Turnaround Tuesday?
October 19, 2021
–Follow through Monday from Friday’s price action. All near euro$ calendar spreads made new highs as hike prospects are brought forward. Back spreads made new lows. Peak on the curve for a one-year calendar is still EDU’22/EDU’23 at 84.5, a new high for any 1-yr calendar this year. Of course, this spread encompasses libor transition, so on an adjusted basis it’s actually lower than EDM’22/EDM’23 which settled 78.5, up 5 on the day (3 hikes in a year). From Friday’s high of 9937.5 to yesterday’s low of 9920.5, EDZ2 fell 17. But nothing compares to moves in short sterling, where near contracts plunged 25 bps yesterday. I’ve included a chart of Dec’21/Dec’22/Dec’23 short sterling butterfly, shown at 61, but that’s an old print…it was 82 yesterday! (That means that the closer one-year calendar is 82 greater than the deferred spread). Up 60 bps since the start of September. Without an actual hike, L Z1/L Z2 has exploded to 76.5 while L Z2/L Z3 inverted to -5.5. It’s an indication that central banks have lost control of the narrative.
–I’ve seen a fair amount of commentary indicating the CB’s can’t do much about supply shocks. When Covid first hit, I didn’t think CBs could do much about THAT, but of course they slashed rates to mitigate the economic fall-out. In part, the Fed’s largesse helped to put conditions in place which accentuated supply shocks, and helped stocks to ‘only go up’. I think some restraint is in order, and the market is forcing the issue.
–On Sept 21, the day before the last FOMC, EDZ’22 was 9957 and the midcurve Dec 9956.25p was 6.0. At yesterday’s low that put was over 35 bps in the money. The move has been so rapid that many targeted put butterflies have exited as the market sliced through middle strikes. A couple of interesting trades yesterday, a seller of 40k 0EZ 9962.5p to roll out and down to buy 0EH 9887.5p, taking in 27 to 27.5. EDH’23 settled 9908.0. There was also a buyer of 50k 0EH 9800p for 1.5. Over 100 bps away with the horses long gone from the barn.
–5/30 closed at a new low just below 86. Thirties are hugging the 2% yield as expected tightening will supposedly slow growth.
