June 15. Eurodollar curve inverts: 2020 to 2021 contracts
–The event of the day was the ECB meeting, where the central bank vowed to keep rates unchanged until summer 2019. EUR had a huge outside day, initially rallying and then plunging, high of 1.1851 and low at end of day at 1.1577. Dollar strength is causing further trouble for emerging markets, with JPM FX Index closing at a new low, Argentine peso was obliterated trading nearly 28 to the dollar. BRL weakened as well, though not to new lows, but the Mexican peso also made a fresh low of 20.85 late. EMB (EM bond etf) was strong early but closed on the low, marginally below Wednesday.
–Back end of the eurodollar curve inverted, with new lows in all calendars from reds back. For example, the red/green ED pack spread (2nd to 3rd year) closed at just 6.25 bps, and red/gold (2nd to 5th) also closed at 6.25 as greens and golds settled at the exact same price (9691.875). The Fed this week indicated a slightly more aggressive posture with respect to hiking, but the market views it as a mistake. Both EDU0/EDU1 and EDZ0/EDZ1 settled at NEGATIVE 1.5; the nadir for calendars.
–Large trades included TY call buying, example TYU 123c all day 5 paid vs 119-18.5, 14k. Also, a post-futures-close buyer of EDX/0EX 9750c call spread for 0.0, 40k. Both calls settled 3.0. EDZ8/EDZ9 spread settled 37.5, but was 36.5/37.0 at the time of the trade. Odds are that both calls expire worthless, unless this week’s hike was the last of the year. The idea is that vol is very low on the front contracts, and the skew to calls is extreme in midcurves, which allows this entry point. However, if the Fed is stopped in its normalization mission, there’s got to be a reason, and the 37 bps of cushion on this trade may not seem like enough. On the other hand, the trade DOES allow for selling of EDZ8/Z9 spread with protection.
–The on again/off again trade wars are again in play, with $50 billion in tariffs levied on China. Initial reaction in stocks is negative. New low Shanghai Comp.
–Industrial Production today.
