May 31. Safe haven rates plunge as europe unravels
–“Further monetary policy accommodation is both appropriate and necessary.” Fed’s Rosengren. However Dudley yesterday appeared satisfied with current policy. I don’t know how monetary policy can get much more accommodative given plunging yields driven by safe haven flows. Do we really want to exacerbate that dynamic?
–The world is racing toward zero rates with German Schatz (2 yr) reaching that level yesterday. Swiss already have negative rates and issued debt at negative yields. In the US there was a buyer of 13k TUU 110.5c for 2.5, which also suggests a single digit yield (at least it’s positive) compared to current 27 bps. (The strike price is around 13-14 bps). Red/green eurodollar pack spread closed at a new low just under 22 bps. US ten year fell 11 bps to record low 1.62%.
–Global growth is stalling. Brazil cut rates to 8.5%. India’s GDP was only 5.3%, a nine year low according to Bloomberg. The stock markets of both countries are down ~25% from highs three months ago.
–US stocks were down a bit over 1%, still holding up admirably well and likely benefiting from safe haven flows. Since the Fed chairman has specifically pointed to policy success as measured by rising stocks, a further drop would have to be considered unnerving.
–With June eurodollar midcurve options expiring two weeks from Friday, both the 9937.5 straddle on EDM13 (ref 9935.5) and 9925 straddle on EDM14 (ref 9924) settled at only 7 bps. Too complacent? There was a new buyer of 40k 2EM 9912p for 1 yesterday covered 9922.5/23.
–Today’s news includes ADP expected 154k. Job Claims 370k. GDP 1.9% and Chicago PMI expected 56.1 from 56.2.
May 30. All about Spain
–This morning Spain and Italy bond yields are surging, with new high in Spain/German bund spread. The ECB rebuffed Spain’s plan to recapitalize Bankia with sovereign bonds which could then be pledged to the ECB as collateral. (Perhaps I don’t have the details of the plan exactly right because I would think gold would surge as a result…not). Also, China declined to help with a big stimulus package (your move, Bernanke…). Spain has clearly edged Greece off stage. I do find it surprising that some people think there will be a “relief” or “clarity” rally if Greece leaves the euro, I would think it would be a very temporary counter-trend move at best. As Alexis Tsipras says, “the next day, the markets will ask, who’s next?”
–Trade was subdued in interest rates yesterday except for June/Sept rolls in treasuries, where open interest in TYM fell 701k vs +788k in Sept. Interestingly FVM fell 412k, but FVU was up only 357k (according to prelims)
–The law firm Dewey Leboeuf filed for bankruptcy in the biggest law firm collapse ever. I, like you, say “so what?” Apparently there were guaranteed bonus agreements that simply couldn’t be honored; high debt and excessive compensation sunk the firm. But are the partners going to have to sell their homes and make good to all creditors, including other attorneys due to poor management decisions? Not in a NY minute. But citizens are always expected to pay for the bad decisions of their elected leaders and financial overlords. Or leave. Or revolt.
–Regarding the former option: (CNSNews.com) – “New York State accounted for the biggest migration exodus of any state in the nation between 2000 and 2010, with 3.4 million residents leaving over that period, according to the Tax Foundation… Over that decade the state gained 2.1 million, so net migration amounted to 1.3 million, representing a loss of $45.6 billion in income.”
–And they are abandoning the financial markets as well, perhaps the flameout of Facebook (another new low) is a reflection of loss of public trust.
May 25. Big money happy to let SNB bail them out of EUR positions
–The euro had a bad day yesterday (low 125.14), though it’s rebounding slightly this morning. FT internet edition leads off with the headline “Big European funds dump euro assets.” Underlying sentiment couldn’t be more obvious than the reaction to SNB intervention: EUR/CHF spiked up to 120.76 in about twenty minutes, but by the end of the day was right back down to its previous level of 120.14. Another headline says “Bankia prepares to request more state aid” showing continued deterioration in Spain’s banking system. Interestingly US stocks have shrugged off the last leg of euro weakness and have rallied nicely. The US curve is also steepening, with red/gold up over 6.5 bps to 134.5.
–June/Sept roll in treasuries began in earnest yesterday as TY spread traded a big chunk from 32.25 down to 30.5. There were some rumors of an error, but in any event TYM open int fell 257k and TYU was up 273k. Still plenty to go with TYM having 1.855m open; TYM options expire today.
–Eurodollar and treasury implied vol both pressured yesterday. TYU straddle sold from 246 to 243. There was selling in Green June midcurve straddle at 9.5 and in Blue June 9875^ (underlying 9873.5) at 14.5 just before the end of the day with three weeks to go. Seems cheap given that the period covers unemployment and the euro is still in flux, though FOMC occurs right after expiration.
–Floor closes early today for 3 day weekend!
–Just a bit of local color to show that budget problems appear to be the same the world over (politicians desperately trying to raise taxes/fees to cover outlandish promises and benefits). Two clips from this mornings Chicago Tribune: “An investigation shows how at a time when the state has $8 billion in unpaid bills and is cutting funding for services, Illinois is sending out ever larger retirement checks to former lawmakers who have reaped millions by manipulating the state’s pension code.” EIGHT BILLION IN UNPAID BILLS!! And… “Mayor Rahm Emanuel billed his soon-to-be-launched speed camera program as being about child safety and not raising cash, but a new Tribune/WGN-TV poll shows most Chicago voters are skeptical of the mayor’s rationale and don’t want the devices.”…because more voters think its about raising revenue.
May 18. A Bronx Tale
–Interest rates continue to plunge, with tens at 1.70, essentially at new lows. 2/10 down 7 bps to 141. Red/gold pack spread at 125, also a new low. The Fed’s pledge to keep rates low through late 2014 had shifted the market’s interest to the blues (2015 contracts) in terms of setting shorts through puts and calendar spreads. Now those plans have gone awry, as green/blue calendars have plunged. (I’m truly sorry Fed’s dominion, Has broken market’s social union…) I marked green/blue pack spread at 47 yesterday, was around 60 two weeks ago. So, one could argue that the Fed’s pledge has backfired in an unanticipated way, though the ECB’s overt pledge of low rates through the LTRO has also spectacularly flamed out in terms of calming markets.
–There was a seller of 40k EDZ2 9925/9900 put spreads vs 9962c yesterday at 2.5. Trade was an exit. I am wondering if paring down of positions is due to a shift in market perceptions about the economy, or perhaps has a little bit to do with JPM fallout. There was also a buyer (only 500 according to prelim sheets) of USQ 173c for 2 and 3. Probably represents yield level of around 1.5% for the long bond as the contract is worth about 6 bps per point. The guy just looked at yesterday’s yield drop and figured the bond yield would fall 8 bps per day so he’ll be in the money in about a month. Simple.
–NATO summit starts. Protesters are supposed to be around the intersection of the Chicago Fed and the CBOT, targeting a bunch of clerks in trading jackets that are barely eking out a living. It brings to mind the story of protesters who thought it would be clever to swarm the LIFFE exchange, but who ended up having the same fate as the bikers who visited Sonny’s Bar in the Bronx Tale (youtube “now you’s can’t leave”, http://www.youtube.com/watch?v=pTzie3yKh40 ) Those were the glory days of trading floors…
May 16. US curve flattening continues…
The trend of curve flattening in the US remains firmly in place. 2/10 down another bp to 150, while red/gold pack spread fell over 3 bps to a new low of 134. Option trades were partially responsible for the move in the euro$ curve. Early in the day there was a buyer of 50k June (red) midcurve 9937p for 7-7.5 (9.5s). Prelim open interest from CME shows volume of only 10k but an open interest drop of 29k…trade appears to be an exit. At same time TYU 132.5 straddle was sold down from 2’53 settle Monday to 2’41 yesterday, taking vol back down below 5%.
–This morning gold is down over $25 with GCM around 1530, near the spike low of the end of last year. Same story with silver. The markets that ran up in the first 3 months of the year, whether due to liquidity or “economic growth prospects” have made a round turn trip. That includes EUR, now around 127, just about where it started the year, having popped up to 135 in the interim. It seems to me that these are important levels to try to find support across many markets, or else face wholesale liquidation.
–As a side note, one of the catalysts, or more appropriately, excuses, for the current turmoil is JPM. Interesting to note that while the stock has dropped 22% from the high in March (46.50 to 36), it still isn’t near the low of last November which was around 28. Given the outsized media coverage of JPM, one might think that vulnerability in one of the strongest global banks would be reflected in higher LIBOR settings? Nope…EDM still holding around 9949.5 and 9950 straddle 5.5/6.0.
–Today’s news includes Housing Starts at 690k, Industrial Prod +0.5 and FOMC minutes.
May 15. Curve flattens further
Curve continues to be steamrolled as ten year note yield fell 6 bps to 1.78%. 2/10 down 7 bps to 151. New lows in reds to all deferred contracts with red/green at just 25.5 bps and red/gold down nearly 11 bps to only 137.5. I think red/gold is too low relative to treasury curve (and rates in general); probably worth buying red/gold pack spread and buying some ten year treasury calls as a hedge. In fact, I have just done some of this trade for myself, using EDU13/U16 as the spread, paid 133.0.
–While the curve is at multi-year lows, many “risk” or “liquidity driven” markets are at or near lows for this year. For example Crude has made a new low. Copper is the lowest it’s been since early January. Same thing with India’s Sensex or Korea Kospi, or silver or gold. In fact, US equities have held in remarkably well as SPM started the year around 1260-1280 vs 1340 now. While US commentators wring their hands about recent equity losses, non-dollar investors have been rewarded by using US stocks as a safe haven, with the added benefit of dollar appreciation.
–The question now is whether circumstances that have been driving recent price action abate or accelerate. I lean toward the latter as these moves have a tendency to feed on themselves, and central banks are being perceived more like the man behind the curtain rather than the all-powerful Wizard of Oz. (The next FOMC is a long month away). In the old days during times like this we might get rumors of “emergency Fed meetings” to make things more interesting, now we just get flying monkey Fed speakers that transparently guide us to fields of sleep inducing poppies, otherwise known as the next rounds of QE.
May 10. The road to deflation
–Once again all eurodollar calendar spreads settled at new lows. Red/gold pack spread was down 2 to just under 152. Red/green at just 30 bps. 2/10 treasury to 157 despite ten year auction. 30 yr bonds auctioned today.
–There was significant early buying of eurodollar straddles that fizzled by days end. For example, EDU 9950^ traded up to 16.5, but settled 14. EDZ2 9950^ traded 20.5 but settled 19.5. EDM2 9950^ traded 7 but settled 5.5.
–EDU12/EDU13 spread was as low as 4 bps before coming back to settle 6.
–Today’s news includes Trade deficit expected -49.5b, Jobless Claims expected 366k.
–I saw a piece written by Pat Buchanan about the rise of nationalism across the globe. On a longer time frame I think the impact on int’l trade has to be negative. I think the recent decline in the price of oil underscores this idea. The question now is how central banks respond, and if new financial measures will bolster asset prices. Will the Fed’s new QE program be sterilized? Will the Fed further cut the swap rate to the ECB? By funding nationalized banks, (like Bankia), is the ECB funding sovereign states, and should the US Fed be involved in such programs?
–The world is likely on the verge of a massive deflationary shock. Central banks have attempted to forestall the event with cross holdings and balance sheet expansion but each new program has a shorter shelf life.
May 7. Employment report confirms sluggish economy
–Employment data was weaker than expected and markets reflected disappointment. (From Liscio Report: “Almost 70% of job gains came from bars and restaurants, temp firms, and retail, which do not seem the strongest foundations for long-term growth.”)
–The curve made new recent lows with 2/10 at 163 and red/gold euro$ pack spread at 158 (down 6 on the day). In early December last year 2/10 got below 150 for a couple days, a target area for later this month. All back month euro$ calendar spreads made new lows. Crude oil broke below $100/bbl, down 6.5% in the past few sessions. SPX fell 1.6%. Implied volatility in treasuries sank to new lows. There simply isn’t much prospect for a move to higher rates over at least the next quarter, and perhaps for the rest of the year. Those who had hoped to revisit the higher yields of mid-March are likely to be relentlessly ground down into submission. At the end of Friday, a colleague mentioned that EDU14 should continue to rally. I too think rates edge lower, but I responded that I have a hard time paying 9912 (88 bp yield) for a contract that far out. And that’s the core problem, it SEEMS like it’s too high, but odds are that it rolls higher yet. Which isn’t so bad if you don’t have a position, but is gut wrenching on a daily basis when you’re short, at least in my personal experience. I suppose this week’s treasury auctions could hold the market down, but 1.88 for US tens still seems pretty good compared to 1.58 bunds.
–A line from David Rosenberg also captures a big macro theme: “The ‘baby boomers’ are driving the demand for income which will keep pressure on finding yield which in turn reduces buying pressure on stocks.” I recall the mantra before 2000, when everyone repeated ad nauseum that baby boomers HAD to put their money in stocks for retirement. Well now it’s 15 years later. And they can’t retire.
–One other interesting footnote for those who think “Tax the rich” is the answer: Americans renounced their citizenship in record numbers in 2011. http://rt.com/usa/news/us-citizenship-tax-denounce-521/ The absolute number seems small, only 1788, but I don’t think they’re part of the 99%. As the article notes FROM AN IRS REPORT: For some US taxpayers abroad, the tax requirements are so confusing and the compliance burden so great that they give up their US citizenship.
May 4. Employment day. NFP expected 165k
Employment report today with payrolls expected 165k and rate of 8.2%.
–Going into the data, implied vol in treasuries at the lows. Eurodollar calendar spreads in euro$’s also on the lows. Yesterday there were short dated put buyers and other trades for protection in case of a bearish number. That’s an easy trade from these levels, either placing a small bet on a big NFP or unwinding some longs. What is difficult is finding something to buy to protect against a surge higher. I looked at US1K 144c yesterday and they were 5-7, more than a point out of the money. I was able to buy calls half point out of the money with two days left for 2 last week. In any case, my personal bias is for lower rates. Even if the data is stronger than expected I think there will be aggressive dip buyers. But you never know with this data. What is certain is that oil started the month at 106 and has plunged to 101.50. Gold is off $30 in the past few days and at low end of range. Silver made new recent lows yesterday and is in a two month downtrend. Copper has been trying to rally but has faded back in the last couple of days. The inflationary signals that bond bears have been counting on seem to be sputtering. And geopolitical events that could create safe haven buying aren’t abating.
May 1. Flatter curve, lower vol. RBA cuts 50 bps…more than expected
RBA was expected to cut by 25 bps but went 50 (to 3.75). China PMI was 53.3, slightly less than expected. Today’s US news includes ISM expected 53 from 53.4 last, and there are several Fed speakers. Chicago PMI yesterday was much weaker than expected. The grinding trends in the interest rate market continued, with a flatter curve and lower vol, signaling a sluggish economy at best. The economic data is coming in weak, not just Chicago PMI but the Dallas Fed Bus Activity was -3.4 from 10.8. And the Chgo Fed’s Nat’l Index last week was very soft. I have a hard time seeing tens get back much above 2% even if there is a surprisingly strong employment report Friday, though there are cheap puts for anyone itching to play the downside. Fed speakers yesterday including SF Williams and (not surprisingly) Dallas Fisher showed little inclination for more accommodation, a theme that will likely be sounded again today.
–This isn’t new, but still eye catching: Erskine Bowles “explained that 100 percent of the tax revenue that entered the Treasury in 2011 went out the door to pay for mandatory spending — such as Medicare, Medicaid and Social Security — and to pay the interest on our staggering $15.6 trillion national debt.” …That means that every single dollar we spent on everything else, including two wars, national defense, homeland security, education, infrastructure, high-value-added research and the like, was borrowed. “And,” he warned, “half of it was borrowed from foreign countries. And that is a formula for failure in anybody’s book.”
http://www.huffingtonpost.com/2012/04/30/erskine-bowles-economic-crisis_n_1464999.html?ref=business
