Got your six
Jan 8, 2019
–Iran lobbed missiles at US forces in Iraq, seriously escalating tensions. Equity futures plunged to new lows but came nearly all the way back, tens and bonds exploded higher but have also given back much of their early gains. ESH now 46 points off the low of 3181.00. Gold (GCG0) surged to 1613 but now has come back to 1584, still up around $10/oz. Oil jumped to 65.65 but is now nearly unchanged, off almost $3 from the high. The market continues to dismiss longer term risks. For example, Lisa Abramowicz of BBG tweeted yesterday: “US junk bonds are yielding about the least since 2014 relative to the S&P 500’s earnings yield.”
–In August 1990 Iraq invaded Kuwait. On January 16, 1991, Desert Storm commenced with the US and allies pounding Iraq. There had been large risk-off positioning pre-Desert Storm, but with the first missiles in January, t-bills and shorter treasuries sold off hard; the risk-off trade was instantly over. I recall trying to sell TED spreads into a non-existent bid! The geopolitical landscape is much different now, and becoming more insular. I will also mention that Fed funds were around 6.25 to 6.5% in 1991, and yes, on their way down to the then-historic low of 3% in late 1992 thru 1993. But the current concept of the Fed having our back was not in the lexicon back then. At that time it was Gen’l Norman Schwarzkopf who had our backs…
–New buyer yesterday (adding) EDZ0 9862/9887/9900 call tree for flat, bought the 9862c, 20k. Settled -0.25. This trade is short with delta -4. Takes advantage of skew; with EDZ0 9848, the 9900c settled 5.5 and the 9800p less than half as much at 2.25.
–Interesting note again in Almost Daily Grant’s saying that some lenders are balking at funding Softbank’s plan to rescue WeWork, asking for collateral in AliBaba to participate. Like other large tech, BABA is right at its highs, but the implication to me is that, when/if things turn, that’s how good assets are dragged into forced sales, right along with the junk.–If requiring the safety of a 1.8% yield, US treasury auctions tens today.
