All Clear
January 9, 2020
–Markets had violent reversals from Monday evening’s panic related to Iran’s impotent missile response. Stocks ended at all time highs. WTI crude posted a huge range and closed below 60, nearly 10% off the high print. Yields finished higher on the day with tens +4.7 bps at 1.872%. On the euro$ strip reds through golds closed -5 to -6 bps. Trump promised that Iran will never possess nuclear weapons and increased sanctions, but otherwise de-escalated the rhetoric.
–China announced that Vice Premier Liu will come to the US next week for Phase 1 signing. While that’s another bullish sign for equities and global trade, the Baltic Dry Freight index is telling another story at 773, near the low of last year and nearly 70% lower than the high posted in early September. The prime example of market froth has to be Tesla, which has soared over 20% since the end of December and now boasts a market cap greater than GM and Ford combined.
–EDH0 settled yesterday at 9827.0 and 9825 puts settled 2.25. EDM0 settled 9833.5 and 9825p settled 2.75, while EDU0 settled 9840.0 and 9825p at 3.75. Forward futures prices still reflect a bias toward easing even as the Fed signals it’s on hold and trade tensions are potentially easing. The 9825 strikes have been crushed due to the large previous buyer of 9837/9825/9812 put fly strips, but given curve roll, the forward puts offer very cheap downside protection. It appears as if EDU puts have 1.5 bps of decay over 6 months in a liquidity-infused, potentially inflationary environment.
–Yesterday’s ten year auction tailed, coming in at 1.869 from a pre-auction 1.852. There was a new buyer of about 15k TYH 128/127 put spread yesterday before the auction for 13 to 14, settled 15 vs 128-245. Thirty year bond auction today.
