Aug 11. First out the door….
–Yields fell as stocks sold off on N Korea worries. SPX -1.45%, Nasdaq -2.1% and ten year yield -3 bps to 221. While VIX leapt to 16 late in the day, treasury vol was subdued, with TYZ7 126 straddle closing 2’16 or 4.15%. Green and blue midcurve straddles were mostly up 0.5 tick. August midcurves expire today.
–There were several euro$ ‘disaster’ trades, including new buys of 0EV and 0EX 9862c as a strip for 2.5 vs EDZ8 9829.0. (settled 1.0, 1.25 vs 9828.5). The curve flattened, with red/gold pack -1.375 to a new recent low of 54.75. Some of the one-year spreads also closed at new lows: EDZ7/Z8 at 26.5 and EDH8/H9 at just 23.0 (22.5/23.0 late). Jan’18/Jan’19 FF spread settled 22.5, down 1 on the day.
–The question now is how to de-escalate the N Korea situation. It would seem that China has a major role (according to Trump), but China’s Air Force Chief today said that Tokyo does not own the Sea of Japan… Chinese assistance in N Korea will likely come with other issues further down the road.
–CPI today expected +0.2 both headline and core, but data takes second billing to position exits. Hi yield etf’s closed just through 200 day moving averages, as did Dow Transports. EEM was -2.4% having just made a new high 3 days ago. Financial advisors will all be on tv today counseling not to panic, a reminder of the classic line in Margin Call: “If you’re first out the door, that’s not called panicking.” It’s likely that there will be pre-weekend nervous selling today, punctuated by machine buys to squeeze day shorts. VIX related trading will be key, as a scramble for protection seems overdue. Recall, a recent trade, I believe Oct VIX 12p vs 15/25cs (+ cs) in size of 250k around flat premium. On a quick look this morning that trade looks like it’s worth about 1.00. Note that Oct 25c have 600k open interest…
