July 29.
July 29. Nancy Pelosi on Thursday’s vote: “What we’re trying to do is save the world from the Republican budget. We’re trying to save life on this planet as we know it today.” I’m sure that’s very reassuring to someone starving in Somalia. I’m personally a little sick of hearing the budget impasse referred to as a “crisis”. The people in Japan have a crisis with the tsunami. The people in Joplin who lost their homes and possessions have a crisis. A family that can’t feed the kids is in crisis. I was at a party last weekend where a well to do guy was asking about the budget impasse, and went on to say he was worried his wife wouldn’t get her social security check. Here’s what he ought to be worried about: people who need assistance just to scrape by. Because they know desperation.
–The markets certainly aren’t in crisis mode. Ten year yield remains below 3% even without QE and in spite of an auction week. Treasury vol is getting hammered. There was a seller of 3k TYU 123/126 strangles from 61 to 59 before the close. A couple of days ago TYU atm straddle was 226, settled yesterday at 204. Even with the sell off in stocks, SP500 is in the middle of the range for calendar year 2011. Where’s the panic?
July 28. US stocks finally took a tumble as the debt ceiling impasse lingers…
July 28. US stocks finally took a tumble as the debt ceiling impasse lingers, with SP500 down 1.6% but Nasdaq down 2.7%.
–There were some large buyers of deferred midcurve calls, some as block trades and some in pit. E2Z 9862c were bought 20k from 17.0 to 18.5 (EDZ3 underlying, settled 9837). E3Z 9762c bought in size of 15k from 20-21 (EDZ4 underlying). The latter was interesting because there hasn’t been a blue midcurve traded in months, at least for any size.
–News today includes Jobless Claims expected 425k and 7 year auction.
–Yesterday’s 5 year auction was mediocre. Beige Book reported weakness in 8 of 12 districts, but blamed weather, Japan, flooding.
–Front end of dollar curve is trading heavy. Several news articles are warning of turmoil in the repo market if budget negotiations aren’t resolved.
–The following two snippets sum up problems with the US budget in one area…health care. (Reuters) – The U.S. health bill will account for 19.8 percent of the nation’s spending by 2020, up from 17.6 percent in 2009, (WSJ) Almost half the nation’s health-care spending will come from government coffers by 2020, up four percentage points from 2010, according to new federal spending figures.
July 27.
July 27. Concerns over the debt ceiling impasse are only being reflected in gold strength and dollar weakness. Treasury yields fell again with the five year note falling 4 bps to 1.48% (auction in that maturity today). Red/green eurodollar pack spread made a new low of only 83 bps, which is the lowest of this calendar year. In 2010 in late July and August red/green also had fallen to this level, ultimately going as low as 52 in November.
–Large trade notes from yesterday: There was a seller of 20k TYU 124 stradddle on a block trade at 222 which traded 226 in the pit before the block info was posted. (atm 124.5^ settled 216). Appears to be new position. Ten year vol was off a couple of tenths as a result, but Sept bond vol firmed as a buyer came in late for Sept 124/125 strangle from 334 to 338. (Cover). Also in green Dec euro$ midcurve there was a buyer of 9875/9900/9925c fly 1x3x2 for 1 bp in size of 35k. (new).
–This morning Italy and Spain are widening to Germany on comments from a finance minister, ‘will not give carte blanche’ to secondary purchases of bonds by the EFSF.
–There are a couple of articles on the job situation in the US. NYT piece notes that many employers are shunning candidates that have been out of work for several months. WSJ headline is “What’s wrong with the American job engine.”
–Today’s news includes Durables expected +1.0 from +1.9. Beige Book this afternoon.
–Strange price action yesterday with treasuries higher in a flattening curve, stocks generally firm, dollar index making new lows, all against the backdrop of tense budget negotiations. I think the dollar is partially concerned about the debt ceiling, and partially about a slowing economy. Bonds rally due to fears of renewed slowing in the economy, which is also signaled by the fall in deferred euro$ calendar spreads like red/green. Stocks like a weaker dollar. For example, AAPL gets 62% of revenues overseas…new high in the stock yesterday.
July 26.
July 26. In spite of continued verbal wrangling over the debt ceiling, ten year notes were up only a few bps to 3.00% and stocks were down less than 1%. Some “safe havens” did post new highs, including Gold, AAPL and Swissy. In the US, warnings of catastrophe barely register in the markets. In Europe, where the new Greek bailout “fixed” the situation, we have the opposite effect. In mid July, Italy 10 year reached a high of 5.955%. In the aftermath of the announcement, the yield fell to 5.33. But yesterday it was back to 5.64% Similar movement for Spain…from a high of 6.30% to 5.71, but yesterday back up to 6%. In fact, ZeroHedge had a post that Italy was cancelling bond auctions in August…doesn’t exactly instill confidence. Extending debt in a broken system is a hard sell.
–There were a couple of rumors yesterday of bomb scares, notably in Washington DC, that caused a brief flight into US treasuries. In the aftermath of the tragedy in Norway it’s likely that these scares will occur a bit more frequently as security operations are on heightened alert. Perhaps partially due to this security dynamic and renewed concerns about europe, both bond and stock vol was higher. VIX jumped from 17.5 to 19.35. TYU straddle went from 2’17 to 2’24 interday and closed at 2’22.
–Today includes Consumer Confidence expected 56 from 58.5, Richmond Fed expected at 5.0, and New Home Sales at 320k.
July 25.
July 25. Lack of a budget/debt ceiling agreement is creating market uncertainty, though it mostly seems to be reflected in gold (new high
$1617) and yen strength. Moody’s downgraded Greece again.
–For all the handwringing and disaster scenarios about the possibility of a US default, ten year notes won’t move much higher than 3%, closing Friday at 2.96. Stocks opened lower, but still remain well above the halfway point of July’s range. There have been articles about the Fed’s contingency planning for a US default, which can only mean another flood of liquidity. Of course, according to Bernanke such an action will only
support paper markets rather than products like oil and grains.
–Chicago Fed Index today expected -0.40 vs -0.37. Dallas Fed Mfg Index expected -5.6 from -17.5.
July 22.
July 22. As the financial crisis unfolded, steps taken by the US government transformed impaired private assets into taxpayer obligations. The EU appears to be moving down this same path in backstopping peripheral state debt held by financial institutions (agreeing yesterday to a new increased Greek bailout). With US debt ceiling negotiations, the outcome is likely to be at least some fiscal retrenchment; perhaps a move toward less gov’t influence. While EUR/USD staged a relief rally, is this really long term positive for the euro? In the bigger picture it’s probably more positive for gold and oil.
–Eurodollar curve steepened yesterday with red/gold pack spread up about 6 bps. Treasury yields rose and implied vol on TY and US was up slightly. Volume in eurodollars was light, open interest was down another 31k in futures. Option trading appears to be mostly position unwinding.
July 21.
July 21. Near eurodollar contracts were stronger, while reds and greens had modest losses. Ten year treasury yield rose 4 bps to 2.93%. EDZ11 was +5.0 as EDZ12 fell 1.5. Most action in the short end appeared to be unwinding of positions as the debt ceiling negotiations come down to the wire. For example, the was heavy buying of EDZ 9962c against 9900/9937p spd, but prelim open interest sheets indicate a drop of 57k in the calls. Futures open interest declined total of 61k contracts.
–China PMI fell below 50 to 48.9. Debt problems around the world would become more manageable with higher global growth rates, but we seem to be settling in for moderate growth at best.
–August treasury options expire Friday.
–Today’s news includes Jobless Claims expected 415k. Philly Fed expected to bounce back to 5.0 from a miserable -7.7 last. Leading Indicators expected +0.3.
July 20.
July 20. Amazing 30 year bond rally yesterday, apparently sparked by Gang of Six proposal in the US Senate for a debt deal that the White House endorses. Preliminary details include $3.7T in cuts, a hike in taxes of $1T and elimination of the Alternative Minimum Tax. Thirty yr yield fell 9 bps to 4.20%, though tens only dropped 2 bps to 2.89. Early trade foreshadowed the bond rally, with a large buyer of USU 128/129c spd, 10k. There was also a seller of 25k FVU 121 straddle, mostly down at 135 on a block trade. New position.
–Other markets also reacted to a shift in risk sentiment, with gold reversing from new highs (it was down $14 late, back below 1600). Fed funds contracts eased a couple of bps, the dollar fell, stocks rallied further. Copper made a new high. AAPL blew past expectations after the close leading to further equity index strength this morning. On the other hand, financials remain weak. GS reported subpar results and the stock made a new low for the move. Bank of America also made a new low, having gone from $11 to 9.50 this month alone. AAPL derives 62% of sales from abroad, once again underscoring the idea that exports are a bright spot in the economy, while domestic demand remains sluggish due to weak job growth. I guess if US companies export enough, stocks will rise and capital gains rather than wage growth will again support consumption. Textbook economics of the new millennium.
July 19. Gold above $1600.
July 19. Gold above $1600. “Gold hasn’t had this good a run since Jimmy Carter was in office…” (Fark.com). IBM results helped stocks rebound. Apple, which has now become the ultimate safe haven trade, reports this afternoon. I believe I saw Goldman touting the idea of buying AAPL calls in anticipation of results.
–Ten year yield nearly unchanged at 2.91, but bonds rose 4 bps to 4.29%. Red/green pack spread edged to a new recent low at 87 bps. Still plenty of buying in Green Dec calls.
–Bank stocks were weak, with BofA, MS, JPM all making new lows for the move (though erasing large portion of the losses at the end of the day). Over the past few years, banks have cut credit lines, culled bad loans, enjoyed zero funding costs in a relatively steep curve. One would have to imagine that three years into the crisis that banks are much better off…could new problems arise from the banking sector due to european contagion?
July 18.
July 18. No resolution to simmering problems that are now threatening to boil over, both in europe and the US. No US debt ceiling deal. Pressure intensifying in europe as Papandreou says Greece has done all it can. In the meantime, Dallas Fed’s Fisher last week said the central bank is out of ammo. Alabama’s Governor says Jefferson County may have to declare bankruptcy (“could make for the largest municipal bankruptcy in U.S. history”-Reuters). Chicago’s mayor and Obama’s previous Chief of Staff Rahm Emanuel released 625 city workers, to be replaced with private contractors because “organized labor failed to offer concessions or cost-cutting ideas…” (Chicago Tribune). I guess running a city with a real budget changes one’s priorities regarding gov’t largesse.
–Friday’s news included a plunge in Consumer Sentiment and news that S&P put on negative review entities attached to the US govt, (FNM, FRE).
–Curve flattened. Near euro$ contracts sold off, again reflecting funding concerns in the financial system. EDH2 was -5.0, EDH3 +1.0 and EDH4 +4.0. Several near one-yr calendar spreads made new lows, with EDZ11/12 closing at only 31 bps…soon to invert.
–Currently, there is a flight to US treasuries and German bunds. But does Germany expand the Greek bailout? Is anyone big enough to backstop Italy? Does the US bail out fiscally impaired states and municipalities? The risk is currently being priced into yields in Greece, Ireland, Italy, etc… but could it spill over into what are now considered the safe havens that act as saviors?
