Edu15(sep) presently 99.62 Present June spot 3 month LIBOR is 28.5 bp. Or 99.715 This 99.62 presents approx the same opportunity that existed in March a few months ago when EDM15(june) was priced at 99.62 The drift up to spot was/is about 10bp or $250 or about a 25% return on nominal margin of $1,000. This hypothetical trade is just about done as expiration of edm15 looms and Fed did not hike rates. So what if fed hikes before Sep, edu15 expires and you hold to expiration? Spot will converge to (28.5 bp + 25) or 53.5 bp. A price of 99.47. This represents a loss of 15bp. from the present price of 99.62 Presently at 99.62 and spot of 99.72 means that 10 of 25bp. is already priced in. The market today implies a 40% chance ofa 25bp. hike in September. Seven days ago 68% of 25bp (17bp.) were priced into edu15. So the market presently prices a 40% chance of a (15bp. * 25) $375 loss and a 60% chance of a $250 win(no sep rate hike). Finally, edz15 DEC, is 99.45 for 27bp. higher than present spot LIBOR 3 month rate. Basically a single 25bp.rate hike is priced in for the year. The dec contract has shed about 11bp. over the last 7 trading days.
EDU and Z15 are at high range price extremes after FED and risk on and stong rally the last week. Selling EDZ15 for some varying across this range. This will be in line with long TMV. Looking for follow through on todays selling of 20+ treasury bonds. Some good housing data and the ongoing brief risk rally could justify bond action but also 10 year Bund yield up 13 bp. today to 88bp and euro followed but is at top of range. I bet that this correlation continues. FEZ , Eurostoxx50 up a huge 3.65% today on hope of a week ending can kick. Emerging markets doing well with FOMC and Greece optimism. INDA and ICN the India equity and currency etf usually react to FOMC more than others. EWJ or DXJ , looking to buy for a swing high here. Very late to this but USD/JPY and Japan equity EWJ long , i have learned , are the same position. Also, the Japan thread has a lot of Imfo on the Bank of Japan supporting Japanese etfs and individual equities. If all things are equal, Fedis entermg a tightening biased policy and Japan and Europe the opposite so Japan and Europe equities are better. US treasury curve steepening this year. Adding STPP to etf watchlist. Very thin. Europe bond route drove the 20+ rates up to steepen curve(bearish) and , especially last week, FOMC drove short term rates down.(bullish). Together , the 2-10yr rate spread is up 10% for the year.
6/23 Euro down 150. Better to look at it as a failure of the 114 level and expect some volatility. Conflicting Greece messages. Solution expected. See what FXE and FEZ does. USD large day bar today. Would rather own Japan stocks in Yen here rather than dollar as opposite side of ranges. FXA,FXC and GLD down today with dollar up. Rates following dollar strength along the 2,10 and 20 . little/no change in 2-10yr (STPP). little change in U15 and z15 rates mostly keeping dovish low rates from last week FOMC BUT STILL LOOKING FOR MINUTES IN TWO WEEKS TO WALK THESE EXPECTATIONS UP.
Greece referendum this weekend. I expect a YES vote and an agreement with creditors. NFP came in around expectations at 223k added. Last two reports revised down about 30k jobs each. Hourly wages flat. Increase in people leaving the workforce. Not a good report. -6, -4, -1 bp. Bullish steepening in the 2,10,20 treasuries. EDU15 and Z15 rates were down a couple bp. as well. Steepening is working both ways this year as longer term rates want to go up and short term rates down. USD, Euro and Yen a all mid of recent ranges. Emerging markets generally weak and China contributing strongly to this.
Greek vote was NO to austerity terms. Few days later Greece submits new proposal. They want debt forgiveness and 35 billion in stimulus. European markets rallied a couple days on this news. German 10 year Bund up 18 bp. To 88bp. on the weeks last trading day alone. Another run over 100bp may follow. US 20+ treasury yields and euro up as well. China, FXI, sold off by 35% and has rallied hard. Asia and emerging markets correlate with China and risk off. EM's PA has been weak with global commodity selloff and US bias to tighten later this year. Commodity currencies FXA and FXC weak. Near ED futures expectatioms for Sep and Dec rate hike have eased . Last FOMC, last NFP , and last FOMC Minutes all spiked yields down, yet not by much. 6 month price trends in IEI,TLH and TLT are all down so rates are rising in the 2-5 , 7-10, and 20+ maturities. steepening trades are working in 2015. Yellin, after Friday market close, reiterated bias to tighten this year, data dependent. May get some more through on EDUand Z15 on this comment and easing of Greece stress. SPY in an 2040-2080 range for a week or so on Greece and China.
Emerging markets are a sell here on this pullback. EDZ is short term vehicle. Most emerging and asain countries down. Commodity producing countries and currencies continue to be weak. USD vs euro and yen is strong. Gold is putting in a tripple bottom over the last year at 1150ish level. 1100 seems more likely than 1200. Yellin wants to re-arm rates so she said in a recent speech. Expressed confidence in growth, labor market and inflation expectations . She has termed future FOMC meetings as LIVE. Retail sales poor at -.3 . Buzz is that people are not spending the recent wage increases shown in past data. PPI better than expected at .4 following a .5 last month. Fed seems to have tightening bias. Yellin has warned in the past that the longer term risk premium may be mispriced and can move fast. This has happened to some degree AND rates under 1 year have fallen with important recent data. Stocks have diverged from this steepening, presumably, risk -on rate environment. Best space seems now to be bullish USD and short term rates, and bearish metals, commodities, material stocks, Commodity exportimg countries, emerging markets. Major developed , US, Europe and China equities seem to trade on headline news here.
Does anyone actually listen to Yellen as it is? The markets sure look like they've stopped listening to the Fed.
I dont know they do listen anymore, but it will be interesting to watch currencies, emerging markets and US treasuries if the fed does get in a couple bumps in the next year with Japan and Europe engaging in QE. But no, it does seem US stock indices have become much less sensitive to fed speak and short term rates have not listened, and actually based on economic data , have pushed fed rate hikes further out despite what Yellin says. Its just that i believe they will get at least one in here before year end. US stock Markets reaction??? It may be a mistake to look for a response in the US stock indices rather than other assets.
I will be absolutely amazed if Yellen makes a single rate increase at any point in time. By the time we get around to it the market will either be shitting itself or some other issue will be coming up (China? Greece? Global macro?) and then they hold off with some weasely justification. This is what happens when you run near zero rates for 7+ years without fundamentally addressing any other problem: hope based economic engineering.