more central bank buying will have little effect besides calming the stock market. The entire central banking philosophy is predicated on inflating asset prices and praying for trickle down effects that will affect the “real economy”. One of the big changes we’re seeing is the growing suspicion that such a policy is destined for failure. Yellen speaks today on economic opportunity inequality at 8:35 EST.
Oct 16. Not working anything “with a tick” today !
–Well the Fed’s portfolio is doing pretty nicely. So there’s that.
–It was a historic day yesterday where markets became unhinged on record volume. Ten year yield spiked to 1.85 before coming back late in the day to 2.13, and is just above 2% at this writing. Fives ended the day down 11 bps at 134. Colleague John Brady pointed out a piece of Merrill research dated Aug 1, 2 1/2 months ago, with the tagline “The Death of Volatility…” As the Fed repressed rates, investors felt forced to take more risk, or to take bigger positions with more leverage. There were already hints of volatility spikes in FX markets prior to yesterday’s fireworks, and there had been large commodity moves as well. In a world of cross-asset investment strategies, where banks have come under regulatory attack as liquidity providers, it’s no wonder that crazy markets result, and laborious efforts to squeeze out a few extra bps of portfolio return (by selling option premium), instantaneously went up in smoke. And there is clearly more to come. While there might still APPEAR to be tight bid/ask spreads due to machines that trade in milliseconds, the actual quotes for humans will be wider, especially in options. There is still ebola risk, there is still geopolitical strife.
–Volumes were staggeringly large; new records. Eurodollars over 11 million contracts. ten year treasuries 4 million and fives just under 2 million. According to prelim open interest data, euro$’s lost 442k of positions, tens gained 21k and fives fell 118k. Eurodollar calendar spreads made new lows. Peak one year calendar EDZ15/EDZ16 plunged 12 bps to 85. However, I marked 5/30 spread at a new high of 157 bps, as thoughts of Fed ‘normalization’ go out the window and fives re-adjust lower. What’s normal for fives? Probably under 1% given this environment.
–Here are some quotes for at-the-money ten year straddles yesterday: Pre-open, TYZ 128.0^ ref 127-275, 1’62/2.00. As the rally picked up steam after data, 128.5^ vs 128-12, 2’08/2’12. 129^ at 128-25, 2’20/2’25. Later in the day after the huge futures price spike, 129^ trade 2’49. Someone came in and expressed a view, selling thousands from 2’37 to 2’30 covered at various levels down to 128-18. Final settle of 128.5^ vs 128-18 was 2’24.
Oct 15, 2014. C’mon Kryptonite!
–The slide in oil continues this morning, with CL nearing $80/bbl, down over 6% since Monday’s close near $86. From BBG: “Brent traded at $83.98 a barrel in London. Contract prices on the fuel fell 26 percent from June 19 through yesterday.” I think there should be strong support at these levels, but this move has potential to shake up the global financial architecture as forced liquidation in other asset classes occurs. The disinflationary aspects are of concern to central banks.
–Ten year yield fell to 2.20 yesterday, with 30 year bonds now below 3% at 2.96. Powerful bid for vol in treasuries and green and blue midcurves. I marked TYZ vol 5.6 with the 127.5^ at 1’54. At the 126.5 strike a couple of days ago the straddle was trading 1’41. New lows in near eurodollar calendars. Peak one year, EDZ15/16 is just 97 bps.
–“C’mon Kryptonite!” You know the scene from A Bronx Tale at the racetrack? That’s how stocks traded yesterday. With the expectation that they would sprint higher from out of the gate. Then they glanced over and saw the mush, oil, which dropped $4. Anyone who thinks a further decline in the price of oil is good for equities is in for a surprise. http://www.youtube.com/watch?v=8PLSyFzk-6g
–Today’s news includes PPI expected +0.1, both Core and headline. Retail Sales expected -0.1 but +0.5 less autos and gas. Empire State 20.5 vs 27.5 and Beige Book.
Oct 14, 2014. And….it’s gone
–From The Center for Infectious Disease Research and Policy, “We believe there is scientific evidence ebola has the potential to be airborne.” http://www.americanthinker.com/blog/2014/10/experts_defy_the_cdc_on_ebola.html
–If that’s true, it changes everything. Gonna be a lot of people inside watching reruns of the Andy Griffith show and eating cheetos (not just me) rather than going out. Could be devastating for the economy.
–In interest rate markets yesterday, treasuries maintained a solid bid through the day. Ten year yield is just 2.20 this morning, down from 2.30 during the day yest. There was a buyer of about 20k Blue Dec 9775c for 9.5 that appeared to be an exit. Unsurprisingly, vol was strongly bid in back end of the curve. For example TYZ 126.5 straddle settled 1’43 on Friday, but yesterday the TYZ 127.0 straddle closed at 1’48. All eurodollar calendar spreads made new lows. The peak one year spread is EDU15/EDU16, but that fell 4.5 bps to a new low of just 98. To repeat, there are no one-yr spreads over 100.
–Stocks see-sawed in a gappy session, and closed on the lows. New lows in hi yield ETF’s HYG and JNK. Junk spreads were, of course, wider as treasuries rallied. Get used to MUCH less liquid conditions.
–Oil has been under consistent selling pressure for three and a half months, now around $85/bbl. I remember trying to fade the rally up to $140 in 2007. I think I’ll just sit this one out. No doubt, it’s a gift to consumers; a colleague mentioned something like $44 billion in stimulus thus far. (I can’t recall if that was a monthly figure or simply total). However, I also calculated the drop in total (Wilshire) market cap since the end of September, and that comes to $1 TRILLION. (about 5% of 21T). There are always equity market fluctuations, so it’s probably a little early to panic about the wealth effect in reverse. A little early.
