Oct 8. Columbus Day
–Despite a cut in reserve requirements over the weekend by the PBOC, Shanghai Comp is down 3.7%. Concerns about Italy have taken the Italy Bank index down over 4% this morning. Salvini helpfully called Juncker and Moscovi enemies of europe, sending the btp/bund spread to a new high of nearly 310 bps. US stock futures are also lower this morning, but not through the lows set on Friday.
–The curve steepened on Friday’s sell-off, with both 2/10 and 5/30 up 2 bps to recent highs of 34.0 and 32.5. Near eurodollar calendar spreads also made new highs, with EDZ8/EDZ9 up 3 bps to 59.5, and EDH9/EDH0 up 3.5 to 43. While there was some profit taking on long US puts (USX 138/137ps sold at 27, 6k), there continues to be interest in buying long dated ED puts. For example, EDZ0 9550p 4.0 paid for 20k.
–More deferred ED calendars closed near the highs of recent ranges, but reds/greens and reds/blues are still negative. If things really go pear-shaped in US equities, then reds will probably lead on a rally. If inflation data picks up (PPI and CPI out Wednesday and Thursday), then the curve will likely steepen further, which should also push reds/blues into positive territory.
–An uneasy risk-off sentiment is building which may lead to demand for US treasuries, but it’s far from clear that yields will drop, as Uncle Sam has new supply to move off the lot. Treasury auctions of 3’s, 10’s and 30’s beginning Wednesday will raise $45 billion in new cash. Expect thin conditions today given the US holiday.
IT8300 FTSE All-Share Italia Bank Index (www.bigcharts.com)
