April 29. Stocks bounce back despite BofA’s accounting error
–Interest rate futures remain painfully quiet, with miniscule net changes, though 5/30 was finally able to steepen by just a couple of bps to 173.4 as five year yield was unchanged and 30 yr bond rose 2 to 346. Red/gold eurodollar pack spread up 1.75, closing just under 261.5.
–There were a couple of trades suggestive of paring back tightening bets, for example about 7k FVM 119.75 straddles were sold (off strike as 5’s are around 119.25 strike). Also a buyer of Green June 9937c vs 9925p (sold put on ratio +3/-2). As we go into Wednesday’s Fed announcement and Friday’s employment report, EDM6 trades around 9830 this morning, having settled 9832.5. At the March FOMC meeting the contract settled 9828.5. It subsequently chopped around at slightly lower levels until the employment report, when it rallied and settled 9827.5. It continued higher to over 9850, but has now fallen right back near the 9825 strike. This contract has by far the most put open interest, with 760k May expiry puts and over 2 million in June.
–BofA fell 6% yesterday due to botched arithmetic causing the Fed to halt its buyback and dividend payout program. However, weakness didn’t really spill over to the other financial names, though I would note that GS is around 12% off the year’s high and Citi about 14%.
April 28. Corporate borrowing for dividends/buybacks long in the tooth?
–Surprisingly quiet on Friday, with yields generally dropping a couple of bps. May treasury option expiration was uneventful with tens pinning the 124 strike and bonds 135.
–This week brings GDP, FOMC and the employment report. Expectations are for a continuation of the tapering schedule, and the market is already looking beyond what is expected to be soft, weather related, GDP.
–(FT) Apple prepares for $17bn jumbo bond sale. Proceeds will be used in part to fund the even bigger jumbo stock buyback. David Stockman has an interesting post cited on ZH saying the leveraged recap binge is a replay of 2005/07…”Ironically, the recent surge in corporate lending by banks is being cited by Wall Street’s perma-bulls as evidence that the long-awaited “escape velocity” is about to materialize. But most of the up-tick in corporate loans has been for leveraged lending—an exact repeat of 2005-2007. And that, alas, means that the bubble cycle is in its final innings—not that economic nirvana is about to break loose.” http://davidstockmanscontracorner.com/this-is-crazy-current-leveraged-recap-binge-clone-of-2007-mania/
–Also an interesting post from BofA…”Since 1988 the month of May has consistently seen a rise in Treasury volatility. It is traditionally the second strongest month of the year. With the MOVE index showing signs of basing, this May is likely to remain true to seasonal norms.” I have attached a long term chart of the 2nd month VIX contract which has been “basing” for a year and a half between 14 and 20. Hoping to see a return to SOME volatility this year, in both stocks and bonds… The last time the second month VIX contract exceeded 30 was in Aug/Sept 2011, associated with an 18% pullback in SPX as circled. The next time VIX approached 30 was in May 2012, with just a 10% pull back in VIX. In the past TWO YEARS there has not been a 10% fall in SPX…
–Unrelated but a longer term worrisome trend…7.5 percent of schoolchildren take prescription psych meds. Wow, that’s a big number. www.upi.com/Health_News
April 25. Russia downgrade to “churlish”
–Fairly quiet day yesterday in rates with little net change. Early weakness after data was easily absorbed. Now with S&P downgrade of Russia just as May treasury options expire, 30 yr bond is testing the 135 strike and there’s even a chance of TYK 124.5 calls coming into play as weekend risk of a military “accident” grows. TYM current 124-05.
–There was a buyer (exit) of about 15k Green Sept 9800 straddle for 48.5. Treasury vol was firm, though there was some July straddle and strangle selling with TYN 123 ^ sold a few thousand times at 149.
–Next week should be fairly interesting with the FOMC announcement on Wednesday afternoon and the employment situation Friday morning. It’s likely the Fed will have a very good idea of Friday’s data, and the premise that slow activity was due in part to “adverse weather conditions” as mentioned in last statement appears to have been supported by improved data. So, it should mean that tapering continues right on schedule with concurrent repetition that it “likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.” In a way, one would conclude that steepening should be the natural market outcome. But that’s not the current trend as bond shorts are subjected to the frog boil. The water was tepid earlier in the week, but small bubbles are starting to rise to the surface.
April 24. Tech companies’ results vs gasoline sales. Which better reflect the domestic economy?
–Treasury yields fell yesterday as New Home sales tumbled 14%, with ten yr down 4 bps to 268.4. Eurodollar calendar spreads eased modestly off their highs, with red/green pack spread down 2.25 at 115.75. Tuesday’s close of 118 was not only the high for this calendar year, but for 2013 as well. At the long end, bonds are maintaining a stubborn bid, with 30 yr yield now below 3.5% to 347. May treasury options expire Friday. TYK 124c have the most call open interest at 58k. TYK 124p have 44k open, 123.5p have 69k open. May straddle settled 21.
–During regular trading hours Nasdaq posted an outside day and closed near the low down 30 pts. However, AAPL earnings, split announcement and buyback increase (from $60 to $90 billion), caused an immediate 35 pt jump in Nasdaq after hours, more than erasing the day’s loss. FB also beat. While stock indices surged, treasuries remained strangely well bid. Even this morning, in front of today’s 7 yr auction, tens are only down 3/32’s to 123-27.5. With yesterday’s military jockeying and several reports of jets scrambled in repsonse to Russian incursion of airspace, perhaps geopolitical fears are supporting an underlying bid in treasuries. Obama’s Asian visit and commitment to Japan’s defense may also figure in the mix. In any case, it appears as if weekend risk is again important, and could be exaggerated this week given option expiry.
–Data today, Ind Pro expected +2.0 and Job Claims 315k.
–In an interesting juxtaposition to tech earnings and modes of communication, this article on gasoline sales volume and per capita usage is quite illuminating.
http://advisorperspectives.com/dshort/updates/Gasoline-Sales.php
The author shows that on a 12 month moving average, the volume of gasoline sales is down 8.4% from the high set in 2005. Further, per capita usage has plunged since 2003. The reasons are partially due to urbanization, non-physical communication, better mileage, etc. “What does this analysis suggest about the state of the economy? From an official standpoint, the Great Recession ended 57 months before the most recent gasoline sales monthly data point. But if we want a simple confirmation that the economy is in recovery, gasoline sales continues to be the wrong place to look.”
April 23. Belly of the curve remains pressured; new lows 5/30 spread
–Once again red/green eurodollar pack spread made a new high, +1 to 118, as greens remain the weakest part of the curve. Green June at 9825 is near the low print made on the March FOMC meeting, which was 9821.5. However, 5/30 treasury spread at that time was around 197, and is now just 176 as back end strength continues. I’ve heard several reasons for the flattener, including steepener unwinds, demand for long bonds from German lifers, etc, but there’s an interesting piece on ZH from Scotiabank that suggests a rotation from stocks into bonds as private pensions have become close to fully funded, having been forced to reach for risk in equities after the crash, but now looking to simply match assets and liabilities. ” There are around $16 trillion in corporate pension assets in the US of which approximately 43% are Defined Benefit plans. Many of these plans were materially underfunded (more liabilities than assets) after the 2008 crises. However, after years of QE and resulting asset price inflation, a large portion of these funds have returned to near fully-funded status (97% levels on average according to most estimates). …plans have adopted policies that systematically reduce investment risk as funded status improves. The rationale is quite simply that the cost/benefit equation changes as the plans’ funding status improves.” http://www.zerohedge.com/news/2014-04-22/here-comes-next-great-rotation-out-stocks-and-bonds
–While greens and the five year note continue to be pressured, implied vol in treasuries is still subdued, with tens at 4.5 and fives still below 3% at 2.9. There is no evidence of reaching for puts, though there was some new buying of both Short (red) June 9937p for 4, and Short July 9912p for 9 (open interest +19k).
–Five year auction today. China HSBC/PMI released at 48.3, about as expected but still indicative of contraction.
April 22. Grand Cardinal Cross
–Quiet Monday in a week where economic news is sparse. Treasury auctions begin with today’s 2yr, followed by 5’s and 7’s.
–Red/green pack spread edged to a slight new high at 117. Peak one year euro$ calendar spread is EDU5/EDU6 at 121.5, up 0.5 yesterday, pushed out due to a 40k Short Sept/Green Sept put spread spread: SOLD 0EU 9887/9862ps (3.0s) vs BOT 2EU 9775/9750ps (6.5s). Difference between top strikes is 112.5, but green side is still 23.5 out of the money. Trade was done mostly as blocks. I think this might be the first time that more euro$ options traded as blocks than in the pit, with 210k total blocked.
–The other large trade is a recurring theme in tens, a sale of 3 point wide strangles. Yesterday it was the July 121.5/124.5 strangle sold in 10k from 47 to 44. Ten year implied fell 0.2 to 4.5.
–Chinese yuan at or near new low for the year near 6.24. There is a steady drumbeat of coverage on zerohedge about Chinese commodity financing deals going sour as Letters of Credit become much more difficult to obtain. A friend who was just in China visiting factories for samples reported that business has visibly slowed over the past year.
–Interesting astrological note…”Between April 20th through April 23rd, there are four days of supreme astrological intensity. They are bookended by the Full Lunar Eclipse, just passed on the 15th, and an Annular Solar Eclipse on the 29th.”…Essentially, on 23 April, Pluto will be 180 degrees, [opposite] from Jupiter, and Mars will be 180 degrees from Uranus. All will be in the 13th degree of their respective Sun signs, forming a cross shape, thus the Cardinal Grand Cross. As the term implies, “opposition,” usually entails a major polarizing effect.
http://www.marketoracle.co.uk/Article45279.html
http://www.transients.info/2014/04/examining-2014-april-grand-cardinal.html
April 16. Stocks rally, curve flattens
–China GDP about as expected at 7.4. Nikkei up 3% overnight as Japan apparently is expected to increase stimulus. UK employment at 6.9 is below BoE threshold, new high for the year in GBP. New high as well for crude oil, nearing 105/bbl. (Reuters) – Michigan officials and President Barack Obama’s Administration are discussing a plan to free up $100 million in federal money to aid Detroit’s retired city workers, the Detroit Free Press reported on Tuesday. So the largesse of the Federal Gov’t may keep the public pension plates spinning, as Chicago watches with interest… Yellen speaks today and will likely emphasize a dovish tilt.
–Nasdaq had an outside day and closed higher, suggesting an abatement of selling pressure (up another 20 this morning, above 3500).
–In the US it’s back to weakness in the belly as 5 yr yield rose 1.7 bps and 30 year bond yield fell 2.4. At just over 184, 5/30 spread is again nearing its low of 179, having been as high as 220 in early Feb. Green euro$ pack was again the weakest part of the curve, with a loss of nearly 4 bps, while golds were only down 0.75. Interesting that market action is pressing for a somewhat more aggressive Fed in terms of hiking, while the back end doesn’t seem to buy into the growth and inflation story.
–Gold was hammered yesterday as people liquidated inventories to pay taxes…as good a reason as any? Gold/silver ratio made a new 4 year high (thanks DS) at 66.4.
–News today includes Fed’s Beige Book. Yellen speaks 12:15 NY time to Economic Club of NY. Housing Starts expected 970k and Industrial Production +0.5.
April 14. Thoughts of Fed tightening fade as stocks tumble
–Though stocks continued their descent Friday, red, green and blue June euro$ contracts couldn’t push above strike for April expiration, with settles of 9947.5 in M5, 9847 in M6, and 9749 in M7. This will leave long xx.50 call holders even more aggravated when the strikes are hurdled over this week. Same thing happened at Easter in 2001. I was long April calls that expired worthless just prior to the holiday, and on the following Wednesday, April 18, the Fed made a surprise rate cut of 50 bps from 5.0 to 4.5% at 9:55 Chicago time.
–The life is being squeezed out of greens as hopes for concerted Fed tightening beginning in mid 2015 are fading. Trades that favored greens as the weakest and most volatile part of the curve are being unwound. For example, about a week ago Green Dec straddle was trading 2 bps higher than Blue Dec. As of Friday, 2EZ (green) 9787^ settled 64.5 and 3EZ (blue) 9712^ settled 66.5. So a complete flip…partially due to rally and curve compression but interesting nonetheless.
–Big trade Friday was buy of 100k 2EM 9825/9812/9787 put fly for 0.5. Roll up trade, with new long in 9825 strike. Another notable trade was buyer of about 15k USM 130p for 8-10. This was an exit trade; these puts had been sold around 1’05 to 1’07 a month ago.
–Retail Sales today expected +0.8 with +0.5.
April 11. Stocks get the jitters
–US yields tumbled as the Nasdaq fell 3% yesterday. Tens dropped over 5 bps to 2.64. From last Thursday to yesterday, EDM6 has rallied over 1/4%, (28.5 bps) to close yesterday at 9846.5. New lows were set in some of the near calendars, for example EDM14/EDM15 fell 2.5 to 29.5. The peak one year spread is EDZ5/6, which fell 4.5 yesterday to 111. I had been watching FFQ15 as an indicator of Fed tightening sentiment. Having been above 50 bps a week and a half ago (9946), it reflected a clear expectation of Fed hikes by the middle of next year. Yesterday it closed 9960.5 up 2.5.
–Slight uptick in treasury vol near the end of the day as stocks slid. TYM 124.5^ settled 1’25 or 4.1. These moves have little to do with Russia (though the situation of gas supplies to Ukraine and Europe is becoming more delicate), but perhaps a continued drip of bad news from China is more important. For example, yesterday it was reported that China’s exports had fallen 6.5%. Today, FT reports..”CPI fell 0.5 per cent in March compared with the previous month”…reinforcing slowdown fears. From the WSJ: “Auto sales slow in China”. And from Reuters “Desperate for credit, China importers default on soy cargoes”. This last piece explains that importers are having trouble getting letters of credit. “Industry sources said some of the companies defaulting have been using soybean imports to secure cheap financing, with interest rates on letters of credit as low as 2 percent and allowing delayed payment of several months.” http://www.reuters.com/article/2014/04/10/us-china-soybeans-idUSBREA3914M20140410
–News today includes PPI expected +0.1 with Core +0.2.
April 10. FOMC minutes reveal a Fed that regularly muddies its message
–FOMC minutes caused the market to further reassess the bearish message which had been telegraphed by the blue dots and Yellen’s press conference at the last Fed meeting. Pressure on greens and 5 year notes was alleviated as trades were unwound. Greens were the strongest on the curve, closing +5.875, while golds were only +1.375. 5/30 treasury spread jumped 6 bps to 193.5 as 30 year bond futures fell while tens rallied after minutes. As an example of the round trip move regarding Fed sentiment, consider EDH5/H6/H7 butterfly which rallied from -21 all the way up to -3 as the market pushed up the timeline for (aggressive) Fed tightening, only to fall back to -9.5 after the employment report, and -16.5 at yesterday’s close. [The rally in the fly was due to the EDH5/6 spread widening as tightening was expected to begin in spring of next year. The spread went from 103 high, after FOMC but before employment, to 93.5 yesterday].
–Stocks had a banner day, seizing on the message of continued central bank accommodation. Today’s news includes Jobless Claims expected 318k, and 30 yr bond auction. I suppose that Greece’s return to bond markets with an issue carrying a 4.75 coupon makes the US bond yield look juicy by comparison at 3.57. Charles Evans of the Chicago Fed speaks, though it almost seems incongruous to argue for continued Fed largesse as more and more building cranes dot the downtown Chicago skyline. There isn’t a single street in this town that doesn’t need resurfacing after the brutal winter; construction jobs should boom. In my community just north of the city, I would say that teardowns to make way for new residences are near the peak levels (pre-crash).
–There was a new seller of about 20k Green Dec 9800c yesterday at 20. I marked Green Dec 9787^ at 64.5, and the Green Sept 9800^, which had been heavily sold a couple of days ago at 50.5, settled 49.5. In general, vol remains anchored, though there was 2 way trade in TYM straddle yesterday, 4% holding for now…
