Nov 14. We’ve got (global) issues
The plunge in oil is the big story, with CLZ8 settling 5569 down 424 on the day. From the high in October it’s down 28%. In 2015 the Fed stalled its first interest rate hike as energy and emerging markets were stressed, but this time around a Fed hike is considered certain in December with Jan Fed Funds at 9760.5 (2.395%) vs current Fed Effective of 2.20%. The longer term effect from oil’s drop is unclear; yes it provides a purchasing-power boost to consumers but there is also a lot of production in the US, and investment is likely to be curtailed. In the short run though, this type of move causes blow-ups and dislocations across markets. Bloomberg helpfully ran a headline which said …Supply and Demand Concerns Roil the Market (thanks). A scan of other headlines reveals a much larger picture, and that’s of a global synchronized decline in growth: Reuters notes that, “Japan’s economy shrank more than expected [-1.2%] in the 3rd quarter, hit by natural disasters and a decline in exports, a worrisome sign that trade protectionism is starting to take its toll…” Another article notes that Germany’s economy contracted -0.2% quarter over quarter on weak trade. WSJ: “More signs of trouble in China’s auto market.” Having been at 4% late last year, China’s sovereign ten year yield is catching down to the US, now at 3.42% vs a close of 3.14% in US tens.
–Guggenheim’s Minerd yesterday tweeted “the slide and collapse in investment grade credit has begun.” At the end of 2015, start of 2016, spreads exploded as energy companies had difficultly servicing debts. If we are truly in a global slowdown, spread widening will be much more pernicious and broad based as rates are at a higher base and there’s a lot of debt which needs to be rolled.
–A couple of large trades yesterday to highlight: Buy of 80k TYZ 118/119c spd 26 to 30. Settled 32 vs 118-165. Roll of long to a higher strike, OI -47k in 118c and +57k 119c. Another interesting late trade which was a new position: Buy 16k 0EH 9687.5p to sell the same strike in 3EH. Flattener trade, paid 3.0 for the 0EH over. The underlying futures spread settled -7.5, 9679 vs 9686.5. Depends on the Fed continuing to pursue tight money policy.
–News today includes CPI expected yoy 2.5% with Core yoy +2.2%. Late afternoon Dallas Fed President Kaplan and Fed chief Jerome Powell discuss national and global economic issues, 5:00 PM EST.
