Full scale invasion
February 24, 2022
–Invasion of Ukraine has gone full scale, sparking major market dislocations. As of this writing WTI is +8.25 over $100/bbl. ESH2 -91 to 4131, and that’s after a drop of 1.8% Wednesday. Gold +60 to $1970/oz. In rates, EDH3 is +12.5 to 9798.5 and TY is up a point to 127-09. Grains are exploding higher. Highly inflationary for raw material inputs while paper wealth takes the elevator down. The threat of cyber disruption in the US and Europe has likely increased significantly, which sidelines the idea of near-term aggressive rate hikes from the Fed.
These were a couple of notes from end of day Wednesday…
–The situation in Ukraine accentuated a ‘risk-off’ sentiment in stocks, with SPX -1.8% and Nasdaq Comp -2.6%. However, the strength in oil and other commodities continues to fan inflation fears so fixed income was NOT the recipient of flight-to-quality flows. The ten year note rose 3 bps to 1.976 with the seven-year auction coming up today. New low in 2/10 treasury spread just under 38 bps. On the eurodollar curve, inversion is creeping up the strip, with EDU3/EDZ3 three-month calendar inverting to -0.5 on settlement. The five-year note has been the target of put buyers, and the renewed need to hedge has caused open interest in FV futures to increase significantly. In 2018 as the economy was doing well and the Fed was hiking, OI in fives rose to a record high 5.1m In 2020 had fallen to just over 3m and now 4.3m. This with the 5y yield at 191, highest since mid 2019.
–In terms of inversion and flattening…maybe U3/Z3 not a big deal, but it’s the nearest inversion on the curve yet seen, and that’s without a hike yet
–FFJ2 is 9957.5 as of Wednesday settle. 9942 for 50 and 9967 for 25…leaves us right about in the middle with Daly saying maybe 4 hikes by year end.
–Aluminum right at the 2008 high. New high BCOMAG though not all-time.
