Sept 24. Risk markets erase FOMC gains while bonds test highs from last week
–Interest rate futures rose yesterday as Draghi pledged low rates for a long time and Dudley said the Fed must act forcefully to push against economic headwinds, including fiscal uncertainties. Ten year yield ended 2 bps lower at 2.71. Near one-year euro$ calendar spreads fell to new recent lows, for example EDM14/M15 closed below 1/2% at 48.5 bps, down 2 on the day.
–Broad stock index futures (ESZ, DJIA) have given back all gains from the Fed’s “no taper” decision, as has crude oil. Copper and gold are also pressing lower, nearing levels seen just before the Fed. However, treasuries are close to the spike high made just after the FOMC, in spite of this week’s auctions which kick off with 2s today. Other news includes Consumer Confidence, expected 80 from 81.5 and Richmond Fed, 10.5 from 14.0 last. From these lofty levels, it might be hard for stocks to boost “wealth effect” benefits, even if the Fed maintains QE buying.
–Red/green euro$ pack spread closed yesterday just above 96 bps, holding close to 100 as Fed projections and gen’l market sentiment indicate rate increases in 2016. In April, just prior to Fed hints of lowered accommodation, red/green pack spread averaged 31 bps over the month. So the spread is now over 3x higher. Perhaps greens are still relatively cheap? I would guess that the seller of Green Oct 9825/9837/9850 c tree (sold 2 legs flat) on Sunday eve after Summers withdrew might now have a different feeling about EDZ15 upside, as it trades 9870.
–Debt ceiling and Obamacare likely to dominate news this week…probably not good for general confidence.
