Oct 25. Bring in the bomb squad
–Pipe bombs sent to the political elite and CNN were intercepted yesterday, but they done blowed up the market real good. SPX -3.1% while Nasdaq fell 4.4%. Forward expectations of rate hikes seeped out of the market with new lows in all near ED calendar spreads. For example, EDM19/EDM20 settled at just 15.5, -4.5 on the day. Nov/Jan FF spread closed at 17.5, down 1 on the day, and Feb/April, which captures the March FOMC, settled 15.5, down 1.5. The front end is increasingly indicating funding pressures, with the Fed Effective yesterday at 2.20%, exactly equal to IOER, and 3m libor was over 2.5% for the first time. Financial etf XLF held up better than other sectors but was still down by 2.5%. New Home Sales weaker than expected as higher mortgage rates start to bite.
–Global concerns aren’t easing. CNY this morning traded above 6.95, a new low for the yuan, and while Di Maio expressed support for the euro, Italy is not backing off on its budget. Stocks have bounced, but remain vulnerable. Perhaps AMZN and GOOGL earnings today can turn the tide.
–A few flight to quality trades in treasuries: TYZ 119/120.5 call spread bought at 17 in 15k (settled 19 ref 118-20). TYZ 123.5c 1 paid 20k and USZ 148c 2 paid for 15k.
–On the eurodollar curve, greens were the star performers, settling up 6 on the day, while reds in front were +4.625 and blues behind were +5.5. Green/blue pack spread is still inverted at -1.25 bps, which makes little sense if the Fed is forced to blink. News today includes Trade, Durables and the US 7-year auction.
