June 26. China: It’s not you. It’s me
–Relatively muted response in fixed income to a 2% drop in Nasdaq yesterday as global trade concerns grow. Late rally associated with Peter Navarro comments that trade policies are misunderstood. Featured trades were TY profit taking call sales, notably TYQ 120/122cs sold 30 to 32, with open interest down over 45k in both strikes. TYU 120.5c and 121 calls also sold with open interest -24k and -13k respectively. These calls were mostly bought just prior to the last FOMC. The net result was a cap on the treasury rally (tens fell just 2.6 bps to 287.3) and implied vol that finished just slightly firmer. Copper also posted a new low for the year with HGU closing under 3.00.
–This morning Shanghai Composite is in bear territory, having fallen just over 20% from January highs, and the yuan is also weakening at 6.5650. EUR also weaker this morning at 1.1660, with a shot at testing the double bottom at 1.15….third time’s a charm?
–Selling noted in EDZ18/EDZ19 spread at 32.5 where it settled, -2.5 on the day. Open interest declined by 20k in EDZ9 so appears to be liquidation. New lows posted in some of the more deferred spreads, for example EDM19/EDM20 closed at a new low 11.5, -1.5 on the day. The idea that trade friction will halt Fed hikes, therefore causing a surge in the very front end of the curve relative to backs, appears increasingly questionable. Greens outperformed on the curve, closing +4.
