June 22. First weekend of summer, have some tequila
–Yesterday featured outside day ranges in emini-SP, Nasdaq and Russell, with the latter two posting new contract highs, outside ranges and lower closes. The excuse was the Supreme Court ruling allowing states’ taxation of the internet, which can perhaps spread to a broader sense of unease regarding fiscal imbalances. We had the tax cut, but will other tax increases of various sorts creep up around the periphery? In any case, stock futures are rebounding this morning, but the market signal of key reversals (Nasdaq, Russell) is to be short. Another interesting news snippet concerns administration proposals to remove federal charters from Fannie and Freddie; i.e. privatize them. Could the Fed still buy mortgage bonds in a downturn in this case? Sure, the banking system just passed another ‘stress test’ under the Fed’s scenarios. I don’t pretend to know the ramifications of government withdrawal from the housing market, but on balance I would have to say risks increase slightly.
–Mexico raised its key funding rate to 7.75% yesterday as capital outflows create inflation concerns. There’s sort of an interesting, if disturbing article on Business Insider this morning noting that May had a record number of homicides in Mexico, and that deadly violence is increasing across the country. http://www.businessinsider.com/violent-crime-in-mexico-may-2018-deadliest-month-since-1988-2018-6
I recall a Dept of Defense paper long ago that warned of a key risk for the US: a rapid, unexpected collapse of Mexico’s economy. I’m sure this risk has receded, but not all risks are on the other side of the world. Mexican peso was up yesterday on the hike and is around unchanged this morning. BTW, in 1994, we called it the ‘tequila’ crisis, which I’ve personally experienced in various forms.
–Vol better bid yesterday as stocks slid. There was a buyer of at least 20k EDU8 9750 puts yesterday for 3.0, but late in the session with a small 53.5 bid 2.5’s traded; seems like a no-brainer buy for a possible Sept hike. New lows in EDM19/EDM20 at 12.5 EDU19/EDU20 at 5.5. Probably worth buying for a bounce. [THESE ARE NOT TRADE RECOMMENDATIONS]
