Oct 29. All calm before the FOMC
–Green eurodollar pack continues to outperform, driven partly by option position exits. (Details below). Red/green pack spread edged to a new recent low of 72.375, -1.0 on the day. And while long dated green straddles maintained their recent bid, a new position seller of 6k green March midcurve 9875^ took the settlement down 1 bp to 37.5.
–Tomorrow is the Fed announcement. Today’s news includes PPI expected +0.2 and +0.1 Core. Retail Sales expected 0.0, +0.3 ex-auto. Consumer Confidence 75 from 79.7. And the 5 yr auction.
–As ECB bank stress tests loom, Deutsche Bank profit fell 94% on legal fees and lower revenues and UBS is being told to increase capital reserves by Swiss regulators (FT).
–India raised rates from 7.5 to 7.75 to combat inflation.
–US interest rate markets continue to be driven by position exits (total eurodollar open interest fell 45k yesterday). Implied vol has been sucked out as tens are expected to hover around 2.5% yield level. Recent downside plays have mainly been low delta put condors.
Large trades yesterday
+130k EDZ4 9925/9950ps (open interest down 90k)
-60k EDH6 9887/9825ps (open int -22k in 82p and -49k 88p)
+40k each 3EF and 3EH 9700/9725/9750/9775p condors (new) settled 3.75 Jan and 5.25 March.
-5k TYZ 127.5^ 114-113, 112s OI +5k
Oct 28. Little mentioned food stamp cuts could turn into big news
–This week brings the FOMC meeting Wednesday, Retail Sales Tuesday and treasury auctions of 2, 5 and 7 year notes, beginning today.
–The theme in eurodollar options on Friday was put spread selling. EDH6 9900/9875ps sold about 50k (open interest -26k) and EDM6 9850/9825ps sold 60k (open interest -42k). These sales helped the green pack settle at a marginal new high for the move. Also 4EZ (gold dec) 9750/9700ps was sold on exit 35k. The question is whether these sales are a sign of final short covering capitulation, as ten years have also run into a strong resistance area (2.50 close Friday, down 1.5 bps). The fact that stocks continue to post new highs should also temper buying in fixed income, though it hasn’t thus far. And stocks continue to run in spite of a Goldman note citing increased downward forward guidance by companies for Q4. Taken together these moves suggest strong confidence that the Fed will reaffirm QE this week, perhaps leaving the market vulnerable to a surprise?
–If there is a pullback in fixed income, it should probably be seen as a buying opportunity as economic confidence has declined. Negative press about Obamacare feeds uncertainty, for example the LA Times has a piece on insurance sticker shock related to the new law. “Glitches” are relentless. Also, food stamp benefits are being cut across the board starting Friday. “The USDA projects that the average monthly food stamp payment of approximately $272 per household will decline in November by $36 for a family of four.” http://www.wnd.com/2013/10/new-domestic-threat-food-stamp-riots/#Z28OJujjxssTQc2H.99
–Another topic that could quickly spill over from the back burner is Puerto Rico, featured in an Economist piece. Muni markets have already been roiled by the increasing possibility of default, and the federal gov’t has to walk a fine line in order to avoid setting a bailout precedent.
–News today includes Industrial Production expected +0.4 and Dallas Fed, expected 9.0 from 12.8 last.
Oct 25. Bikes, not oil
–Interest rate futures backed off their highs yesterday, as the notable feature of the day was large buying of Green Dec put condors (2EZ 9875/9862/9850/9837 for 1, 50k). On Wednesday there had been a large outright buyer of EDZ5, so this trade, and other 2EZ put buys, could be related – downside protection. Ten year yield rose 3 bps to just over 251. Curve steepened. Treasury auctions 2’s, 5’s and 7’s next week.
–China is constantly calling for an end to US dollar reserve currency status. Some commentators are saying the Saudi rift with the US, and the fact that China is the biggest importer of oil could hasten the loss of the dollar monopoly if the Saudis accept other currencies. Dollar reserves would not be as essential for other countries to hold; US borrowing rates could be pressured higher. In the shorter term, crude oil and the CRB index both appear to be weakening, while China is letting its repo rate rise in a bid to stem inflation. The great debate between deflation and hyperinflation in the era of huge debt and huge QE rages. Michael Pento notes that fine art auctions are seeing record price increases, which he believes are a precursor to massive inflation, (yet gold is 25% off its high, Mr Grant). Ambrose Evans Pritchard wrote a piece this week saying the EU is under threat of a dangerous deflationary spiral due to large and rising debt levels. In a nod to his argument, NPR: In Almost Every European Country, Bikes Are Outselling New Cars (in Italy the first time since WWII). http://www.npr.org/blogs/parallels/2013/10/24/240493422/in-most-every-european-country-bikes-are-outselling-cars The US interest rate market signals idle inflation, stocks lean the other way. I have to jump on my bike now and ride to the train to squeeze the last value out of my monthly pass.
Buy bonds.
Oct 24. Technical yield levels reached; bonds should consolidate here
–Follow through yesterday; the curve continued to flatten, implied vol under pressure. New lows in most one-year calendar spreads in euro$’s, with the highest spread now under 100 bps (EDH16/H17 at 97.5). Huge outright buy orders came into EDZ15 and EDH16. Total open interest in euro$’s was up over 100k, 40k alone in EDU15, EDZ15 and EDH16.
–New low in red/green pack spread at 73.5, -2.875 on the day, as red pack settled -0.625. In the bigger picture (looking backwards), reds/greens ended April around 30 bps, just prior to taper/tighten fears. By September it reached 109, but that was just after a contract roll. So I would say the rally was from around 27 to 103. Fib retracements are 74 (.382) and 65 (50%), so we are right at 38% at 73.5. (Ten year 38% yield retrace is 247; closed yest 248). So we’re in an area of price resistance. Now, looking forward, why the pressure on reds in the face of massive buying of first 2 greens? Perhaps related to spread compression, but also might be somewhat related to ECB stress tests? These tests are supposed to end in October 2014. Draghi said yesterday that banks that should fail, will fail. Going into Q4 of next year it may well be that EU banks need to raise a lot of capital. Could that possibly weigh on Dec’14 and Mar’15 contracts?
–Obamacare individual mandates may be postponed. Uncertainty moved forward, just like budget negotiations.
–Interesting story in Washington Post about Saudi relations with the US reaching a cracking point. http://www.washingtonpost.com/blogs/post-partisan/wp/2013/10/23/the-u-s-saudi-crackup-hits-a-dramatic-tipping-point/
The article mentions several times that the US is increasingly seen as unreliable in the region, not just by Saudi Arabia, but by Israel, Jordan, UAE and of course, Egypt. It almost appears to be a strategy of neglect in the region, now that US energy production has been ramped up. However, increased instability could cause problems down the road.
–News today includes Internat’l Trade, Jobless Claims exp 335k, and PMI.
Oct 23. Treasury yields drop on weak jobs report.
–Soft employment report sent yields to new recent lows with tens down over 9 bps to just under 2.52. NFP 148k and Avg Hourly Earnings +0.1. Eurodollar calendar spreads made new lows. The peak one-yr spread is now 100 bps (EDZ15/EDZ16 which was down 4). Red/gold also at new low of 259, down over 10 bps.
–Implied vol was likewise hammered. For example, Green Dec 9887 straddle settled 22.5 Monday, the 9900 straddle was sold at 17 just after data (17.5s). The buyer of 25k blue Nov and Dec 9775/9762p strips up to 40 on Friday exited the trade yesterday, from 24 to 17. I marked the TYZ straddle down 0.7 at 4.7, and the atm bond straddle at 7.7 which started October over 10%. Most euro$ option trades appeared to be exits; probably still a bit more behind.
–This morning there are several articles about upcoming ECB stress tests on banks, which are supposed to be completed by Oct of 2014. Of more immediate importance are large write offs of uncollectable debt by some of China’s banks, (BBG) “China’s biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults.” Also, the repo rate in China is up this morning in what may be a fresh attempt by the PBoC to stem inflation. Asian stocks are lower this morning, and in another DIS-inflationary piece of news for the US, crude oil is down about $1.
–TIC data was released yesterday, expected inflow of $30B was actually an outflow of $9B! I didn’t go through details but Bloomberg notes a big outflow in foreigners’ US equity holdings (-16.9B) and net selling of treasuries. Big picture take-away seems to indicate selling at the lows (August was a down month in both stocks and bonds), and chasing on subsequent rally…
Oct 22. Today’s delayed Payroll Report; NFP expected 180k
–Yields backed up slightly with tens up a couple of bps to 2.61. Activity was sparse at best, though there was a large buyer of EDZ3 up to 9975.5 as the 3 month Libor setting dribbles lower (just under 24 bps). Open interest increased nearly 6k.
–The long awaited payroll report is released today, expected to show a gain of 180k. I’m of the opinion that even if hiring shows some momentum, the gov’t shutdown likely squelched it, along with the fanfare of the Obamacare roll out.
–In the absence of interest rate trading activity, I looked at grain markets over the past couple of years as crop yields are expected to be large. Corn trades nearly half the price of 2012’s high. Beans and wheat are also near the lower end of the past two year range. Farm income is declining, according to a slightly dated KC Fed report. http://www.kansascityfed.org/publicat/research/indicatorsdata/agcredit/AGCR2Q13.pdf Will farmland prices be able to sustain their gains? In Q2 2013, irrigated croplands jumped 25% in price, but income should again become a determining factor. (Other factors noted in the KC report were low finance rates and lack of competitive investments). In spite of QE, weaker grain prices are likely a disinflationary influence.
–(Reuters) – “The federal judge overseeing Detroit’s bankruptcy filing called the city’s pension funds “unsecured creditors” and stated that any special protections for them would violate federal bankruptcy law.” From Breitbart: “In a Sunday morning interview with WGN Radio, Illinois’ Senate President John Cullerton said the state’s staggering $100 billion unfunded pension liability is not a “crisis.” …“People really misunderstand the nature of this whole problem; quite frankly, I don’t think you can use the word ‘crisis’ at the state level,” Cullerton said.” http://www.breitbart.com/Big-Government/2013/10/21/Illinois-Senate-Pres-100-Bil-Unfunded-State-Pension-Liability-Not-a-Crisis Amazing. I’m sure those hoping to receive pensions in IL are happy to know that they too, are unsecured creditors.
Oct 21. Delayed data week. Employment report on Tuesday
–Notable put buying Friday in euro$’s led to modest losses with blue pack (4th yr) the weakest at -3.75. There was a new buyer of both blue Nov and Dec 9775/9762 put strips in size of about 25k each. Delta of around 60 in Nov and 70 in Dec which translates into over 30k futures. Again, with a net change of less than 4 bps, one could say the market absorbed selling pressure fairly easily in front of Tuesday’s delayed release of employment data. (NFP expected 180k). Ten year yield nearly unchanged at 2.587.
–Interesting Lacy Hunt (Hoisington Mgmt/always bullish on fixed income) post on ZH. He notes that the Fed’s forecasts are consistently too optimistic, concluding that their models aren’t working due to too much reliance on the wealth effect, too much faith in impotent LSAP’s and too much US debt. http://www.zerohedge.com/news/2013-10-18/lacy-hunt-warns-federal-reserve-policy-failures-are-mounting Of course, the Fed’s response will likely just be “MORE”, a la Japan.
–JP Morgan settled with US gov’t for $13B, WSJ helpfully points out that banking profits are getting squeezed. Of the $13b, $9b goes to the US gov’t in fines, which covers less than a week of the deficit. BofA next up to bat with proposed $6b settlement.
–Japan posted record high trade deficit of 932 billion yen ($9.5 billion), the 15th consecutive monthly shortfall. (Slightly weaker yen this morning). A scan of other internat’l news is disconcerting. A city in NE China of 11 million, Harbin, which I hadn’t even heard of before has been shut down by heavy smog (RTRS). And from the Telegraph, “…54 per cent of the French believe that taxes – of which there have been 84 new ones in the past two years, rising from 42 per cent of GDP in 2009 to 46.3 per cent this year – now widen social inequalities instead of reducing them. …By 2014, France’s public expenditure will overtake Denmark’s to become the world’s highest: 57 per cent of GDP.” [Note: income of 46% GDP, outlay of 57%. Sustainable?] “Today, one out of four French university graduates wants to emigrate, “and this rises to 80 per cent or 90 per cent in the case of marketable degrees”.
Oct 18. Bacon beer milkshakes and gasoline
–Strong rally in interest rate futures with ten yr yield plunging over 13.5 bps to 2.583. The curve flattened with 2/10 down 10 bps to 227. Eurodollar one year calendar spreads made new lows, for example EDZ14/EDZ15 fell 3 bps to 59. EDZ15/16 is still above 100 at 102, but was down 5 on the day. Red/green pack sprd made new low just above 78, and red/gold pack spread dropped over 8 bps to 266.5, essentially tracing out the same path as the ten year yield. Both got up to around 3% and are now within a few bps of each other on the way back down.
–The euro made a new high and the dollar index looks quite vulnerable to a quick move lower. New highs in stocks (despite China’s rating agency downgrade of the US). It’s all fixed…back to the model of supporting financial assets with liquidity and a weaker currency. Almost unbelievable that the FT suggests a chance of December tapering, while the WSJ goes out on a limb and says an October taper is “unlikely”. Gee thanks. In any event the real economy, i.e. the US consumer, doesn’t seem particularly robust. For example Ebay is warning of weak spending without much hope of improvement in Q4. (Stock down 4%).
–There was early selling of TYZ 128 and 128.5c vs buying 124 puts that held futures down initially. I thought it was a cover of the short leg of 124/128 strangles that had previously been sold, but open interest was up in all strikes with TYZ 124p adding 33 k positions. Rumored to be in conjunction with outright buying of 7 yr treasuries.
–Texas. The best country in the world! …Of course there’s a bacon beer milkshake at Texas Motor Speedway. http://www.chron.com/news/article/Of-course-there-s-a-bacon-beer-milkshake-at-Texas-4901345.php?cmpid=hpts
Also, they’re not exactly going for the trendy Target shopper, but you’ve got to give Kmart a thumbs up for this one: http://www.youtube.com/watch?v=NmcCWNGz-Ns
Oct 17. Treasuries rally on debt accord, surprising the shorts
I want a girl with uninterrupted prosperity
Who uses a machete to cut through red tape
-CAKE
The chart below looks like a penny stock that some charlatan has perpetrated a pump-and-dump scheme on, but no, just the Oct 24 T-bill during gov’t negotiations…
Oct 17. The gov’t passed a bill to avert debt default. Gold is up $27 this morning, back above 1300 at 1309. TYZ is close to making a new high for October, but back month eurodollars are easily making new highs to levels not seen since last June in the midst of the taper sell off. New low made yesterday in red/green pack spread at 83 bps. Highest one-yr calendar spread on the curve is EDZ15/16 which settled yest at 107, though Sept’15/16 is trading below 100 bps this morning. The fight resumes in January as funding only goes to the 15th of that month with a new debt ceiling until Feb 7.
–IBM reported the 6th quarter of declining sales, partially blaming emerging markets. China is also citing a slowdown in SE Asia as a reason for slowing exports. Taper/tightening fears of early summer exposed EM problems and spurred capital flight, the effects of which are still being felt due to loss of confidence. At the same time, there is more press on upcoming EU bank stress tests and the possibility of more depositor bail-ins. Weidmann continues to warn that banks are carrying too much sovereign debt of their home countries. Is it any wonder that treasuries find support in this environment?
–There’s an article on Reuters that sums it up pretty clearly with this headline: Washington is the Biggest Risk to the Economy (due to continuing uncertainties and lack of resolution to structural problems). It’s amazing that this gov’t, so intent on protecting citizens from any possible malfeasance from the financial industry can single handedly sabotage the entire economy. For example, I saw a blast from MNI that said the Fed was considering imposing penalties on banks for owning physical commodities. Good, let’s reinforce disinflationary tendencies. Moral hazard? Look at DC…no risk to wrong decisions, and rules for the rest of the populace don’t apply. It’s the best example of moral hazard in the country. Look at the attached chart of the Oct 24 t-bill. Trades like a penny stock. And when critical mass is reached in a population that feels it has no voice, a void is created which gives rise to, for example, Le Pen, whose party won elections in France and assures us the EU will collapse like the Soviet Union. Her party strikes a nationalist chord by rejecting Brussels’ control over France.
–News today includes Jobless Claims expected 330k and Philly Fed 15.0.
Oct 16. Me worry?
–Approaching the disaster deadline for a government deal. Yesterday afternoon Fitch put the US on negative credit watch. From Reuters: North Carolina is first state to cut welfare amid federal shutdown. It all sounds pretty bad, right? And yet the range in SP’s in the month of October so far is smaller than the last five months and remains within spitting distance of new highs. (I know the month is only half over, but these seem like momentous days). Implied vol in interest rate futures is also going lower. In short, the markets don’t care. No bond vigilantes, no stock vigilantes to light a fire under Congress. But the bigger themes just continue to roll forward on a tide of liquidity. For example, Fed Ex announced yesterday that it’s buying 32 million shares back, or 10% of outstanding. The stock hit a new high.
–Beige book this afternoon. I’m sure it will note mixed conditions across the country. Yawn.
–Things that Make You Go Hmmm newsletter compares the current size of QE at $85 billion a month to previous financial crisis periods that required emergency cash infusions. “Now, a mere five years on [after Lehman] we find ourselves in the position of requiring roughly three Bear Stearns bailouts every month just to keep things humming. Put another way, we require 23.6 LTCM bailouts or 65.38 Baring Brothers bailouts every month, just to keep the global financial system from being brought to its knees.” I would add that TARP at around $700 billion is covered in just over 8 months of QE at the current rate. The markets don’t care about the Federal Gov’t as long as the Federal Reserve keeps working. Put a kink in the gears of that institution and you’ll see panic.
