May 2. Refunding
–Breakout of the dollar continued with DXY and EUR through 200 day moving averages. Stocks had a nice run both before and afterAAPL’s earnings. Fifteen mins prior to cash close AAPL was 168.90, ESM 2647.00 and NQM 6666.00. As of this writing ES is 10 points higher while Nasdaq is 59 higher. July Corn also appears to be breaking out to the upside, trading 405 late.
–Interest rates were quiet, with flows dominated by premium selling. Yields rose with the ten year +4 bps to 297.4. Near ED calendars posted new highs. EDM8/EDM9 closed 51.0, +3 on the day as interest in 0EM puts continues prior to the employment report. EDZ8/EDZ9 closed at 35, not a new high, but just above the heavy selling level of 34.5 seen last week.
–Today’s news includes the Treasury refunding announcement at 8:30 (a likely contributor to higher yields) and the FOMC meeting in the afternoon.
–Interesting trade late in the day was a new buyer of 80k 0EU/2EU 9737c calendar for 0.5 covered 9702.5 in EDU9. EDU9/EDU0 spread is 10.5 and both options settled 3.25. Trade works on a roll up, and possibly on a change in Fed perceptions (an end to tightening). As a comparison, 0EM 9737c settled 1.0 and 2EM 9737c 0.5.
–Interesting speech by BOC Poloz yesterday, outlining concerns about high debt levels while still looking to raise rates. This line sort of sums it up for the developed world, and is something Dudley has also mentioned/warned about. “Remarkably, the aggregate debt-service ratio on mortgages for Canadian households has been very stable, remaining within a range of 5 to 7 % since the early 1990s. What this means is that Canadians have taken advantage of lower interest rates to carry a higher level of debt, thereby keeping the debt-service ratio fairly constant.” In other words, it’s a heavily debt-laden, cash flow dependent economy that has a hard time withstanding rate increases.
