Feb 11. Yellen seen as dovish. Like that one the Pope released in St Peter’s
–New Fed chair Yellen speaks before Congress today. Gold knows what she will say. MORE MONEY. Gold up 8 this morning to new high for the year at 1283. Stocks are getting the same message, up 8.50 near 1804. Crude oil also strong, CLH over 100 this morning, having been as low as 92 in early January. One of the reasons to taper is because QE creates market distortions, artificially funneling money into financial assets. It’s like the huge river dam projects to control water and create hydroelectric power. Sure, water is stored where it’s needed, but the climate of the land downstream turns into a desert as droughts and seismic risks increase. That’s QE, or the risk at any rate.
http://www1.american.edu/ted/ICE/china-dam-impact.html
–Remaining with the water theme, option premium continues to evaporate. All eurodollar straddles fell 0.5 to 1.5. TYH 126 straddle fell another 10/64’s to 52. April 124.5 straddle fell 16/64’s to just 1’40. And it’s not just decay of options rapidly approaching expiration. For example EDZ5 9900 straddle was 77.5 one week ago and settled yesterday at 73.5. 22 months left until expiration.
–High point on the curve with respect to one year eurodollar calendars has moved out one slot to EDH16/EDH17 which settled 107, down 1.5 on the day. 5/30 treasury spread is near recent highs at 2.20 (using w/i bond) as pressure has come off of the five year. FVH vol was as high as 3.8 last week, I marked at 2.8 yesterday.
Feb 9. Treasury option recap
Interesting week in treasury options, centering on early put buying in TYH 125 and 125.5 puts. Vol ends soft across the board, further compression expected. However, the drop in the unemp rate to only 6.6% may force the Fed into a more qualitative assessment of forward guidance, essentially weakening it, perhaps supporting a bid in downside put skew.
One week ago Friday, TYH 126.0 straddle settled at 1’16 or 5.4 with TYH 125-24. Last Friday TYH 126 straddle settled 0’62 or 5.3% with futures 125-31, a change in futures of just 7/32’s over the week. The premium decay is not that surprising of a result, given 2 weeks until expiry, and that employment data was released with the establishment survey weaker than expected. The interesting part was the vol surge in the early part of the week.
On Monday, there was a buyer of approximately 125k TYH 125 puts (as tens rallied and stocks sank), and on Tuesday another 50-60k TYH 125.5 puts were bought, taking the TYH 126 straddle to 1’25 or 6.4% as of Tuesday’s close. But as mentioned above, weak NFP catapulted the TYH contract just above the 126 strike and took the straddle back down to 0’62 or 5.3%.
There was heavy trade in the 125 puts of 88k on Friday, what appeared to be liquidation, but open interest only fell 12k to 187k. This put is still the largest OI of any TY option. Settled 10 on Friday, 21 delta.
There was consistent selling in TYK 124.5 straddle over the week. On Tuesday, 2’34 to 2’33. On Thursday it was sold at 2’27 and finally on Friday the settle was 2’16. A loss of 11% of straddle value in just a few days.
It was the same story in Eurodollar options. Blue June 9750 straddle trade 55.0 on Tuesday and settled Friday at 51.0. Short June midcurve 9950 straddle trade 21.5 on Thursday and settled 18.5 on Friday. Of course, the end of week rally in stocks was equally unkind to premium longs as VIX sank from almost 22 on Monday to just above 15 Friday.
The market has been constantly fine tuning the point at which time rate hikes are expected to start, having recently pushed forward that time frame to late 2015/ early 2016 as evidenced by massive long positions in Green March midcurve put structures. This idea was equally conspicuous in the curve as the red/green/blue pack butterfly moved from -30 in early December to a high of +6 in mid January. (In other words, the spread between reds/greens moved higher relative to greens/blues as the tightening schedule was moved forward by the market). Weak mfg ISM and payrolls pushed thoughts of tightening further away, as red/green/blue pack fly closed back down below -11 on Friday, and red/green pack spread made a new monthly low settle of just under 93. So the Green midcurve puts that had been heavily in play in terms of a late 2015 tightening schedule, withered on the vine by the end of the week. 2EH 9850 puts still hold the most open interest with 260k positions, but settled at just 1.75 Friday, 34.5 bps out of the money. 9862.5 puts settled 3.75 with a 22 delta, now 22 away from the money. Expect these puts to be under continuous pressure, as it’s hard to imagine Yellen being anything but generous in terms of liquidity projections at this week’s Congressional testimony, what with mixed US data, emerging market stress, and US equities that didn’t completely recover their footing on Friday. The overhang of long puts in TYH should likewise keep pressure on the treasury complex.
Feb 7. Employment day
Feb 7. Yields pressed a bit higher in front of today’s employment data with NFP expected 180k, rate of 6.7 to 6.6. Tens rose just over 3 bps to 2.70. Longer end of the curve displayed the most weakness with golds down 5.75 and greens down just under 3. Option trading reflected a (measured) bearish bias. For example a new seller of 40k 0EM 9950c at 6.5 and a buyer of 0EU 9925/9875/9862 p 2x3x3 for 8.5. Taken together (not that they were done as part of the same package), there would be a small premium credit and a reasonable delta short in EDU5, and with EDH5 at 9955 even the curve roll shouldn’t be a big problem for the June calls that were sold.
–Draghi’s inaction on further easing led to a jarring rally in the euro and pushed bunds down.
–China HSBC Service PMI at 50.7 is lowest since August 11. I haven’t been strongly in the deflation camp, having thought better US growth would lead to wage gains, but I looked at a few industrial products yesterday, rubber, nickel, aluminum, zinc…all at or near multi year lows. Primary use for rubber is tires, but according to a Bloomberg story China’s rapid ascent to 20 million vehicle sales is expected to stall. Reuters has a post on Daimler being concerned about slowing sales in emerging markets. The yuan is easing slightly, a response to Japan’s yen depreciation as a result of explosive QE? The point is that Japan has been a catalyst for deflationary export pricing in Asia, with many analysts continuing to warn of a negative price spiral looming over Europe especially. Negative unit labor cost data out of the US yesterday also a concern.
Feb 5. Puerto Rico downgraded by S&P. US jobs downgraded by CBO.
–Implied vol in treasuries continues to post new highs as there is a continuous buyer of March puts in TY. Yesterday it was the 125.5 strike, which added 47k in open interest. Monday it was the 125 strike, bought in size of 110k. I marked TYH 126 straddle at 1’25 or 6.4 vol. However, there was straddle selling in May, the 124.5^ sold 5k from 2’34 to 2’33. In eurodollars there was notable midcurve put buying, though mostly exits. (0EJ 9900/9875ps bot for 1, OI -60k. 2EH 9825/9812ps bot for 0.5. 0EM 9912p 4 paid for 40k, OI fell 35k). EM currencies bounced as did US stocks, but a late downgrade of Puerto Rico to Puerto Pobre by S&P reminded the market of lingering fragility globally. $/yen moving back toward 101 (now 101.20) as risk off mentality is associated with a rebound in yen.
–Today’s news includes ADP expected +178k and ISM Services, 53.0 vs 53.9. CBO estimates the equivalent of 2 million jobs will be lost due to Obamacare. As Nancy Pelosi eloquently reminded us back in September, this will allow Americans to “pursue your happiness … follow your passion.”
–Crude oil strengthening in sympathy with Nat Gas. CLH now near $98 bbl after having been as low as $92 in early Jan. Lower energy bills were supposed to give a boost to the American consumer who is now going to have to pursue happiness by pedaling a little faster.
Feb 4. Sometimes a “wall of worry” is there for a reason, and not worth trying to climb
–Stocks were clobbered yesterday with SPX -2.3% (off nearly 6% from high) on huge mini-SP volume of 3 million. ISM was much weaker than expected, coming in at only 51.3. But you can blame it on the cold weather. Ditto for car sales. And no need to worry about EM woes, there are just some country-specific imbalances. And the Nikkei being down 4% today and 14% off highs is in no way a negative reflection on massive QE risks. Yellen will address all this and assuage our misguided fears as she testifies to the Fin Services committee one week from today.
–The big interest rate trade of the day was TYH 125 puts, hoovered up from before the floor ever opened and thru the day, creating a huge bid in implied vol. These puts traded over 150k. Open interest increased by 111k with total March put OI of 1.02m as compared to TYH which added 56k positions to total 2.38m. TYH 126^ was 1’16 at Friday’s close (5.4 vol) while yesterday the 126.5^ jumped to 1’23 or 6.1. I don’t know if these put buys were in conjunction with cash treasury buying, but the ten yr yield fell 8 bps to 2.582 as safety concerns prevailed. Treasury implied vol at new highs across the curve, unusual to be associated with a rally.
–All euro$ calendar spreads made new lows. Red/gold pack spread fell 5 to 269. 2/10 treasury spread is 228, 32 bps off the high of the year. Highest one year calendar is still EDZ5/6 but it’s now only 105.5, setting a new recent low, down 2.5 on the day.
–Today’s news includes Factory Orders expected -1.8%.
Feb 3. Big week ahead with ECB and BoE meetings; US job report Friday
— US yields continued to press lower on Friday with tens down 3 bps at 266. However, TYH put open interest rose nearly 50k with notable buying of TYH 124.5p and 125p which both saw open positions rise >15k. Some near euro$ calendar spreads made new lows, for example EDH14/EDH15 fell 1 to 21.5. This morning Nikkei is down nearly 2% and 10% for the year as JPY has slipped below 102. China Service PMI weak.
–Today’s US news includes PMI and ISM, the latter expected 56 from 57.
–Did Italy send us an engraved invitation to sell EUR? It had been previously reported in December that Italy might revalue the Bank of Italy from €156,000 to €7.5 billion, thus providing a huge capital gain to a couple of large domestic banks, and a gift to the Italian treasury as those gains are taxed. ZeroHedge and Reuters reported this measure (arbitrary revaluation) passed Wednesday, and the euro promptly went from 136.50 Wed to 134.80 on Friday. Sounds like a page taken out of Argentina’s playbook. In late Dec, the ECB…”warned the Bank of Italy to ‘act prudently and in accordance with principles and objectives of the European System of Central Banks’ when effectuating the capital increase.” It might not be the time to own gold in dollars, but in almost any other currency? Even the Chinese yuan appears to be turning (weakening vs $).
Here are links on Bank of Italy: http://www.centralbanking.com/central-banking/news/2321228/bank-of-italy-share-capital-revalued
http://www.reuters.com/article/2014/01/31/intesa-unicredit-centralbank-stake-idUSL5N0L53LR20140131
http://www.zerohedge.com/news/2014-02-01/italy-enacts-most-bizarre-bank-bailout-yet
–ECB and BoE meetings on Thursday, US Employment on Friday with NFP expected 185 to 200k with chance of weather distortions.
Jan 30. So goes January….
–Turkey and S Africa CB’s took action to stem capital outflows by raising rates, but rather than throw a lifeline to EM investors, the Fed continued to taper bond purchases. US equities took a run at the downside following the FOMC, but appear to be stable for now. Other notable movers yesterday include extension of the parabolic natural gas rally, (with associated rumors of fund blow-ups), and a new high in Russian ruble, now above 35 vs around 33 at the start of Jan. I guess my dollar will stretch further in Sochi. JPY is holding 102 level, though Nikkei was down 2.5% and Shanghai 1% as Final HSBC Mfg PMI dropped to 49.5, lowest since July. This morning it’s the Forint that’s plunging.
–US rates fell with tens easing by 7 bps to just under 268. Back month eurodollars led the charge higher with red/gold pack spread down nearly 7 bps to 273.25 as gold pack was up 9.625 bps. Many eurodollar calendar spreads made new lows. The highest one-yr spread is still Dec’15/16 but it’s now only 107 bps, down 3.5 on the day. (Last year in Sept max one year spread was 122.5).
–Greens had led the way on the downside. Currently there is zero (or negative in some cases) put skew in 2EH and 2EM. Additionally, green to blue straddle spreads remain compressed with 2EZ and 3EZ straddles trading the same premium. 2EJ 9850^ is 36.5 and 3EJ 9737^ is 40. Yesterday blues outperformed greens to upside, blue +8.25 and green +5.5
Jan 29. FOMC day. Turkey jacks rates by 4.25%
–It’s a conclave of serious people where decisions are made that can truly affect the outcome of people’s lives and fortunes. SOTU? Nah, today’s Fed meeting. Expected to continue on a modest tapering path, especially since Turkey single-handedly stanched all EM outflows by raising rates to 12% from 7.75. Now that’s a bad@ss central banker.
–Interest rate futures were fairly quiet. Ten year yield fell 1.5 bps to just under 275, right around the midpoint of the past 6 months. There was a new seller of 20k TYJ 123.5 calls, taking the atm 123.5^ from around 2’00 to 1’58 and shaving a couple of tenths off vol as stocks rebounded. Economic news remains mixed as Durables printed weak. Greens outperformed to the upside (+4.75), causing red/green/blue pack fly to close 4 lower at -4.75. Eurodollar options mostly featured position exits, though there was some selling of green midcurve puts vs blues that appeared to be new, in both March and June. 2H 85p/3H 73p and 2M 80p/3M 68p.
–On what may be a quiet morning, here are two links with longer term relevance for the banking industry. First, Marc Andreessen “Why bitcoin matters” (My conclusion is that given the security and inexpense of even small global transactions, bitcoin could do for banks what the internet did to the printed newspaper). Second is Reuters, “Exclusive: U.S. banking regulator, fearing loan bubble, warns funds”. “…”Transferring future losses from banks to pension funds does not aid long-term financial stability for the U.S. economy,” [Pfinsgraff] added.
http://www.reuters.com/article/2014/01/29/us-banks-regulators-loans-idUSBREA0S0DG20140129
Jan 28. Ruh roh
–State of the Union speech tonight. “We need to show the American people that we can get something done,” Dan Pfeiffer, a senior White House adviser, told CNN. Ruh-roh. From the Washington Post: “Just 37 percent say they have either a good amount or a great deal of confidence in the president to make the right decisions for the country’s future, while 63 percent say they do not.” I think I’ll watch an old Columbo rerun instead.
–Stocks fought back from early weakness, though futures took another late tumble on AAPL’s earnings release as future growth prospects appear sketchy. AAPL -8% after hrs. Interest rate futures closed a bit lower, with green pack again the weakest, down 4.375 bps. However, there was notable put spread selling in dollars: 20k 0EH 9950/9925/9912p fly sold on exit. 50k 2EJ 9812/9787ps sold (appears to be exit as 78p OI fell 42k, though 81p +19k). 25k each 2EM 9800/9775ps and 9800/9762ps sold as new positions.
–Also for the first time, a green midcurve atm straddle settled above blue. 2EZ 97.75^ settled 87 while 3EZ 96.875 settled 86.5 (this according to BBG though prelim CME sheets don’t show open interest in 9687 strike; 9675^ settled 87.5).
–Durable Goods today expected +1.6. Two year auction as well.
Jan 27. Remain risk averse
–Thursday’s explosive rally in interest rate futures continued into Friday morning, though by the close futures had slipped well off their highs, for example EDH6 closed 9966.5, 8.5 bps lower than the high of 9975.0. Red/green pack spread edged to a new low, -1.125 on the day to just above 98 bps. Clearly, turmoil in the emerging markets is now dominating the conversation, having spilled over into all equity markets, leading to speculation the Fed might suspend the taper at this week’s FOMC. As I’ve said before, the market tends to test a new Fed chief. And in some ways, the BoE’s Carney saying last week that “The Bank’s assessment of how to evolve guidance to changing circumstances…” is another indication that central bank philosophy (globally) is uncertain in the face of current challenges.
— Front eurodollars edged slightly lower, a reminder that funding issues can surface once in a while, though we’re all sure that China will bail out its shadow finance “wealth mgmt” funds, the US will do the same for Puerto Rico, and Janet will gladly add her surname to the Greenspan and Bernanke put. Policymakers got our backs, right? And if there were any question about the paternal instincts of the banking system then HSBC’s policy of restricting large cash withdrawals removes all doubt. Fromm BBC news: “But Eric Leenders, head of retail at the British Bankers Association, said banks were sensible to ask questions of their customers: “I can understand it’s frustrating for customers. But if you are making the occasional large cash withdrawal, the bank wants to make sure it’s the right way to make the payment.” http://www.bbc.co.uk/news/business-25861717
–In terms of China, this morning on BBG: “China Credit Trust Co. said it reached an agreement to restructure a high-yield product that sparked concern over the health of the nation’s $1.67 trillion trust industry and contributed to a global selloff in emerging-market assets.” So maybe they DO have our backs [just like banks in the US initially covered SIV’s]. And, from the FT: “ECB poised for battle to ward off deflation…Draghi signals purchases of bank loans”. So with this policy maker response, the S&P’s muster only a 3 handle rally? Nikkei falls 2.5%? And Moody’s cut Sony to junk. The risk averse shall inherit the earth
