July 19. Musings
-After a brief reprieve yesterday, commodities are again getting hammered as the dollar strengthens, with DXY near a new high for the year. Copper was 3.31 in June, now 2.68, down nearly 20%. Gold was 1360 in April, now 1220, down over 10%. Lumber was limit offer yesterday and likely going lower today. WTI down 85 cents as of this writing, beans slightly lower. Blame it on China, as the yuan tumbles with CNY now 6.7719, highest since last August. SHCOMP continuing to probe lower as well. So…if China is once again “exporting deflation”, then why are treasuries lower? Marked down for Amazon Prime? Might as well blame treasury weakness on China too, and what it’s exporting isn’t specifically ‘deflation’; simply forced sales. Sell what you can to patch holes where you HAVE to. This hypothesis may be a stretch, but if there’s even a modicum of truth in it, then spillovers could get ugly. Certainly, the pounding of interest rate vol in the US will seem misguided at best. And, as criticism of Trump’s performance in Russia reverberates, how can he regain his strong man persona? By ratcheting up pressure on China. it’s for the AMERICAN WORKER.
–Headline blurb in the Financial Times: ‘Bernanke says distortions mean an inversion does not necessarily point to recession.” Hmmm. And who, may I ask, is most responsible for the ‘distortions’? More on this later….
–Large trade yesterday is dismissive of near term inversion. Bought 80k EDZ8 9737/9750c spreads to sell 40k 2EZ 9737c. Package settled 0.75 (3.25 for call spread and 5.75 for call). Front call spread works out if the Fed hikes in Sept but passes on Dec. But if it starts looking as though a Sept hike was wrong, then I’m not so sure that being short green midcurve calls is a path to sound sleep.
