Shifting sands

Dec 13, 2019

–There is a LOT going on that may portend trend shifts.  First, a Phase I deal jolted stocks to new highs. Yields jumped, with the curve steepening.  As of the futures settlement,  tens had surged 12 bps to 1.904% while twos were up 6 to 1.672%.  On the euro$ curve, reds to deferred packs made new high spreads.  For example, red/gold pack spd (2nd to 5th year) rose 4.75 bps to 23.25. [chart below].  This is the highest since early August.  However, 2/10, which is at the exact same level of 23.2 bps, is NOT at a new recent high, and longer end yields have not yet broken out (the Nov 8 high in tens was 1.943 and in 30’s was 2.425 vs 2.333 yesterday).  So, the euro$ curve is hinting at bigger things to come, but implied vol was hammered, indicating that a true breakout in the long end is not quite in the cards.  On the other hand, relatively cheap options allow for breakout views to be expressed at good risk/reward levels.  

–GBP exploded with the decisive Tory win.  Euro also higher; the dollar index appears to have shifted to a more bearish posture.  If this is indeed the case, it would be another argument for a steeper US curve.  I read an interesting piece (BBG) about the Swedish krona yesterday, which has been in a weak trend but has firmed significantly in the last few weeks, with the Riksbank poised to hike Dec 19.  It’s perhaps a small example in a globally shifting trend away from negative rates.  (It also seems to me that moves in the krona lead DXY).

–Front ED vol is being crushed.  A few weeks ago the expiring EDZ straddle was trading 10; yesterday the EDH0 9825^ settled 8.5.  EDZ9/EDZ0 yesterday settled -27.75, a new high.  EDZ9 will expire Friday, and with that, there will be NO one-year ED calendars below -25.  In other words, the market is accepting the Fed at its word that eases are not likely to occur in the upcoming election year.  FFF0/FFF1 settled -21.0.  Having said that, the Fed is using a bazooka to make sure that repo is kept under control through year-end, so liquidity will be amply supplied even if the FF target isn’t lowered.  And, in spite of the sell-off in rate futures yesterday, there was heavy buying of call spreads in ED’s for the prospect of a forced move by the Fed.  Examples: +30k EDM0 9837/9850cs vs 9825/9812ps flat premium.  Buyer of another 30k EDU0 9875/9925cs for 4.75 (settled 4.25 vs 9838).  

–Dec midcurve option expiry today.  2EZ1 9837.5 straddle settled 5.5 with EDZ21 exactly at strike. Interestingly, the contract is unch’d currently, but early this morning traded 9831.5, just a shade thru the straddle b/e. Retail Sales today expected +0.5%, but economic news pales in comparison to China and Brexit.  In the FT, El-Erian writes that two clouds are lifting.  In another interesting development, it seems that the Saudis are trying to ease tensions with Iran, perhaps another small cloud moving off the horizon. 

Posted on December 13, 2019 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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