WEEKLY SUMMARY: China Greece and Oil

THEMES:

 

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Week to week changes in selected prices (Thursday July 2 to Friday July 10):

7/2/2015 7/10/2015 chg
UST 2Y 63.3 64.9 1.6
UST 5Y 164.3 167.3 3.0
UST 10Y 239.0 241.4 2.4
UST 30Y 319.2 320.7 1.5
*new 2 & 5 yr
GERM 2Y -24.8 -21.0 3.8
GERM 10Y 84.5 89.8 5.3
EURO$ Z5/Z6 84.0 83.5 -0.5
EURO$ Z6/Z7 69.0 69.0 0.0
EUR 110.84 111.56 0.72
CRUDE (1st cont) 56.88 52.74 -4.14
SPX 2076.78 2076.62 -0.16
VIX 16.79 16.87 0.08

You can see that there was little change in many prices above, but the week was quite volatile, finishing with a solid rally in stocks on the supposed Greek deal. Note that on Thursday, AAPL (with its $700 billion market cap, had nearly touched its 200 day moving average at 119, but bounced to close at 123.28 on Friday. SPX index had also traded slightly through the 200 day, but closed near the top of the week’s range. The VIX traded as high as 20 Thursday, but pulled back to just under 17 to close out the week. Interestingly the Shanghai Composite is another index that traded to its 200 day ma on Thursday, just below 3500, but it too bounced (with overt gov’t interference), and closed at 3877.

Fixed income in the US closed at the highest yields of the week. Yellen’s speech on Friday was generally dovish in terms of her discussion of labor markets and productivity however she did say, “Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” The curve is near the steepest levels of the year, with 2/10 over 176 bps and 5/30 over 153. The 2/10 spread is just over the 38% retrace from the high of 262 at the end of 2013 to the low of 119 in January of this year.

The big change in the above price table is in energy, with August Crude Oil down over $4/bbl on the week, a decline of 7%, and down 11% since the end of June. This is probably the biggest tell for the state of the global economy.

While Yellen mentioned Greece “…the situation in Greece remains unresolved”, she did not mention China at all. Clearly, the issue with Greece is one of contagion and the existential threat to the euro. I would just mention a couple of data points regarding Greece. In 2007-09, GDP was over $300 billion, it’s now just $240. In 2007-09 debt to GDP was just a bit over 100%, now it’s 175%. Clearly, there’s a need for structural reforms; gov’t spending as a % of GDP is 49%. (However, it’s 57% in France and 51% in Italy). But I would say that what is needed is growth, and higher taxes probably are not the optimum solution.

As of this writing Sunday morning, the situation is still “unresolved”, with Schaeuble calling for a five year “time-out”. The repeated theme is one of distrust and credibility. Now the Greeks have sacrificed Varoufakis, and backtracked on the referendum vote and it’s the Germans saying nein. It’s over.

So the situation in Greece and the destruction of its banking sector will again roil markets this week, though the absolute amounts of proposed new lending aren’t particularly huge, €50-75 billion. What is interesting about Yellen’s speech Friday was that she didn’t mention China, where stocks had plunged some 30% off the highs in a month, a change of $3 trillion. In terms of risks to the economic outlook of the US, I would think China is one of the big factors, and the decline in oil, along with persistent weakness in copper and iron ore are probably indicative of underlying fragility. Perhaps Yellen will touch upon China in her congressional testimony this week.

While overall vol has been fairly subdued, I would note a consistent bid in long dated green straddles. For example, EDM18 9775 straddle closed Friday at 127.75, having traded during the day at 128.5. On Monday that same straddle settled 122.75. The pit community is trying to defend the short, but there is underlying demand. Probably worth noting with respect to FV and TY vol traders.   In fact there was decent activity in October TY options Friday, notably a buyer of TYV 123/121.5 put spreads from 19 to 21 (ref 126-00/01 in TYU; settled 21 vs 125-235).

Posted on July 13, 2015 at 4:57 am by alexmanzara · Permalink
In: Eurodollar Options

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