When logic and proportion have fallen sloppy dead
May 14, 2020
–Powell dismissed the possibility of going down the rabbit hole of negative rates saying the Fed’s “…view on negative rates has not changed.” However, the market’s view on rates still allows for the possibility of that outcome with FFH1 settling at exactly 100 and a few of the following contracts a couple of bps higher. The two year note is hanging around mid-teens, ending yesterday at 15.7, and the peak eurodollar contract EDU21 is only 20 bps at 99.80. The ten year yield ended at 64.8, having just been auctioned at 70 on Tuesday. In dollars, the red/green pack spread notched a new low at just 6.5 bps, down 1.75 on the day. I believe this is a record high close for the green pack (average of the third year contracts) at 99.72875. The curve flattened as buyers are simply forced in at longer maturities.
–Three month libor set yesterday at 0.392 and EDM0 at 99.66 or 34 bps. The yawning divergence between libor and near ED contracts has thus closed, and ED straddle prices remain subdued.
–Many commentators and analysts have opined that stock market lows have been set with the plunge in March. However, large investors like Druckenmiller and David Tepper (yesterday) have thrown shade at current valuations. Let’s start at the front of the alphabet. AA (Alcoa) had fallen 76% from the start of the year to the March low, and has now recovered to being down only 68%. AAL (American Airlines) is below the March low, and below the subsequent low made in early April, and below the next low made earlier this month. The chart looks like a plane bouncing in for a sloppy landing. I won’t go through the entire alphabet, but WFC (Wells Fargo) deserves a shout-out as well, having made a brand new low on the largest volume of the year. GET ME OUT. Sure, some stocks have recovered most of March’s losses. But it’s a little early to say we’re out of the woods.
–Now just a few days from expiration of the June Crude oil contract which is currently trading [positive] 26.66. Quite a bit different from the May contract expiration when prices plunged to negative 37.00, and the June contract set a low of 6.50. Many clearing firms have now restricted access to the front contract, or at least required a mask and social distance. There are now 137k open in CLM0 vs a high in that contract of 582k during last month’s festivities. Last trading day in 19-May.
“Why, sometimes I’ve believed as many as six impossible things before breakfast.”
