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Oct 24, 2019
–Little change in interest rate futures yesterday. In euro$’s reds thru golds +1 to +1.5. Ten year yield fell 1.1 to 1.757%. However, there is still turmoil below the surface, as the Fed increased o/n repos to $120 billion from $75b and term to $45b from $35b. While the signal of increased liquidity was welcomed by the stock market, EDZ9 still closed -1.0 on the day. The spread between EDZ9 and FFF0 (a proxy for libor/ois) gained 1.5 to 39.5. This spread had peaked at 41.5 in the mid-September repo scare, but had quickly eased back down to 36. Additionally there were a couple of new trades buying Nov FF vs selling Nov one-month SOFR at a spread of 5.5 (settled 5.0, 9838 vs 9833). This spread had gotten up to 8.5 in Sept. In the grand scheme of things, these are micro moves, but adding $55 billion in repo doesn’t strike me as being micro. In a tweet yesterday Jim Bianco said “Repo issue in 2 words, ‘liquidity hoarding.'” While this doesn’t bode well for end-of-year funding, there was still a seller of EDZ9 9812.5 straddle at 14.5. I understand selling FVZ9 atm straddle at 0’56, but I do not understand selling EDZ at 14.5. The Fed reportedly had a closed door meeting with banks a couple of days ago; the banks would prefer regulatory relief, but the Fed doesn’t want to go that route. For now, the issue is still simmering.
–I, of course, still harbor concerns that many of the assets we think are solid, may not be worth nearly as much as we think. The obvious example is WeWork, but Beyond Meat has gone from a BigMac to a hamburger in three months, and Peleton has also shed some weight since the IPO (clever, eh?). All of the new AI tech firms seem to be under a cloud (UBER, LYFT, CRWD). On the other hand, Tesla just blew the doors off with its earnings report yesterday. Well sure. They have to keep replacing the cars that spontaneously combust.
–Speaking of spontaneous combustion, Chicago’s Mayor Lightfoot released her budget plan to close the deficit with help from Springfield, the state capitol. (This while Chicago public schools are still closed due to a teacher’s strike). At the same time, a report on the financial health of Illinois projects the gen’l fund deficit to hit $3.2 billion with a backlog of unpaid bills of $19 billion. And I believe they just floated some bonds to take care of unpaid bills. I don’t think Springfield is the answer to your prayers Mayor.
–VP Pence scheduled to pour some gasoline on the Hong Kong situation today, but I can’t find anything indicating a time for his speech. Economic news includes Markit PMIs, with the Composite expected 51.6 from 51.0 last, and Durables expected -0.8 from +0.2.
–This whole environment sort of reminds me of a floor story…wait, do I have time for this? Yeah, what the hell. In the eurodollar pit the area devoted to back months covered everything from reds back. Some spectacular spread traders in that pit, which was jam-packed with filling brokers, market makers and of course a few pit reporters. A lot to keep track of. The pit reporters wore dark blue trading coats and would indicate where markets were on occasion when it was busy. There was a new broker, a guy who had been a clerk but his employer had the bright idea to badge this guy up to fill some of the overflow orders. Can’t recall his name, but anyway, one busy day a pit reporter yells “red dec 2 trade and it’s 2 bid” holding up his hand with two fingers to indicate it. And this clown says “Sell you 50”. The pit reporter says, “what the hell are you talking about?” And our hapless broker indignantly says, “I sold you fifty at 2. Card it up.” The pit reporter says, “You can’t trade with me, I’m a pit reporter and have been for years.” Not willing to immediately realize what a jackass he was, the broker calls attention to himself by yelling out, “Who is this guy in the blue coat? He’s trying to back out of a trade!” Thereby sealing his fate as the object of relentless ridicule. Ah, those were the days! Moral of the story, there was no trade. He THOUGHT there was a trade, but there wasn’t one. (I’ll ask Royals for his name, I’m sure he will remember).
https://www.reuters.com/article/us-illinois-budget/forecast-points-to-deepening-illinois-budget-deficit-idUSKBN1X22RG
