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.

Posted on September 19, 2011 at 8:25 am by alexmanzara · Permalink
In: Eurodollar Options

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