Front-loaded ease
March 5, 2020
–The market dialed down risk yesterday, with ESH0 soaring 117.75 to close at 3114.75. The Feb 20 high of 3397.50 to the subsequent low of 2853.25 has a 50% retrace at 3125. This level was tested yesterday, but appears to have failed as ESH currently is -59. Other examples of receding risk yesterday were seen in rate implied vol (treasury vol pictured below) and in precious metals which couldn’t rally in spite of a weaker dollar. The curve steepened as the market perceives frontloading with respect to Fed easing. All one-year calendars in euro$’s from EDM0/M1 back made new highs. Red/gold pack spread jumped 5 bps to 36.25, up 20 bps from the low set Feb 21, just after stocks peaked. In dollars, white pack +6.8125, reds +5.875, greens +3.625, blues +1.375 and golds +0.875. The ten year yield was down a couple of bps, marked at 99.9 bps at the time of futures settlement.
–Bank of Canada cut 50 yesterday. The US curve is smugly pricing all ease in the front. For example, FFJ0/FFV0 settled -38.5 while FFJ0/FFJ1 settled -39.5. That is, in the period after the March FOMC through September, the market expects one to two more cuts, but after that, nothing. Peak contract on the dollar curve remains EDH21, which settled +5.5 at 99.395, but EDU0 is very close at 98.38.
–Some example of profit taking yesterday. EDZ0 9950 calls were sold from 4.5 to 4.0, an exit of the 100k bought last week for 1.5, OI fell 130k. April FF traded to a high of 99.29, a rate of just 71 bps vs what should now be the current Fed effective of around 110 bps. So at the peak, the market was projecting odds of around 80% that the Fed goes 50 at the March FOMC meeting. Just after that high was made, Bullard made comments throwing cold water on the prospect of another aggressive ease at the meeting and FFJ0 settled back down at 99.22. In another example of odd pricing, EDH0/EDM0 atm straddle spread settled 17 bps, with March nearing expiration. (EDH0 9900^ 10.0s and EDM0 9925^ 27.0s). However, EDM/EDU straddle spread settled at just 1.5 (EDU0 9937^ 28.5s). Probably won’t be there this morning.
–California declares state of emergency. United Airlines cutting domestic flights.
