Sept 20. Italy downgrade by S&P. Greece makes bond payment
Markets fought back from losses Monday as hope for a solution to Greece lingers. S&P cut Italy ratings by a notch, which was also taken in stride. New low in the 2 year note of only 15 bps. Tens are back below 2% at 1.95. All treasuries have taken out crisis low yields of 2008/9 except for bonds, which had plunged to 2.5% and now sit at the lofty level of 3.21%. FOMC meeting begins today, with an announcement tomorrow afternoon. Eurodollar curve flattened dramatically with (new) red/gold pack spread down 12 bps to 197.
–EUR/JPY nearly made a new low, trading briefly below 104, but came back to close above that level. Copper made a new low for the move. Gold and silver both weak. Oil was down over $2. A tilt back toward deflation is slowly settling in; likely to become a more prevalent theme if the dollar maintains strength.
–AAPL made a new high even as the general market was selling off. It’s hard to tell if this is a defensive move into the new “safe haven” or if it reflects underlying buying power based on huge liquidity (even as financial stocks remain mired near their lows). Nearly every expert says AAPL is cheap relative to earnings growth, but it’s still an impressive move in a down market.
In: Eurodollar Options
Sept 19, 2011. EU meeting goes badly; euro tumbles
–The biggest event on the US calendar is FOMC Tuesday and Wednesday. The market is expecting a “twist” operation which could further flatten the curve and erode yet another source of US banking revenues, which have already been limited by Dodd-Frank rules banning prop trading. 2 year note ended at just 17 bps. There are suggestions that Bernanke wants to further support stocks, but outside of direct buying, continued monetary efforts are likely to yield only temporary results. (If it really worked, then why hasn’t the Nikkei rebounded?)
–In Europe, things appear to have gone badly over the weekend: (BBG) “We have slightly different views from time to time with our U.S. colleagues when it comes to fiscal-stimulus packages,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing the meeting yesterday in Wroclaw, Poland [with Geithner]. “We don’t see any room for maneuver in the euro area which could allow us to launch new fiscal stimulus packages. That will not be possible.”
From ZH: German Finance Minister, Wolfgang Schäuble, took Geithner to task and explained to him in no uncertain terms, according to Fekter, that it was not possible to burden the taxpayers to that extent, particularly not if only the taxpayers of Triple-A countries were to be burdened. A bailout “with tax money alone in the quantity that the USA imagines will not be feasible,” Schäuble said. (Wiener Zeitung, article in German).
Geither warned of catastrophic consequences.
–Is it the euro that needs to be saved, or is it the european banks? Obviously the two are linked, but each country recognizes the risks to its own banks. As of the end of the week, DB, UBS, Credit Suisse, Soc Gen and Paribas COMBINED market caps were about $171 billion. JPM alone has $132 b mkt cap. JP, Wells, Citi and BofA combined have $423. According to a Reuters piece, French banks have exposure to Greece, Ireland, Portugal, Spain and Italy of $671 B, and the exposure of Germany to the group is $522 billion. Clearly those funds aren’t all at risk, but the assets of european banks rest on a slender reed of capital, and are significant percentages of GDP. Further equity AND debt capital is certain to evaporate in the crisis. The system isn’t unified enough to confront the problems, and to think that US stocks can escape tangential negative effects is unreasonable at best.
In: Eurodollar Options
Sept 1 thru 16…will post daily going forward
Sept 16. The coordinated central bank action to provide dollar liquidity to banks in the EU caused immediate curve steepening. EDZ1 jumped 10 as the relief valve was opened in the form of longer dated dollar swaps. Red/gold pack spread rose 10.5 bps. Stocks and the euro also surged, but gold remained under pressure, nearing a loss of $50 even after the announcement, though bouncing about $15 later in the day. There was an article yesterday in the FT about banks using gold to access dollar liquidity. If the liquidity provided by the ECB comes with stigma, or at a punative rate, the gold method may still be preferred, creating an overhang on gold’s price. I’m not sure the ECB can force “healthy” banks to tap the lines like the Fed did in order to make it look like “everybody’s doing it.”
–Ironically, the ECB move comes on the same day UBS announced a $2B loss in unauthorized trading by a single individual. So this is the financial system that the citizenry of the world is being asked to save, where $2B can be misplaced without management noticing. Gives a whole new meaning to the slogan “You and Us”. Moody’s warned that lack of risk control could cause a downgrade. No sh*t? After the Fed was heavily criticized for aid to Dexia and other non-US banks the last time around, they jump right back in. The drumbeat calling for bank nationalization is getting louder…as Kyle Bass mentioned on CNBC yesterday, equity and subordinated debt holders could get wiped out.
–In another example of a world gone awry, Goldman is closing its Global Alpha computer driven fund due to losses. The usual stuff isn’t working…there is a lot of forced activity and a lot of official manipulation. Somewhat stable relationships become unhinged. Does instability in the financial world spill over into the real world? I suppose a small example from yesterday is the run up in EDZ1. The fact that at-the-money near month straddles are higher than midcurves appears completely justified because of the 10-11 bp jump in EDZ, but it’s still hard to fathom how a midcurve March with 6 months to go can trade only 23.5 as if large moves are a thing of the past in reds.
–The number of U.S. homes that received an initial default notice — the first step in the foreclosure process — jumped 33 percent in August from July, foreclosure listing firm RealtyTrac Inc. said Thursday.
Sept 15. Stocks continue to rebound as does the euro, even though Merkel said eurobonds are “absolutely wrong” for tackling the crisis. However, Merkel and Sarkozy pledge to keep Greece in the euro, so hope triumphs over reality for the short term.
–Both FT and Wall St Journal feature top internet edition headlines “Loss of $2 billion at UBS by a “rogue trader”. These days it’s a drop in the bucket, as the european banking system needs to be recapitalized with over a trillion dollars. It’s like Dr Evil in Austin Powers having completely lost a sense of monetary value over 30 years. Makes LTCM, the hedge fund that rocked the foundation of the financial world in 1997/98 seem quaint.. losses of $5-8 billion and leverage of 50 to 1. European banking system is leveraged about 40 to 1 right now according to many estimates.
–A lot of news out today, CPI expected +0.2 both Core and headline, Job Claims expected 412k, Industrial Production +0.1% with Capacity 77.5, and Philly Fed, which was atrocious last at -30.7, expected -15.
–A reasonable amount of back month call buying yesterday. E2Z 9837c were bought about 40k in total, exit. E3V (blue Oct) 9862/9875cs bought vs 9812/9787ps in size of 45k…new position. Net changes on the day were fairly small…ten year yield edged back above 2%.
Sept 14. Credit Agricole and Soc Gen downgraded by Moody’s. BNP is under review and, like BofA, is shedding assets and intends to raise capital. ECB’s lending facility is being tapped in larger size; BBG reports that two euro-area banks are being lent dollars. A Republican who never held office before won the NY house seat in a traditionally Dem district.
–Stocks rebounded Tuesday. However, the technical picture on copper, which has a similar pattern to SPX, portends lower levels and is nearing Aug lows. EUR/JPY is also relentlessly breaking lower. Even though it seemed to be a “risk on” day, there was a large buyer of EDZ1/EDH2 9912p strip for 18.5 and 19, and EDZ1 9912p bought outright for 8.5 and 9.0 late, causing EDZ 9937 straddle to go from 31.5 to 33.0. Dec puts traded 60k and March 30k…new positions. This front end put buying seems to be a disaster trade related to dollar funding. EDH2 9875/9900p spd was sold on exit 130k at 2.5.
–The situation in europe appears to have shifted from ‘saving’ Greece to preventing an uncontrolled downward spiral. While vol jumped in the front end of the dollar curve, treasury vol is steady, as the Fed is expected to extend the maturity of its portfolio in a “twist” program. I wouldn’t be surprised to see a mad grab for USD and treasuries even before the FOMC meeting as europe unravels this weekend.
–Today’s news includes PPI, expected 0.0 with Core of 0.2 and yoy 6.5%. Retail Sales expected +0.2 from +0.5 last. 30 year bond auction.
Sept 13. Late day bounce in stocks as Italy negotiates (pleads) with China to buy its debt. Even if China does become the buyer of last resort, austerity measures still need to be enacted. The basic structural problems still loom.
–Many stocks made new recent lows in the US market, DOW, MMM, GE…large multinationals that are wary of a stronger dollar. Financials are also making new lows, GS, MS, JPM ( and of course DB, and UBS).
–Midcurve Sept options expire Friday, quarterly Sept options on Monday. EDU1/EDZ1 spread is over 20 bps while EDZ1/EDH2 sits at zero; a reflection of increased LIBOR settings and variation in settings from different banks.
–Gold took another $50 tumble yesterday; appears vulnerable to a hard washout, especially if dollar continues its recent strength.
–Ten year auction in the US today.
Sept 9. I didn’t watch Obama’s speech. (But Aaron Rodgers looked pretty good). Morning headline on Bloomberg says it all. “Stocks Tumble Worldwide after Obama Speech.” Well…that doesn’t really say it all…the big news is the breakout of the dollar, or decline of euro thru mid-July crisis lows of 138.37. A stronger dollar doesn’t bode well for US stocks. A friend sent me a chart which overlays current US stock pattern on that of Japan stock index (in dollars) lagged by 11 years. Implication is that the US is in for another down leg.
–It appears that Obama’s jobs plan is fighting strong headwinds. Headlines this morning say BofA is looking at cutting 40000 jobs. Illinois yesterday announced plans to shave 2000 state workers. It’s too late for states that are trying to balance budgets, and renewed financial market stress saps confidence.
–Treasury vol declined yesterday in a very quiet day for rates. New seller of about 10k FVX 122.5/123 strangle from 50 to 49 (the pit graciously settled 50.5). I marked Dec TY vol at 6.7, a new recent low.
–Eurodollar curve was a bit flatter with red/gold spread down to 182. This isn’t just a new recent low, it is a low for the last few years (I think since May of 2009).
–Going into 9/11 anniversary, and many press reports about possible threats, there will likely be a safety bid into end of the day.
Sept 8. Bernanke and Obama speak today. Hilsenrath of WSJ says Fed is considering three options, 1) extending maturities of its current portfolio (Twist), 2) reducing the 25 bp rate on bank reserves and 3) more jawboning. The market appears to be expecting maturity extension, the first option, but with ten year rates already at 2% it’s hard to see how much of an additional boost the economy will get. It’s not that rates are too high, it’s that the transmission mechanism is broken. Underwater homeowners aren’t able to access new loans at low rates.
–The prospect of Obama’s speech seems to be notable for how little is likely to come of it. Various details have already been leaked, and republicans have already lined up against increased spending.
–Dec/March eurodollar spread made a new recent high yesterday of +1 bp, having spent the last month at zero or below. There was heavy screen buying in the spread, and appears to be exiting of positions that were betting on a further dollar funding squeeze. Sept/Dec spread settled 16.75, as EDU nears expiration. EDU1 9962 straddle traded at only 3.25 bps, (expires 1 week from this Monday). An upward roll of 17 bps for EDZ appears fairly juicy, if a european bank implosion is avoided.
Sept 7. From FT: German court upholds eurozone rescue. Sparked a rebound in stocks and EUR (for now). However, in the bigger picture, many large banks are nearing lows made at the height of the crisis in early 2009, which could force a new round of recapitalizations.
–In the aftermath of the SNB decision to devalue, many commentators point to gold as the last safe haven asset. But what if the dollar becomes the safe haven? Precious metals and US equities could tumble, maximizing pain. The initial move in gold was higher after the SNB, but gains didn’t hold.
–Beige book this afternoon. President Obama’s speech Thursday, with Reuters reporting a proposed $300 billion jobs package on tap.
–Tens closed below 2% yesterday, with 2/10 spread at new low of 178. Not sure that I’ve marked this exactly right, but I also have ten year note to TIP (inflation index note) at new low of 196. Whether the mark is exactly correct or not, the recent trend is, of course, lower. This would be the low for the year, (possible confirmation of deflationary forces). Again, the prospect of a strengthening dollar would be deflationary for the US, and would knock a leg of support away from multinational exporters.
Sept 5. Horrible employment report sent yields tumbling, with ten year note ending just above 2% at 2.01, down 14 on the day. Back month euro$ calendar spreads all made new lows with red/green at only 37 bps.
–Swiss franc plunged as SNB has committed to cap the currency at 1.20 per euro. Gold is back near $1900.
–China Service ISM released Monday fell to 50.6 from 53.5.
–Global stocks have plunged. SInce last Thursday, ESU has fallen from about 1220 to 1150, nearly 6%, and was briefly below 1140.
–Kocherlakota speaks today.
–From NYT over the weekend: “The United States Postal Service has long lived on the financial edge, but it has never been as close to the precipice as it is today: the agency is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances.”.
Sept 2. Employment report today. Goldman revised estimate for NFP to only 25k. Consensus is probably around 50k.
–Curve compression continues in eurodollars with reds up barely 1 bp, while blues and golds were +12.25 and +11.25 respectively. Red/green pack spread at a new low of 40.6 bps. Red/blue pack spread at only 119 bps, also a new low. Large option trades reflect the same flattening trend, with call buying of blue midcurves, or rolling to higher strikes further out the curve, For example, there was a seller of Grn Dec 9862c (deep in money, Z13 settled 9917) vs Blue Dec 9837c (EDZ14 settled 9840). Buyer of 20k E2V 9925/9937c spd vs 9875p. Green pack is 99.08…amazing that the third year forward in dollars is below 1%, especially given unit labor costs (in productivity report) of +3.3% yoy.
–The government is set to file suits against large banks for mortgage abuses either today or next week; caused weakness in financial stocks. The ever-flatter curve at zero rates is also a huge challenge for the financial sector. Libor setting has been ticking up and there have been many press reports about variation in 3 month settings from various banks. Front end of the curve is again under pressure this morning. Uncertainty is reflected in option prices: EDH12 and EDH13 both settled at 9949…calendar spread zero. But EDH12 9950 straddle settled 29.0, while EOH settled only 24.5. Essentially the same expiration, but straddle on red trades lower!
Sept 1. Not much net change in eurodollars. Curve steepened as longer treasuries rose a few bps in yield with tens at 2.21.
–Today’s news includes Jobless Claims expected 407k and ISM, which is expected 48.5 from 50.9; (economic contraction associated with sub-50 readings). Employment data Friday alos expected weak with NFP at 70k, though it seems like the market is skewing that level even lower.
–In a surprise move Brazil cut rates from 12.5% to 12.0, citing a deteriorating economy. Spillover into BRICS? Merkel’s cabinet approved expanding euro aid, but the real test is a vote in the lower house on Sept 29. Obama gives his national address one week from today. There is speculation that a big new homeowner refinance plan could be unveiled to homeowners current on mortgages who have negative equity. That would provide a big boost to the economy as many people have been completely shut out of the refinancing window.
–There is still heavy trade in blue eurodollar midcurves, for example a large new buyer of E3V 9850/9875/9900c fly yesterday…lower strike is still around 40 bps away from lower strike.
In: Eurodollar Options
Aug 25. Gold falls over $100/oz
In the past three days (including this morning) gold has fallen $200 from the high. As of yesterday’s close it was right around the halfway mark of August’s range. As of this morning at just over $1700, it is about halfway from the July low of just above 1500 to the recently set high of just over 1900. Stocks rebounded, treasury yields rose, the curve steepened, all in a bounce toward risk from overbought safety. BAC rose over 10% and all financials rallied. The market will await Bernanke’s testimony tomorrow in a somewhat more neutral state.
–Today’s news includes Jobless Claims, which continue to flirt with 400k level. Treasury auctions 7 year notes. News that Steve Jobs resigned as CEO of AAPL seems to have been taken in stride.
–While economic growth has clearly eased recently, the demand for more proactive steps may be misplaced. The Fed has just about used all its ammo, and really, delinquent loans have fallen, the pace of foreclosures has dropped, bank lending standards are apparently slightly easier. Obama is about to unveil new steps to help the economy…an infrastructure bank, payroll tax breaks…blah, blah. Some of the recent weakness has been due to Japan disruptions, some due to european financial problems…the tincture of time will heal US problems. Perhaps the best advice to policymakers is what I got as a kid time after time…”the best way you can help is by staying out of the way”
Aug 24.
The market was again fairly quiet yesterday, with yields edging higher. Ten year rose 5 bps to 214. Five year treasury auction today followed by 7’s tomorrow, and then Jackson Hole Friday.
–There was a reasonable amount of buying of EDZ1 9950/9962c 1×2 for 1.0 (new).
–It feels like there’s a trend toward more official retribution for actions that could be construed as damaging to the financial system. For example, the removal of S&P CEO after the US downgrade. Also, the NY Atty Gen’l (Schneiderman) was just ejected from a gov’t group probing foreclosure fraud, apparently because he wanted more time for investigation, and Geithner wants a speedy resolution (to any problem that could ruffle the current financial architecture). BofA publicly disputed Henry Blodget’s negative claims about the bank’s finances: “Mr. Blodget is making “exaggerated and unwarranted claims,” which is what the SEC stated publicly when he was permanently banned from the securities industry in 2003.” In other words, the SEC/gov’t should take action against Blodget? If gov’t machinery can be mobilzed to reverse the decline of financial shares, then risk assets will again be embraced and confidence will return, right?
Aug 23. European bank shares slammed
Light volume Monday. The spotlight continues to be on shares in the financial sector, and on gold. In August alone, Dec Gold has rallied from just above $1600 to nearly $1900, gaining $40 yesterday alone. Perhaps the move is partially due to Venezuela’s Chavez trying to repatriate physical gold, but certainly growing cracks in the financial world are a factor. Prime example yesterday was Goldman losing 5% of value in the last 30 minutes of trading as Reuters broke a story about CEO Blankfein engaging legal counsel outside of the firm, with speculation that he will have to defend himself against (perjury?) charges stemming from last year’s appearance before Congress. Was Geithner’s public consideration about possible resignation connected with an attack on his (former) employer? But of course, it’s not just GS stock that’s under selling pressure. This list isn’t all inclusive, but since May 31, here are financial stocks that have dropped in value: RBS 54%. More than 40%: BAC, BCS, CS, BNP. More than 30%: C, MS, UBS, DB. Goldman actually looks pretty good, only having lost 24%, similar to JPM, USB, WFC, and HSBC. But these are significant losses of capital….
Aug 22.
Aug 22. Bernanke’s Jackson Hole speech is Friday, probably the biggest event on this week’s calendar. Over the weekend, I read several stories relating to european banks’ Tangible Common Equity and comparisons with Lehman, which were not, as you might suspect, positive. There was also a last minute rescue of a smaller Greek bank, Proton Bank. As equity prices of banks deteriorate, the crisis threatens to enter a culminating negative whirlpool. The market believes that tarnished assets will swamp equity…the official response hasn’t restored confidence. There are some suggestions that the Fed greatly expand dollar swap lines with the ECB, though I’m not really sure if the global system perceives the Fed as having enough credibility to be the lender of last resort to the world at this point.
–As of Sunday night it appears as though Gaddafi might be out in Libya. A good thing in terms of the worst of the conflict drawing to a close, but, like the financial crisis, there’s not really the intrastructure in place to assure a smooth transition. The theme of the last several years is to kick the can down the road, both financially and geopolitically.
–Slight new low in 2/10 treasury spread to 187. Back month vol was firmer in dollars. Stocks continue to trade defensively while waiting for financial authorities to announce dramatic new measures (whick seem to be losing potency).
Aug 19.
Aug 19. Yields once again plunged with the US ten year briefly trading under 2% before ending the day at 2.08, as the world undergoes a crisis of confidence. European bank stocks are being slammed. Curve compression is evident in eurodollars as huge buying of blue midcurve calls continues. Red/gold pack spread fell another 7.5 to 199 bps. EDH14 is the first contract with a yield above 1%. There is nothing good about a completely flat curve near zero rates.
–Philly Fed was an eye-popping -30.7 vs expectation of +2. Stocks were crushed with DJIA -3.8% and SPX -4.5%. The Fed has reactivated swap lines to europe; ZH reports the SNB borrowed $200 mln. While the amount is tiny (so far), the idea of the Fed coming to the rescue of the global system will again engender political attacks. Jackson Hole next week.
–I heard a monetary official respond to the question of whether the world could function on a gold standard, and the shrugged-off response was that ‘there isn’t enough gold’. In my mind, that’s the same thing as saying there’s not enough gold relative to the massive money stock, or, put another way, that the price of gold is way too low. (Up $35 yesterday).
–While the “easy” trade is to pour into the safe haven liquidity of treasuries I am starting to think that a true crisis of confidence will also eventually ravage this asset class in the form of much higher yields. The heart of the problem is excessive leverage. The official response to prevent a negative feedback asset collapse has been expansion of money. A true loss of confidence in monetary institutions which have made dubious private debts public, could result in much higher yields demanded by lenders.
Aug 18. Flattening continues…
Aug 18. Flattening continues with red/gold pack spread down nearly 9 bps to just under 207 bps. Red/green pack spread now around 46.5 bps, also a new low. Option trade has shifted further out the curve, with significant trade now occurring in blue midcurve calls, again expressing the trend toward a flatter curve. For example, there was a new buyer yesterday of 40k Blue Dec 9875/9900c spd for 5.5(E3Z with EDZ14 underlying 9835s).
–While the 10 year note closed at only 2.16%, there continue to be news items that point to inflationary possibilities. For example, (Reuters) – Prices for farmland in the heart of the U.S. grain belt were up 17 percent in the second quarter compared to a year ago, the biggest jump since 1977, the Federal Reserve Bank of Chicago said on Wednesday. Also, yoy PPI reported yesterday was up 7.2%. And while the price of gold may or may not be specifically related to inflation, Venezuela’s Chavez yesterday announced nationalization of that country’s gold industry, apparently sending redemption notices to several internat’l vaults.
–Fed dissenters Fisher and Plosser were both out yesterday explaining their reservations with current Fed policy, probably making QE3 even less likely. Plenty of news out today, including CPI expected +0.2 both headline and core, Jobless Claims 400k, Existing home Sales expected 4.92m, LEI +0.2% and Philly Fed 4.0 from 3.2.
Aug 15. Relentless flattening of eurodollar curve…
Aug 15. Relentless flattening of eurodollar curve. All calendar spreads making new lows, with EDZ1/EDZ2 at -9.5, remarkable in a zero rate environment. Red/green pack spread made a new low just above 50 bps. And there is still interest in 100 calls, on Friday EDU2 100c traded 1 about 15k. EDM2 99.625 straddle was heavily sold in the pit from 27.5 to 25.0, and then traded 20k on a block trade at 24.0 (new position). Calls traded 36k with open int +28k and puts 78k with open int +68k. EDM2 9962^ settled 25.0, and EDM3 9950^, expiring right around the end time of Bernanke’s pledge for zero rates in June 2013, settled at only 50.5.
–All ‘developed’ economies are now trying to cheapen their currencies to pay off future obligations with paper worth ever less against ‘things’. For example, over the weekend Reuters had this item: “UK Chancellor George Osborne said deeper integration had been the inevitable conclusion from the start of the single currency project. Asked if the only answer for the health of the euro zone was some kind of fiscal union, he told BBC radio: “The short answer is yes.” To the Swiss: ‘I’ll see you on euro peg, and raise to FISCAL peg…ALL IN’. I wonder how GBP will trade after that bombshell.
–Consumer confidence is plunging, almost certain to transmit into ‘real’ economic activity. See this chart posted on ZeroHedge:
