Stocks reversing
July 8, 2021
–Stocks in a sharp reversal this morning with ES -56, Nasdaq -190 and RTY -38. Interest rate futures continue to rally after yesterday’s 4.7 bp drop in tens to 1.32%. New low once again in 2/10 which fell just over 4 bps to 110.7. Whether sparked by China’s continued clampdown on big tech and hints of rate cuts, or renewed covid fears, US yields are telegraphing that growth and inflation have already peaked and are headed for a hard skid. Of course, the Fed minutes did NOT make that forecast. The staff report was positive on growth prospects as least through the end of the year, though saw risks tilted toward the downside due to the possibility of covid variants. They saw inflation risks balanced citing upside risks related to bottlenecks and a possible change in inflation expectations, and trotted out the (now discredited) flat Phillips curve for the downside. Interestingly, ‘participants’ saw balanced risks on growth, but inflation risks tilted to the upside due to labor shortages and bottlenecks which might persist.
–Big trade +2EU1 9900/9875ps vs -3EU 9850/9825ps 0.5 paid for 40k, buying green. EDU3 settled 9909.5 and EDU4 9868. so 9.5 out vs 18.0 out. The actual calendar settled 41.5 versus 50 between top strikes. Implied vol firmed significantly in treasuries, indicating that fear has shifted to the prospect of a continued rally.
