May 22. No worries
–Stress related to EM and Italian markets is taking a back seat to improved prospects for China/US trade. Below are a few charts showing 1) a surge in Italy 5y CDS from 100 to 135 bps this month, 2) new low in the JPM EM currency index and 3) a fairly sharp drop in the FTSE Italian bank shares index. US fixed income is mostly ignoring these developments, as are risk assets. The curve had a slightly flatter bias as treasury auctions kick-off with today’s 2 year. The euro$ curve was 1-1.5 lower over the first 4 years, the ten yr yield fell half a bp. Large trades yesterday in dollars include a buyer of 25k 2EZ 9650/9625/9612 put tree for 2.0. Settled 2.25; trade was a roll, covering shorts in the 9650p and adding new shorts in the lower strikes. There was also an exit sale of 55k 2EM 9687/9675/9662 put fly at 2.5 (covered various levels). While net changes were small, implied vol firmed slightly. As June treasury options expire Friday, the cab-7 option buyer will begin replacing these positions: yesterday +70k FVU8 106.25 puts bought for cab-7.
–Crude oil continues to move higher, but markets feel a bit like a ‘turnaround Tuesday’ could develop (stocks/energy). Given that stocks and energy are near new highs, we’ll likely see some profit taking before the holiday weekend.
