Sept 17, 2018. ‘Beautiful counter-attack’

–Last week David Tepper was on CNBC saying that equities were probably in the late innings.  He specifically cited trade/tariff concerns with China and off-handedly said the stock market could see a decline of 10-20% if the situation isn’t resolved.  Today Trump may announce $200 billion in additional tariffs and Reuters reports that China’s Global Times warns of retaliation:  “We are looking forward to a more beautiful counter-attack and will keep increasing the pain felt by the U.S.,” the Chinese-language column said.  For now, it doesn’t seem to be US equities that are feeling the pain, but rather China’s, where the Shanghai Comp made another new low and is down over 25% from the high in January.  In the US, such a move would be devastating.
–Not much of a change in US rates this morning after tens rose 2.9 bps Friday to 2.99%.  5/30 notched a slight new low at 23.2 bps. 5/10 treasury spread is inside of 10 bps.  Partially in anticipation of today’s expiration of EDU8, there has been sizable eurodollar calendar spread trading.  All near calendars are making new highs.  For example, EDZ8/EDH9 settled 18.5 (+0.5 on the day and +1.5 on the week).  The one-year EDZ8/EDZ9 spread rose another 2 bps on Friday to close at 49 (+9.5 on the week).  Heavy new buying Friday of EDU9/EDU0 which settled +0.5 bp at 4.0.  On a constant maturity basis with EDZ9 as the first red now that Sept is gone, the red/green pack spread will post a new low (on Friday it was unchanged at -4.375 bps).  However, I would again mention Brainard’s speech of last week where she said that the neutral rate is INCREASING. If past rate increases are contributing to a rise in the neutral rate, then current assumptions that 2-3 more hikes accomplish neutral may have to be re-calibrated.  In that case, it’s likely that forward ED calendar spreads are too cheap.
–Empire State today expected 23 from 25.6 last.
Posted on September 17, 2018 at 5:26 am by alexmanzara · Permalink
In: Eurodollar Options

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