Sept 27. Party’s over; qtr end re-balancing

 –Curve flattened and stocks reversed with a late sell off and lower close in the wake of the FOMC.  The Fed as expected hiked 25 bps.  No real change in December odds after the meeting; Nov/Jan Fed Fund spread was 19/19.5 all day but went 19 offer late.  Russell was the weak link, down about 1%.  Banks were especially unloved, with JPM and MS -1.2%, Citi -1.4, GS -1.5, BofA -1.8 and Wells -2.0.  Explanations for late price action included quarter end rebalancing.  Also, many (myself included) thought the press conference might be more hawkish than it actually was, which caused position unwinds.  Implied vol in rates was crushed.  30 days left in November treasury options and the atm bond straddle is barely above 2 points (USX 140.5^ settled 2’04).  Ten year yield fell 3.9 bps to 3.059%, having, for now, rejected the 3.11 high of the year.
–In terms of the economy, Powell said that trade tensions were raising concerns of businesses, based on supply side constraints.  On the inflation front, Powell says the Fed sees no real risk of a breakout to higher levels, but said that in general, future forecasts are uncertain.  One journalist noted that the Fed had raised growth forecasts for this year 3 times already; somewhat interesting in that the Fed clearly underestimated the tax package boost.  These are the Fed’s GDP growth estimates for 2018: March, from 2.5 to 2.7%, in June, 2.7 to 2.8 and yesterday, 2.8 to 3.1.  Core PCE prices released tomorrow, expected +2.0%.
–Today’s drama surrounds the Italian budget, due to be released shortly, with the Italy bank index (IT8300) seeing a sharp reversal, -2.8%.  The deficit may push as high as 1.9% of GDP (frugal by US standards with a 4.2% deficit).  Kavanaugh hearings should also provide a little spice.
–Oil flirting with new highs this morning.
–Once again there was heavy buying of long dated put spreads as the previous ratio put spread buyer pays to roll his short strikes lower.
EDH20 9625/9600ps covered 77.5, 10d, 4.0 paid for 50k (3.25s)
EDM0 9600/9575ps 2.75 paid for 50k ref 9679.5 (2.75s)
EDU20 9600/9575ps 3.5 paid for 43k
–Early buyer 0EV 9687/9700 c 1×2 1.5 paid for 75k
Posted on September 27, 2018 at 5:26 am by alexmanzara · Permalink
In: Eurodollar Options

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