Aug 6. Flight to quality could really take off, as dollar and long bonds make new highs
–Weakness in equities is spurring a bid in longer dated treasuries this morning with USU near a new high at 138-30. Late yesterday stocks finally took notice of the Russia/Ukraine situation as Poland’s Sikorski said that Russia’s troop build-up at the border may portend an invasion. The immediate drop in stocks is a signal of a skittish market, and the news of Fox withdrawing its bid for Time Warner is another negative sign (along with Spring dropping T-Mobile bid). This morning DAX is down 1.5%, the pullback from the high last month is now around 10% in Germany. DAX also well below its 200 day MA. The dollar index is at a new high for the year as EUR continues to probe lower, currently 133.65. Nikkei also continues to fall, a sign that massive stimulus in Japan has run out of steam.
–The ebola scare is also threatening to expand and depress international trade.
–There was some early buying of out of the money Ten Yr calls, 5k TYZ 129.5c for 6 and 2k TYV 133c for cab8, along with a late buyer of a few thousand TYU 126c for 12. If stocks continue to decline, then fixed income vol is likely to jump from current depressed levels. For now buying is occurring at the longer end, but we might look back in 3 months and say that fives at 165 were a steal.
–(Reuters) ABC…Anything But Capex …Corporate America has never been more flush with cash. But business investment or capital expenditure – “capex” – has remained depressed, puzzling economists and strategists who have long predicted its resurgence and attendant impact on growth.
Aug 5. Subdued activity Monday as stocks rebound
–Quiet day Monday with continued outperformance to the upside by green euro$’s (+4.0 on the day while golds were +1.375). Ten year yield edged lower by 1.5 bps to 249. Stocks rebounded modestly, though Nikkei had also bounced on Monday, but has resumed lower today (-150). A couple of notable put sales in dollars. EDM5 9925p sold in size of 20k at 6.5 covered from 9946 to 9945. Appears to be new, there is already sizable long in 9950/9925p 1×2, so adding to shorts in the lower strike. Short red Dec 9912/9850 p 1×2 was sold at 16.0, 5k, appears to be exit.
–Peak one year calendar spread continues to be EDZ15/EDZ16 at 106.0, down 2 on the day.
–Today’s news includes ISM Services expected 56.5 and Factory Orders expected +0.5 from -0.5 last.
–Implied vol pressed lower. FVU 119.25 straddle at 32.5 is just 2.3, near the lowest level for fives this year. FVV is 2.7.
–India’s central bank left short rates unchanged, as expected, at 8%. India’s stocks are up about 20% since the start of the year. Fairly stark difference between developed economies that are addicted to ZIRP and QE, and emerging economies that function with much higher funding rates.
Aug 4. Friday summary
—Interest rate futures exploded higher after the employment report, apparently due to the average hourly earnings number of 0.0%. The thought seems to be that Yellen will be very hesitant to pull the trigger on raising rates unless wage growth is on much firmer footing.
–The ten year yield fell 5.6 bps to 250.3; tens seem quite comfortable bouncing around 2 1/2%. The five year note plunged over 9 bps in yield to 167. On the dollar curve, the green pack outperformed, up nearly 10 bps to average price of 9780.5 or just under 219.5 yield. The curve steepened with 5/30 up 7.3 to 162.4. Red/gold eurodollar pack was up 2 to just over 207. Green/gold was up 3.5 to just over 104. So red/green, 2nd the 3rd year spread is 103 and 3rd to 5th (green/gold) is the same level.
–After Friday’s data, EDH5/6/7 futures butterfly traded as low as -18, before immediately bouncing back to -10 and settling at -12. The huge seller from Thursday at 0.0 to -3.5 covered the short. Open interest in EDH5 was -10k, in H6 -38k and H7 -18k.
–Stocks closed modestly lower but the high yield ETFs continued their plunge (HYG 5.62 yield and JNK 5.76 yield).
–As mentioned Friday, both Dec Corn and Nov Beans made new lows, off the highs of May by 29% and 17% respectively. Sept Crude Oil is below $98/bbl, having been as high as 106 in June.
–Implied vol was hit. TYU atm straddle went from 1’05 Thursday to 0’60 settle Friday.
August 1. Weak stocks to kick off August dog days
—Unemployment today with NFP expected 230k, rate of 6.1.
–Stocks took center stage yesterday as SPX and Nasdaq both dropped 2%. Some pointed to the ECI print of +0.7 yesterday as a catalyst, along with, of course, Argentina’s default. There are numerous reasons for stocks to pull back from record highs, including all of the geopolitical problems, (and ebola), but also, the steady lessening of Fed stimulus through tapering is another factor. The question is whether this move is the beginning of something larger. Market signals suggest there is more to come. For example, the 5 yr swap spread is now above 13, close to the high for the year, having started July around 7. HYG (hi yield ETF) settled at its lowest level of the year, as the WSJ reports pressure on corporate bonds and widening spreads. The yield curve steepened as stocks sold off. Red/gold rose 3.37 to just above 205. 2/10 treasury spread rose over 3 bps as well to 202.5. VIX jumped 27% to nearly 17. Crude oil and gold had hard sell offs to new recent lows. In other words, “…they panickin’. I can feel it.” (Billy Ray Valetine). It’s a broad based pullback without much divergence; suggests a further retrenchment. The failed rally on Q2 GDP of 4.0 was a major signal of a tired bull.
July 29. FOMC tomorrow
Just a few notes from yesterday’s trade. In interest rate futures, the near one year spreads notched new highs. For example, EDH15/EDH16 was up 2.5 to 96.0. In tens, there was a buyer of about 10k TYU 125.5/TYV 125^ spread for 44 (settled 46), appears new on both sides. The two year swap spread made a new high of just under 21 bps, having started the month at 13. This is above last year’s high in August associated with the taper tantrum. HYG, the high yield ETF closed on its daily low and looks ready to test the low of a couple of weeks ago (5.31 yield according to bigcharts). ZeroHedge has another post about hi yield and corporate debt in general, showing a significant amount of outstanding paper that will need to be rolled in the next 5 years. Finally, the Shanghai Composite has had a strong rally, perhaps spurred by the PBoC’s Pledged Supplementary Lending of 1T CNY.
–5 year auction today. FOMC announcement tomorrow.
–Having made a couple of market comments, now I am going to rant just a little bit. I know Chicago is the wearing the crown of the new murder capital, but I live in a pretty nice suburb just north of the city without much crime. And I was walking the dogs yesterday evening, and went by a park near my house. The dogs are pictured in the attachment. Not a great shot, but you get the idea. Anyway, I am walking past Maple Park, and posted there is a new shiny sign, a handgun with the red circle and slash through it. My first thought is: Who is the idiot that thinks this is a good idea? Or necessary? What are you hoping to accomplish? I am not a big handgun advocate, but in my community, or anywhere else for that matter, these signs are simply meaningless. It’s like the comedian who says “Here’s a public service announcement: You don’t have to put an Obama sticker on a Prius. We get it.” Same thing here. Anyone that’s bringing a gun into the tot lot isn’t going to be dissuaded by a sign. It makes me think of the vast new regulatory apparatus that’s been assembled recently. For example, in my industry, we have to complete video courses on a fairly regular basis for compliance purposes. No additional comments on that topic…
–Anyway, you might wonder what the dogs have to do with this. Well, the big dog is named Axel. His idea of protecting the property is marking his territory, and for good measure, charging the fence and barking menacingly. We’ll call him Richard Fisher. The fluffy white one, is relatively quiet except for the occasional yap. Her name is Xena, and though it’s an somewhat of an insult, I’ll just call her Janet Yellen. (An insult to the dog, just so we’re on the same page). Now, the yap can be compared to macro-prudential policy. Regulation. Video courses. Anti-handgun signs. As you might guess, I side a bit more with Richard Fisher. Remind the market that funding costs aren’t always going to be zero. By hiking. Show your teeth. Snarl once or twice and let them know you’re there, and that you can get to the gate in fraction of a second.
July 27. The thrill is gone (in high yield)
The thrill is gone
It’s gone away for good
The thrill is gone, baby
It’s gone away for good
B.B. King – The Thrill Is Gone
–Once again on Friday, the curve flattened with 5/30 treasury spread at a new low of just under 157 bps. Red/gold euro$ pack spread settled just above its recent low of 197, down 2.75 on the day at 198.5. There has been some premium buying recently, notably Short (red) June 9800 puts covered; another 15k added Friday.
–Employment data this week, preceded by the FOMC on Wednesday. Auctions of 2, 5 and 7 year notes likely keeps the pressure on 5/30 spread in the beginning of the week.
–The most notable theme of my weekend reading concerns weakness in high yield bonds. Attached is a chart of HYG, the hi-yield ETF. As you can see, it has had a pullback this month. I haven’t done much research on this topic, so I don’t want to read too much into it, but what I do know is that Corporate Debt has been expanding, used for share buybacks rather than capex. From the Fed’s Z.1 report, Corp debt grew by 8.3 in 2012, 8.9 in 2013 and 9.3 in Q1. Taking advantage of low rates for financial engineering. In terms of debt outstanding, in Q1 Corp debt was at a RECORD $9.6T. If it was being invested in productive capacity, the economy would be humming like BB King’s Lucille. Perhaps Wednesday’s GDP report will reflect that. Perhaps not.
–The FOMC is expected to continue with its measured withdrawal of QE; not much drama associated with this meeting as there is no press conference. The high yield market appears to be taking notice. Sometimes the inflection point passes quietly, only later being assigned importance for the myriad clues that were piling up. Like AMZN’s continued losses, with the market now hesitant to provide a free pass with respect to the stock price.
–What I would note with regard to HYG and euro$’s is that one year ago June 2013, when QE reduction was first hinted, HYG was crushed, and so, of course were interest rate futures. Red/gold pack spread went from 175 in mid-May to 250 in mid June. I am not suggesting the same move is likely, but with red/gold and green/gold pack spreads at new lows, I think it’s prudent to own blue or gold midcurve puts.
July 25. Market continues to place bets on tightening onset for Q2
–Ten year yield climbed 4.5 bps yesterday to just above 2 1/2%, as Jobless Claims fell below 300k (284k). Trade continues to be focused on EDM5 puts as the market places bets on Fed tightening in the first half of next year. Once again, EDM5 9950/9925p 1×2 were heavily bought, for 1.0. However, late in the day there was covered buying of 9912 puts as well (5.75s vs 9942). According to prelim sheets open interest in EDM5 options rose another 32k to 1.175m.
–August treasury options expire today. There was a buyer of about 50k TYQ 125.5c for 1 late yesterday. Appears to have been an exit.
–Against the backdrop of new highs in the SP’s, AMZN released earnings showing an operating loss of $15m. “The thing that really stands out is operating loss guidance for next quarter of between $410 million and $810 million, compared to just $25 million a year ago.” (BI). Real estate sites Zillow and Trulia may combine…”Neither company is currently profitable on an annual basis.” (BBG). Seems to be a pretty forgiving environment for unprofitable ventures (I don’t know what I’m doing wrong…), though AMZN down 10% after hours.
–Besides the EDM5 put activity, there are some signs of life in terms of implied vol. There was a new buyer yesterday of about 7k TYU 125^ for 1’12 to 1’13. I marked vol up 2/10’s to 4.3.
–Durable Goods today expected +0.5.
July 23. Wait until next year…for rate hikes that is
–Yields slipped as CPI was slightly lower than expected. Green pack was +3.25. Ten year yield ended at 246.4, almost 1 bp lower. EUR made a new low for the year and is now around 134.60. In related news the NY Fed is targeting Deutsche Bank for poor risk management.
–The big trade yesterday was in EDM5 puts as Fed hikes are expected next year. There was a large buyer of EDM5 9950/9925p 1×2 for 0.5. There are 3 FOMC meetings next year prior to June expiration on 15-June 2015; the June FOMC (4th of the year) is on June 17, 2 days after expiration. Volume in all June puts was 286k, open interest was up 153k, with 70+ added in both 9950 and 9925 puts. Recall that there had been a large buyer of 9900 puts for 4.0-4.5 a couple of weeks ago (OI in 9900p 143k). The buyer of the 1×2 probably now has the 9950/9925/9900p fly on for 4.5 to 5.0.
–If there is certainty of a Fed target of 50 bps by the June’15 FOMC then the 9950 puts will, of course, be in the money. August’15 Fed Funds (FFQ5) settled yesterday at 99.535 or 46.5 bps. This contract cleanly captures 5 FOMC meeting from next year, the 5th meeting being on July 29. Might be worth selling FFQ at 53.5 vs selling 2 EDM 9925p at 8.0, though there’s more upside risk exposure than on the 92/95p 1×2.
July 22. Flattening continues. Sept 30 yr bond contract at new high
–The biggest aspect of yesterday’s trade was continued flattening to new lows. Red/gold pack spread was down nearly 4 bps to 197, though it was below 195 during the day. 5/30 treasury spread fell 4.8 bps to 158 as the USU (30 yr contract made a new high). Near eurodollar one-year spreads notched new highs, with EDH15/EDH16 up 3.5 bps to 95.5. EDU15/EDU16 rose 1.5 to become the highest one-year spread on the curve at 105.5 as the prospect of tightening edged forward. The mere perception of a rate hike steepens the front and flattens the back end, but perhaps lower inflation signals are also a factor. Grains closed either at or near new lows. A friend mentioned that an auction of farm land in Princeton, Illinois started the offer at over $11k/acre but ultimately sold at $7800. If there was a farmland price bubble, then the air is coming out. Dec Corn was 5.10 in May, but is now 3.72, a fall of over 25%.
–Today’s news includes CPI expected +0.3 with Core +0.2.
–According to the Telegraph, Russian sanctions “…have frozen almost all Russian companies and banks out of the global capital markets. This matters because they owe most of Russia’s $715bn in foreign currency debt. They cannot roll over $10bn coming due each month.” Could there be unintended consequences?
–TYU 128c 33k bought on block for 5, and 128.5 call bought for 3 in size of at least 15k. Both new positions. 128 strike is about 35 bps out of the money…2.10 to 2.12 for current 10 yr vs 2.47 close yesterday.
July 18. Geopolitical concerns rising to the forefront
–The downing of a Malaysian Airline jet over Ukraine, and Israel sending ground troops into Gaza spurred a safe haven trade, with the US ten year yield falling over 6 bps to 247. 30 yr bond yield made a new low for 2014, 329 at the futures close and 327.5 shortly afterwards. The curve flattened, with 5/30 at a new low of 164 and red/gold at 202, barely holding support. 2/10 also at a new low of 201. Stock indices retreated from highs, falling 1 to 1.4% (Nasdaq -1.4). For now, the curve still indicates strong probabilities of rate hikes next year, and while 5 yr notes dropped 5 bps to 165, there is quite a bit of curve roll down that will be greatly accelerated if the market changes its mind on hiking prospects. I would note that the ten year inflation index note yield is right at its lows for the year at 21 bps, having started the year at 3/4%.
–Vol firmed as the markets reacted to geopolitical strife, though only modestly. VIX jumped 32% but is still below 15, and right around average for the past 52 weeks.
–On a micro note, Stanley Druckenmiller 2 days ago said that IBM is the “poster child” for bad corporate behavior through financial engineering. He noted that revenues haven’t gone up in 6 years but that the company had loaded on debt to buy back shares (rather than to invest in plant and equipment). There is an informative piece on ZH that breaks down IBM’s financials, well worth a look. http://www.zerohedge.com/news/2014-07-17/scariest-chart-ibms-history Yesterday it bucked the trend and closed slightly positive in a down market as earnings were released.
