Vols lower, curve pulls back
November 12, 2020
–Once again, year end funding became a topic as JPM released a report that rising bank stock prices could lead to higher GSIB scores and thus a pullback from intensive balance sheet activity. EDZ0 settled -2 at 9974. This was after Tuesday’s heavy sales of EDH1 at 9978.5 to 78. With the crazy rotation this week, JPM stock has rallied from around 95 at the end of October to 115 yesterday. While I don’t know the technical details of GSIB scores and balance sheet ramifications, I do know that all front (white) straddles are 7 bps or lower, which doesn’t seem to compensate for possible regulatory shifts. 9975 straddles: Dec 3.5, March 5.5, June 6.5, Sept 7.0. There was also an article noting that Boston Fed’s Rosengren is concerned about pressures on prime money market funds. I guess that will leave the Fed as the funder of all CP.
–In spite of these concerns implied vol was again pressed lower as the curve receded from the steepest levels of the year this week. 5/30 lost about 1 bp to 128.8 while 2/10 closed on a new high just above 79 using the new ten year. Thirty year auction today, $27 billion. Red/gold euro$ pack spread fell 4.5 to 62.375. USF 172 straddle settled 3’48 or 8.0, right at recent lows. On election day the atm USF straddle was 4’32.
–CPI expected 0.1% with yoy Core expected +1.7 from +1.7 last month. While Corn pulled back from new highs, Jan Beans powered to a new contract high at 1152 1/2, best level since 2016. There’s an article on Aljazeera noting that LDC, Louis-Dreyfus, is selling a portion of the firm to Abu Dhabi. ADQ wants to “boost food security”. This may become a much bigger investment theme. For example, Corteva, an agribusiness and seed company (CTVA, and yes I own some) closed at 36.50, a new high.
“For ADQ, formerly known as Abu Dhabi Development Holding Co., acquiring a minority stake in one of the four largest traders of grains, oilseeds and sugar will help boost food security for the United Arab Emirates at a time when governments around the world are accelerating efforts to ensure they can feed their citizens.”
https://www.aljazeera.com/economy/2020/11/11/bblouis-dreyfus-sells-stake-in-family-business-to-abu-dhabi-fund
–The market is aggressively selling interest rate insurance (premium) because the Fed “has our backs”. VIX is also at the lowest level of the past couple of months at 23.76. However, other forms of insurance are still being purchased.
