Oct 2. Powell, part deux
–The Nafta agreement with Canada got stocks off on the right foot yesterday, but gains faded late in the session with the Russell displaying particular weakness, closing down 1.4% (SPX was +0.36%). This morning attention has shifted away from N America, with comments out of Italy relating to its budget taking center stage. Bund/btp spread is blowing out, nearing 300 bps. Italy bank index (IT8300) is at a new low for the year, down about 13% from the high last week; -2.7% today alone. EUR is 1.1523, and although it was lower in August (1.1302), it is nearing the late May low of 1.15 when stress related to Italy last peaked.
–It’s not just Europe. The US/China trade war threatens to become something more intimate as warships apparently came within 45 feet of each other in the South China Sea yesterday. Not exactly groping, but certainly an invasion of the safe zone. Well, maybe it WAS a grope. In addition, the Indonesian Rupiah is at a new low vs USD, with additional weakness in the ringgit. IMF’s Lagarde says the world economic outlook is ‘dimming’.
–Oil exploded higher yesterday with CLX8 up over $2/bbl to 75.30, a new high for the year. This exceeded the front contract high set in early July by a small margin, but the rally in Brent has proven much more powerful.
–All of these factors have caused a bounce in US treasuries this morning and a pull back in stock indices. If a full-blown risk-off episode develops, I prefer shorts in the latter rather than longs in the former, though the curve will surely steepen.
–A couple of weeks ago recall the >250k buy of 0EH 9687/9662/9637p fly 1x3x2. Since then 0EH options have been heavily traded, with a buy of over 50k 0EH 9662/9637p spread yesterday for 5.0 covered 9682.5. Total volume in each strike was over 100k but prelim sheets indicate little change in open interest. Total open positions in 0EZ and 0EH options are huge, with EDZ19 the peak futures contract in terms of open interest. This part of the curve could become more volatile.
–News today includes testimony by Quarles (text already released on Fed website) and a speech by Powell at the NABE.
12:45 p.m.
Speech – Chairman Jerome H. Powell
The Outlook for Employment and Inflation
At the 60th National Association for Business Economics (NABE) Annual Meeting, Boston, Massachusetts
