Good evening,
This is the last post I will write on this blog as I have accepted a new position at the same bank but on another desk (Even another country in fact!). Interest rates will not be my focus anymore, hence the end of this blog.
To all the persons who wrote to me to share their views on the T-bond or support me, thank you!
That's the end for now!
Cheers
I did not follow the market very closely today as I was stuck on an unexpected holiday due to a snow storm... But here are my thoughts about today as I was driving back towards home once the highways were cleaned.
Today, we saw the relief rally we talked about last Friday as the market was getting over-extended to the short side on strong inflation data and a depricing of the credit/liquidity crisis. Today, we saw both technical players, playing for a quick buck on a small rally, as well as more fundamental players getting hedgy about the liquidity in the market... Apparently, lots of people think that the FED's cash injection might not be enough... Also we had a flurry of new downgrades in the financial sector...
The question is, is there a lot more room to the upside on the T-Bond? Yes there could be, but right now lower prices could be seen in the very short term as the equities are due for a bit of a relief... They have been hit constantly in the last few days.
All that said, I remain very sceptical of where the price will go in the next few days... Our long position we had put on at Friday's settle was take-profited early this morning and for now we are flat... I will return back to scalping the market intra-day until more visibility comes up.
Not a good day... Did not respect the trading plan and got caught trading the wrong positions at the wrong time with the wrong size and blew the whole week's PnL in half an hour. Up to there, had a pretty good streak posting good stable PnL all week long but got ahead of myself this morning thinking I new better than the market... In the end, the market was right and I was wrong... Before I blew up more money, I pulled out the plug, suck on my losses and thought of why I did not respect the clear and simple rules I have established... The answer is I was too confident. There is a saying going around stating: "Don't worry the market will make you humble whether you want it or not". True.
Outside of that, CPI numbers got out on the strong side this morning and led to a sell-off (again) in the bond market... From there on we just oscillated in a 10 point range all day long with liquidity dying out as we where closing the week... The last two days have been a bit of a change as for once the bonds did not follow the opposite of stocks... Both ended down these last two days.
Looking at a weekly chart we see the drop has been very steep over two weeks in the T-bond... Sure we have a depricing of the credit/liquidity crisis and some strong inflation numbers but I think the market has maybe fallen a bit too hard lately and should maybe bounce a bit... From what I hear, I am not alone with that opinion... In any case our daily elasticity model gave us the go ahead to buy some long bonds at 3PM. Our target is 50 cents. Hope to see it sooner than later!
Okay, that was an erratic session... It almost felt like the market was a trapped mouse trying to escape but not kwnowing where to go...
Arrived this morning on downward pressure after yesterday's little panic. This subsisted until the FED came in announcing a concerted plan with other central banks to inject liquidity in the market, thus alleviating the pressure for financial institutions to fund themselves... This had an immediate impact as stock indexes soared on the news and bonds got killed... Basically the market started to deprice the credit crisis and dreamt off higher growth for next year... This did not last for very long and we found some support in the mid 114s again (We had already tested these levels on Friday). From there on we skyrocketed back towards pre-announcement levels as the market grew again aware that we were not yet out of the bush... The day was volatile but gave very nice trading opportunities as the trading was not choppy.
We got killed on our daily momentum trade which recommended to buy at 116-15, but at least we made some decent money today nibbling the market at juncture points... Did not cover for all of the the loss but at least part of it... Also still sad to have let go my Jan08 call spread on Friday...
We've been saying for two days that the drop has been too abrupt and that we need to maybe take a breather.... We are almost up two bucks on the day! We did not expect that much
The market opened the day up and kept climbing the whole day in front of the Fed. This move was nice and well expected after rebounding against the 114-10 area yesterday (level on which we took off for our preceding run-up). This part was fun and easy to nibble as the market moved in nice little waves.
Then the Fed came... The Fed did less than what the market expected and the market did not like that... Results everything that was not risky just jumped up as well as credit risk instruments. The FED cut by 25bps the fed fund and the discount... Statement dropped the negative bias on growth but said there was a lot of uncertainty both on inflation and growth... Blabla... Right now, we see high inflation in Europe, China is even worse and GDP is running at 4.9% on a annual basis... Ok, given that with the subprime we could see a slowdown.
Today's move in the market was rather surprising... Such a move to the upside means that the recent downmove (almost 5 bucks peak to through) was just smoke and we are in for good on the long side... Unless of course the market is just stupid and today was again another panic... By the way, don't expect Libor to tighten much, because the Fed's move clearly indicated they are not too concerned about liquidity problems... If they had been, they would have lowered the discount by 50bps, not 25. Granted, they could still flood the market with cash.
Also our daily momentum turned bullish at the settle... So we put on some longs but betting the farm on that would maybe be a bit too bold... Wouldn't be surprised to see the market relax tomorrow.
The other day, the market was too pessimistic about the future of the economy... Now it seems, that we are too optimistic... For a fourth consecutive day, the T-Bond went tumbling down as market participants re-adjusted their view. Every day, we now hear some positive news (MBIA receives cash injection from Warburg Pincus, Soc Gen takes 4.3Bn SIVs on its books without affecting its capital ratios) and the only bad ones we hear are transformed into good ones ( We are thinking UBS). In addition to that, we had all that talking about long term inflation over the week-end and how this should send fixed income instruments lower...
In any case the market looks bearish in terms of price, but the recent drop seems rather too abrupt... The fall as been so fast that our daily elasticity model went from overbought a week and a half ago to almost oversold. In fact, we had bids at 114-02 to buy the market for a jump the other way. We did not go that low but the market maybe needs a little breather before resuming its downmove.
Tomorrow is FED day as we talked earlier. Market is pricing 25 bps rate cut but people are also looking to see if the Fed will cut its discount rate by 50bps... This would be a way to help the liquidity crisis without lowering the overnight rate by too much....
Well in the end the reverse hammer we saw last Friday ona weekly chart proved to be right for this week as we have sank by two bucks since then and almost three since the top seen on Tuesday. Is there more room to the downside? There is always room for lower prices when you are in the 115s but maybe the recent drop has been rather too abrupt... In fact it has been so abrupt that our elasticity models that were in the higher bands are now nearing the oversold thresholds on the long bonds... In addition to the abruptness of the drop, we also have to take into account the 115 line on which we bumped today... This line has been a major haggling area for the last few years as shown on the above graph (the big fat purple line).
Today was a nice downward, no surprise day. We opened and started to go lower and basically just kept going down all day long. This downmove was spurred by several factors. First, we had the Paulson's subprime rescue plan and secondly we had the quite strong NFP. Granted the trend is downward on the NFP, but there is hope. Such a number must have calmed a lot of people on the street as it gives us reassurance that the consumers will continue to consume as they have a job and thus money flowing into their bank accounts... So for now, everything is good...
Next week, everybody will be looking at the Fed on Tuesday... According to the Euro-dollars, the market is widely expecting a 25 bps rate cut... This is less agressive than earlier this week when the market was giving a 50-50 probability for 25 or 50 bps rate cut... There is still a fair amount of people in the market that thinks that the Fed should maybe do more than less and cut by 50 bps given the actual poor financial conditions, but this is not what the market says (Options, Euro-dollars and Binary options all point to a 25 bps for now).
The last two days have been firmly bearish with only slight pick-ups when bad news where hitting the screens... Today was the turn of MBIA... Moody's announced that they were not so sure about MBIA not experiencing a capital shortfall in case of worsening credit conditions. That lilttle upward move was crushed and from the top, we lost a whole dollar in three and half-hours. This move on the T-bond was a bit strange by the way, because it was not mirrored by the 2, 5 and 10 years notes....This means it was probably not some steepners being put on because if so one the other maturity would have gone up... The other solutions are either a large long position was being dumped by someone who took its profit on the recent run-up or someone paying fixed in the long end, thus forcing the receiving bank to sell the 30s to hedge the direction. In any case, this move pushed the T-bond back to its long term fair value against the T-note according to our elasticity model. This move also pushed the T-bond towards its recent support levels sitting in the high 116s.
Today, we saw the ADP number get out on the very strong side at almost +190k.... This is extremly bullish, but we have to be cautious with the number as we have seen in the past ADP sometimes gets it wrong... One more day to wait until the real number... If the NFP comes out that strong, we might see a real bloodbath in the market since in addition to strong employment data we also have the government working hard to find a solution to the subprime crisis...
Did you know?
If you take a weekly chart, you will notice that we have been climbing for 8 straight weeks... When was the last time this happenned ? The answer is in 1998... So what we are seeing in the market is pretty rare and just add to the temptation of selling the market if not already done....
Well, the reverse hammer does not look to good right now.... Since the close of Friday, we have climbed by almost a buck on heightened risk in the credit markets... The market remains very fragile and will shoot up as soon as an opportunity presents itself... On the other side of the trade, we are hearing more and more people saying that its valuation is maybe getting on the rich side. With the bull run in the commodities and the inflation creeping up in Europe (look at Euro-zone CPI...) it might be logical to see lower prices in the long bond.
Today was a real rollercoaster. Go up, go down, go back-up, fall again and close unchanged with yesterday.... And this was in the face of falling equities. Don't know if this is the start of the reverse trend but we have lots of room to the downside!!! Looking at our non-stationary model, we see that the last time we visited such distortion levels the T-bond had skyrocketed to 123 from the 110 area. After that, the market tanked by almost 20 bucks... We won't do the same thing this time, but maybe a little downtrend wouldn't hurt anybody.... All that said, with the current market we can still go higher...
Interesting week we have ahead of us! From a techinical standpoint, we have just formed a nice reverse hammer on the weekly chart and last time such a configuration like that presented itself, the market strongly reversed its course... So let's wait and see. Still in that same vein, our non-stationarity model tells us the market maybe needs to catch its breath a bit...
Now from an economical point of view, we have plenty to look at this week. For one, we have the ISM reports at the beginning of the week but we also have the Non-Farm payrolls on Friday! This will be very interesting especially given the actual context of a slowdown in the US. In addition to that, we will also follow the Government's efforts to stem the housing crisis. Lastly, this week the BoC, the ECB and the BoE will release their rate decision... This will be most interesting to follow as the Fed will go live the week after.
Fundamental view:
The credit/liquidity crisis is still there and housing is still making new lows. What more is there to say? The market is predicting more and more a hard year for 2008 with the possibility of a recession in Q4 2008. For now, the market is waiting for the FED to cut rates one more time at the December 11th meeting. Otherwise, there isn't much to say except that it will be very interesting to see December data come out. Jobs and inflation will be of particular interest as these two points have shown a certain strength that has been missing in the rest of the economy. The market seems also more rational following the little panic we had on November 26th. The panic seems to have cooled everyone and we are now all a bit more rational. So next time we climb up, we might do it in a more orderly fashion. This move reminded me of what happened in mid/end June 07 when we saw some extreme bearishness conclude the downward run we had started a couple of months before.
For now, we might end our bullish trend with the rumours circulating in the markets. Noises say that the government is toying with the idea of a freeze on mortgage rates, which would most likely stem the housing foreclosures we've had in the last few months.
Seasonal/statistical point of view:
Last year the beginning of December had signalled the end of the summer/autumn rally as the market reversed sharply and quickly went on to loose a bit over three bucks.... But looking at history, December has never been a month prone to see lower prices... The main theory is that as year end approaches, people dump there risky holdings and buy safe haven assets like govies. Altough this year, I would bet that a majority of persons have already dumped their risky assets. Anyhow, looking at a seasonal chart, the trend is clearly for higher prices. Over the last 7 years, only twice did we see prices drop... Over 20 years, prices fell only 7 times during the month of December.
Looking at our elasticity index, we can see that there is nothing to do on a weekly basis but at least we saw some action during the month of October on the daily elasticity model. Right now, both models suggest "nada"...
Technical point of view:
After blasting trough all the resistances during the month of November, we will most probably test those new supports as the market might give back part of what it has taken in the last few weeks. Why this bearishness ? The answer can be found in the post of November 30th, where we talk about a weekly reverse hammer... The supports for December are the 117-10 zone (on it right now), the 116-10 area, the 115 level, 114 level and finally the 112 zone. The last few supports might be hard to reach but the first three are do-able. If ever the market goes the other way, there is not much to look at. After the 119-15 area there is nothing before the tops we visited in mid 03 at 124-12.
The week is almost over and the close is not the most bullish as seen in the above graph. We have formed a nice hammer and according to chartists this is a bearish signal rooting for a change of direction. This would nicely cap-off the current run and would enable us to see lower prices...
Today was quite interesting. After initially trading higher, which enabled us to unload our long at 118-04 (we were lucky), the market went crashing down as equities posted another strong performance all across the board on probabilities that the Fed will cut rates and other central banks will follow suit. In a little less than an hour, the market lost a complete dollar before regaining a bit. Sadly, we missed that opportunity. At least our options are the right way... Afterwards, the market whipsawed between116-29 and the 117-10 zone enabling us to nibble on each side of the market. Liquidty was rather scarce today as it was year end for several US-dealers.
Next week, is a new month and the last of the year. The week will climax with the job reports on Friday... The market is expecting a softer number after two strong numbers.
After a little calm, the T-Bond has restarted its forward march, RSI is back at more reasonable levels andelasticity is ok, thus leaving room for higher prices. But if we look at a weekly chart, the picture might not be that bullish... Depending on tomorrow's close, we might be forming a reverse hammer. If the market closes in the low 117s, we would have a nice candle picture which could signal a reversal of the latest trend... Just to remind ourselves, this is what signaled the present bullish run we started at the end of June 07.
All that said, today was an interesting day with clear trends almost all day long. The 117-20 level offered some good support while the 118-06 zone provided us with a resistance. All in all, the market climbed by almost a full dollar today. This move was not a complete surprise with the continued widening of the LIBOR levels, the weak equities overnight in Europe and the month end buying indexers that have to re-adjust their portfolio duration to the upside. Another signal was also, yesterday's monter move in the equities that was not followed by the bond market. They only went causiously down, letting us know that if the equities showed any weakness', they would shoot up and that is what happenned today...
Our daily momentum turned long at the settle. Now we need a 118-05 print to be happy... We might see it on any weakness tomorrow as more people jump in the month-end band-wagon. Tomorrow we have PCE data as well as CPM.
Reversal day! After yesterday's run-up, today we saw some nice distribution. At one point the market was loosing alsmot 2 bucks... Talk about crazy days.... The short we put in place yesterday at the settlement was taken off during the night as the T-bond went crashing down, before picking-up ground for our open. From there on, the market essentially monitored what happened in the credit and equity market for the rest of the day...
If you think that the market is too high and don't want to risk too much money, an interesting play is to buy put spreads... This morning at one point, the 117-116 put spread for march was trading around 22/64... This is almost some 3 to 1 profit ratio...
That is it for tonight. Short message, no time for more
I have nothing to say except that we are in panick mode. The market in my opnion is a bit ahead of himself... But hey who am I to decide when the T-bond is high enough...
The whole day was bid, bid, bid... Our daily elasticity gave us the go ahead to short the market at the settlement... Now we need to see a 118-9 print to be happy. Our short call are getting whamed... Granted we still have protection room but the MTM is not friendly right now ( vega and prices higher)
I don't want to appear too bearish on the future direction of the T-bond, but today's run-up was mainly done while the stocks where only midly down (got killed after the settle although) and swap spreads were also loosing ground... Weird...
The market is going to focus on three items this week. First, Thanksgiving shopping data supposed to come out on Monday. Experts are expecting relatively strong numbers. Secondly, GDP data on Thursday. Is the economy still growing at a good pace? The advance number for Q3 showed a strong number on Oct. 31st. Finally, as the market has done in the last couple of months, it is going to focus on more credit related stories .
In addition to that, several numbers are due on the housing sector for the last three days of the week, but it is very doubtfull they will shed more light into the problem...
Looking at the above chart, we can see that on a historical basis the market seems to be overextended, but the last time we moved by that much in such a period were crisis times... The last three years where we had these kind of moves were 2000, 1997 and 1990 (the last two are not shown on the above graph). Each time we were in the middle of a crisis: Tech bubble imploding, Russian/Asia/LTCM and recession in the US...
Bulls are on steroids with what continues to happen in the credit market. In fact the market seems to be panicking a bit (as seen in Europe where the players in the Covered Bond market decided to completly stop market making activities so as to stop the blood shed since bids are non-existent). Another days brings another trolley of bad news and the market just keeps going up in sympathy with the problems despite the fact that it should maybe relax a bit.
Are the bulls loosing breath ? We bounced all day round between 115-28 and 116-14 and closed at the low end of the range... Not the most bullish especially since the T-Bond is overbought, the FOMC was more or less bullish for the economy and the 116-14 level has been a resistance level in the last hours and is also a longer term resistance we had 2 years ago.
We opened the market, on the bullish side this morning after creating the low overnight on strong european equities. As the stock market opened on the strong side, the long bond scaled back from the 116-14 level. After reaching again the lows of the day, we had the Countrywide rumour... Apparently, CFC was to file for bankruptcy, but the stocks was trading a 9.8 when we heard it and in general a company on the verge of Chapter 11 is not trading at 10 bucks.... Any how, the market went back up as we waited for the Minutes. They where kind of mixed, but overall they were kind of bullish.... Afterward, the market just slowly drifted down to close at the 116 mark.
Option expiration was today and we finally took off our option strategy... Definitely not the best month... In fact the worst month in a while. The only good thing is, as the market was falling we did not cover the delta right away and were able to recoup 23% of the loss... Otherwise not a super day, with the whipsawing, trend followers got hurt and our momentum models on EDs didn't give the right direction.... Better chance next time!
Another short week ahead! In total we only have 3 trading days this week, but realistically the market stop Wednesday at noon.
Accordingly to this shortened week, the economic calendar will be light. The highlight will take place Tuesday afternoon with the release of the FOMC Minutes. In addition to that we have housing starts Tuesday morning and leading indicators Wednesday morning.
Tuesday will also so be expiration day for options on T-bonds, so our option strategy will come to an end. For a second consecutive month the strategy is not doing very well. The strategy is only points away of flat trading... but there is still two days ahead.
New high again today but rather weak close for the week-end. Altough after yesterday's monster move, today's consolidation was to be expected...
Arrived this morning at the office after challenging lower and higher prices that would proove to be the resistance and support level for the rest of the day. As people arrived at their desk, the market was getting challenged as stock futures were climbing. This lasted until the stock market opened and started to loose ground. From there on, we developped a nice upward trend that nicely topped near the high we created early that morning. We spent the rest of the day oscillating around yesterday's close climbing to 115-17 for the close as equities were being hit. In the afterhour session, the T-bond lost again some ground as equities shot higher to close with a 0.5% profit for the day.
The market is still fearing for more bad news to come, as we saw some fresh steepners being put on 20 minutes before the pit session close. The T-note was gaining 4.5 ticks while the T-bond was only up 4 ticks. Normally the long bond should have been up by at least 6-7 ticks.
Yesterday, we said that we were entering into a new configuration that enable us to see much higher prices... We still stand by this scenario, but it is important to bear in mind that in Europe, the Bund is still not able to make new highs and is still stuck under the 115 line. At one point, the bulls will run out of time, so the sooneer, the better.
Our option strategy is expiring Tuesday afternoon. Right now the strategy is a little in the red... To flat trade we need the T-bond to close at 115-7 so let's hope for lower prices in the next two trading days. As for our daily momentum, that showed the green light at 3 o'clock yesterday we had a better day than what we were expecting with a close at 115-17.
Short week ahead for fixed income players as the market was closed today.
We closed last week at the top of the market for 2007 and near 2006 tops... The question is will we break convincingly to the upside or remain in the large trading range between 105 and 115? Economic data roots for lower prices with relatively strong consumption and strong employment numbers but we are in the middle of a financial crisis and bad news just keep pouring in (today was the turn of e-trade).
This week's economic datas are Inflation numbers (Wednesday and Thursday), Retail Sales (Wednesday) and Empire State Mfg and Phily Fed surveys (Thursday)
Okay, we have busted through the 114-00/05 and we are now closing in on the
115 level. Last time we visited these lofty levels was in December 06. In fact, the 115 vicinity has been the top side boundary for 2006 trading range. The 115 level has been a major resistance for the past two years.
Days pass by and the market remains the same. Bearish intentions in the morning quashed by bad credit/losses/downgrade/liquidity/... news during the rest of the day. Today was no different than the rest of the trading week as we closed still hovering near the 114-00 yard line. The market seems to have bearish intentions but the actual financial crisis keeps prices-up as no one seems to be willing to sell the market.
The market opened on the strong side overnight challenging the 114s, as european equities were susbtancially lower. The Bund made a gap at the open but subsequently filled it, fuelling bearish convictions. This lasted until 9h40, just before Bernanke. In the mean time, scalping on each side of the market was profitable but not trend following. About then, the market started to climb as bad news started to hit the screens at the same time that Bernanke was reiterating the Fed's view for sluggish growth in the next 2-3 quarters and continued problems in the financial markets. Nothing new there but it had the expected impact. Stocks tumbling down, bonds higher and curves steeper! In late trading, we subsequently retraced or moves to the downside leaving the T-bond about unchanged.
What to expect for the next few days? The market looks like we are due for lower prices over the next two weeks but the short term will be controlled by the amount of bad news that continue to fill the screens... Also, from a graphical point of view, we aren't able to make new highs but our lows are higher and higher... Tomorrow is half day with no work on Monday. We have trade balance, import prices and U of Michigan.
One last thing, our daily momentum model is showing the green light to be long for tomorrow, but tomorrow is a half day... So could be weird... The lights turned green yesterday for eurodollars futures...
Another day passes and we are still under the 114 level even after an unsuccesful try to the upside early this morning on more credit news... We are about flat over the day but this is only due to some steepning trades being put in place. If it was not of that, the T-bond would be much higher as are the 10 and 5 years notes. The T-Note closed on the top side of its daily range while the T-bond just bounced off its lows and slowly drifted higher but with a good lag.
For the last few days, we have been consistently bouncing off the 113-13/16 area. This would tend to indicate that this is becoming a new support level that would favor higher prices... Options are also showing more potential to the upside. This view can be easily explained by the fact that given the current context, people tend to prefer longs against shorts and will therefore be unwilling to sell in the wind even if long targets are reached. Talking about targets, the bund has bumped again, against the low 114s... It will be interesting to follow its pattern.
Stocks and news were definitely bearish with stocks getting hammered (Dow Jones down -2.64%). The only piece of news reaching ours ears were either about losses, writedowns or weak capital ratios... Not good. Also, we had several Fed speakers that were not exactly bullish...
Tomorrow, we have 30 years auction which could put a bit of pressure on the long bonds in the morning. Also on the economic front we have Claims and Bernanke testifying about the US economic outlook...
For now the 114-00/05 resistance holds thanks to advancing stocks and tomorrow's 10 years auction. We arrived this morning with some choppy trading to the downside that offered plenty of opportunity for some scalping as we were bouncing from the bid to the offer all the time. The only time of the day where we had a bull run was just before Morgan Stanley announced new writedowns. This was the perfect moment to short more bonds, as recent history showed us that it was profitable to do that(eg: look at last week...). The rest of the day was on a downward slope as we went back to reach the 113-18 zone.
Does this means that the bull run is done and we are starting a new bear leg? Well no, not exactly, with the recent run to the upside, we could very well be in consolidation still... To confirm a bear leg we would need to break the 113. Just worth of mentionning, the Bund did not succeed to advance today despite rather supportive economic data. So...
Fresh beer is waiting for me.... So more tomorrow.
I am back from holidays and the market is radically in another configuration than when I left! When I left for holidays, the market was firmly in a bearish move and we were trying to break the intermediate resistance standing near the 110 level. In the end, we did a nice little double bottom configuration and went back-up on the back of the return of the liquidity crisis.
Now the interesting question is where are we going ? The conscensus we are hearing on the street is that we should see higher prices before lower prices, but to confirm that we have to overstep in a convincingly way the114-00/05 level that has hold (minus a few overpass) since December 06. Granted, Friday we went to see much higher prices on the back of bad news in the banking industry ( Merrill's CEO out, Citigroup's CEO most probably out and a score of huge write downs by lots of banks in their fixed income books), but after testing higher prices this morning we went straight back toward the 114 level. This week will be interesting to look at, because there is no big economic news on the radar so the market will be able to develop its own story. If we do not overpass the 114 level significantly, we could see the 112 level as a first target and 110 after. It will be especially interesting to look at the T-bond's move since the Bund in Europe is closing on upside targets.
Did not look to much at the trading session today as I was touching back with the market.... Satisfied myself with some small scalping in the T-Notes and T-bonds.
Please note that I am taking a three week honeymoon and consequently, there will be no post made in the meantime!
I will be back on November 5th.
Cheers
Short week this week for fixed income traders! The week is relatively calm in terms of economic data except for two things: 1- FOMC minutes on Tuesday and 2- Retail sales on Friday.
The minutes are avidly expected, because everyone will want to know why the Fed cut rates by 50bps and especially how important was the -4k NFP in August in the decision to cut rates. We will remember that the market was expecting a 50bps cut and that is exactly what the Fed did, but it is a bit unclear why they did so. Sure there was continued problems in housing, the liquidity crisis and the poor job report, but was there something else? In any case, some light will be shed Tuesday afternoon!
Retail sales on Friday will also be of interest to take the pulse of the consumers. A slight pick-up is expected after the disapointing September number... Year to date, the numbers have been slightly mixed...
Of secondary interest in the economic arena, we also have 10y tips auctions, consumer sentiment, PPI (let's wait for the CPI), import prices and business inventories.
Looking at the T-bond, the big challenge this week will be to break below the 110-00 level if we want to continue on Friday's venture. Otherwise, to the upside we are still looking at the 112 area.
That was a real curve ball that a lot of people did not see coming! NFP up 110k and revision of +93k for the preceding month ! Evidently, T-bonds got trashed... Two months ago, I underlined the importance to not take face value on NFP data... Basically, the error margin on the NFP is something around 70k and this month we've had the perfect example with a 93k revision sending the market in turmoil with people scrambling to re-evaluate their view of the economy. Let's just hope that the Fed did not put too much weight in August's NFP to cut their rate... In any case, unless very adverse economic conditions come in the very near term, it is safe to say that the Fed will probably not move for the rest of 2007!
So the 112 line looks a bit far from the 110-25 line. After playing with it for the past week, we have cleared away on strong NFP data. Until the number, the market did not want to move away as it did not knew were to go. After that, it was all the way down except in the last hour and half of trading were people were just covering their shorts for the long week-end. In terms of trading, you just had to be short. Our intraday trend model gave us the tip (believe it or not) 1 minute before the NFP. The model covered just before the final bell on the little pick-up. That was the good trade. The bad trade was our swing trading model that was bulllish coming in this morning... The cost was over a buck today and wiped out just over a third of the yearly profit on this model... Not good. Better chance next time.
Two points:
1 - The iron butterfly we've put on Monday is high in the sky after today's NFP data. For now, we have been very lucky this month as we have sold our 111 call on the 2nd of October after reaching the 1$ target move. Now, the lower the T-bonds close on the 26th the better it will be! Although, don't celebrate yet... We are still early in the month and a rally is still possible.
2 - Options are still expensive, yesterday we were looking to buy a November straddle and were in the end deterred of doing it... Too expensive. Good thing we did not do it. The 111 strike lost money and the 112 one barely moved up by a paltry 4/64....
For now, the 112 line has held on a daily close. After testing new highs in the morning, we broke the 112 line and held there for the rest of the day, even if for the close we made a half hearted try to reach again the resistance level. All morning long we bounced on the 112 level, but never did we overpass the 112-10 level that also contained yesterday's push. ADP numbers came in as expected and at 10h00 ISM non manufacturing came in sligthly stronger. This sparked some bid in the equities and credit indices as people momentarily forgot about the ongoing liquidity/credit crisis. As expected, bonds went on to visit lower levels and there we broke the 112 line. test
We lost almost half a buck between 10h and 12h before the bids started to disappear in the equities and from there we started to climb back. But this attempt to close over the 112 line failed and afterhours we resumed our descent... On Friday, we have NFP and there is a theory going around stating that Friday's NFP will be higher. The rumour says that due to technical problems the September NFP was missing 30k and that they will be added to this month number, hence the expected stronger number.
Okay we have overpassed the 112 line but for now, this passage does not look too convincing. In fact, we closed the day barely over at 112-01 after trying higher highs and failing on heavy offering. We arrived this morning with the T-bond being hit as European equities were on fire after yesterday's Dow Jones performance. While waiting for the pending home sales, we had some interesting range trading comprised of yesterday's support at 111-16 and 111-25.
At 10h00, pending home sales were out and worst than expected even after last month monster loss. As expected, this sparked a rally toward the 112 line. After a bit of hesitation, we went through and went up to the 112-10 level. This was the perfect level to sell our 111 call since the market had moved by one dollar since we put on the trade... yesterday (Historically, it takes a bit more time to reach the 1 dollar level). In the perfect world, we would now want to see the 112 line holds its ground and send the T-Bond lower... We will see in the coming days.
We are getting closer to Friday and the NFP... The market is pricing a +98k which is pretty strong, if we come under that we could very well open the door for higher prices. By the way, the CGBs and the Bunds have both cleared their configuration for higher prices. Their targets are about 2 bucks higher each. Stay tuned for the US...
It looks like we are pulling away to the upside... But beware, we haven't passed the 112 mark which is a resistance line as well as the monthly moving average. We arrived this morning at our offices while the market was trading unchanged after an earlier challenge to the upside. With no specific data before 10h00, the market drifetd aimlessly in a little range on low volume... At 10h00, we had ISM indexes, they were a tad lower and this gave some fuel to the bulls to run-up prices but we failed at the 111-26 line. After that, we drifted back lower to sit on the preceding top, made just before 10h in the 111-16 zone. This support holding, we tried again to the upside but with the afternoon coming to an end we failed on the 111-28 line which, by the way is the level on which we failed on Friday... 112 seems to be a bit tough to overpass right now.
Options are expensive right now. That being said opportunities are still around for people who like to be long vega. On september 20th we had a signal from our breakout model to buy straddles and they were sold back this morning while the market was at 111-21 for a small profit.
The actual context seems a bit tough for volatility buyers since daily moves are very small, but opportunities are present since we have huge intraday vol. Just think of today where the market closed unchanged on a daily basis but had a range of over 1 buck for the day. Taking all of this in consideration, market participants who want to buy vega must be careful of where they pick their spot and look throughout the day for sell points.
October is starting Monday and iron butterflies are expansive, as you might have guessed! In fact, prices for them haven't been that high since 2005... Just before the close of Friday, you could buy iron butterflies for around 88/64 where as lately the price is more around 78/64... One thing not to forget is that we have slightly more days this month that the norm so this also helps to bump the price a bit.
Few, what a day we had ! We opened this morning on the upside, licking the
112 level and boom in the afternoon we went as low as 110-26 before recovering to the 111-11 level which was the opening price! The daily movement does not give a fair idea of the intraday movements... This morning we ticked higher on the back of continued fears about the economy and month end. We had several economic indicators in the morning but they all came around their expected values and did not create any major turbulence. After the news we started to drift slowly lower and we were looking to close the day around 111-22 but that was not to happen.
In the early afternoon, the US Dollar started to weaken against most currencies and started to spiral down prettty fast. Since the US basket and the Bonds are positively correlated, the bond just started to puke on volume. People were dumping treasuries on the fact that if US is getting dumped, that means that foreigners are probably selling their investment and you don't want to be left holding the poop bag alone. The slide was maybe a bit exagerated and we started to win back part of the loss. We closed the day unchanged... Again... We've had a lot of compression days lately, when the market is going to move one way or the other it might be very abrupt.
We broke overnight the 111-00 resistance we had been toying with for the past few days but closed below it on steepner trades ! We opened higher this morning and broke through the 111-00 resistance overnight while Germany had disappointing economic numbers and the rest of the world was fretting about increased risk about the slowing of the economy. After that the T-bond started to slip as well as the rest of fixed income as equities were opening on a strong foot. The T-Bond fell more than its fair share, even breaking its new 111-00 support as people are still rooting for a more pronounced economic slowdown and thus a steepning of the curve. Sell the long end and buy the short end.
Right now, the feeling in the market is very mixed. Traders are trying to balance in their mind and their book two fears. On one hand we have inflation risks that are increasing with higher oil prices, lower Fed rates and China's overheated economy and on the other hand we have economic slowdown... Which one is the most probable and the scariest? This is the question a lot of the street is asking.
Right now, trying to profit from the actual instability through an ATM straddle is pretty expensive. Friday morning it was running at about 140/64. Today this is a bit better but nothing to call your grand mother.
So you might just want to wait until the beginning of October, next Monday, to put on iron
butterflies. These butterflies performed in a stellar way, especially if you sold the most expensive option on September 7th, bringing home a bit less than 2 bucks in. Altough, past performance is no indication for the future and this is especially true for October. Looking at the two preceding years, October has always been a rough month for these strategies....
We are about flat on the day, but this is not a fair description of the day. We arrived this morning at the office with the T-Bond loosing half a buck overnight. As soon as everybody was fully seated at their desk, we started to run higher as market participants had increased fear of an economic slowdown in the US. In accordance to that, equities were hit, thus rejecting for now, higher highs . It is worth noting that we have been in this dynamic since early June 07. Bear, here we come ???
We are slightly up for the day, but we still haven't validated a bullish configuration. As long as we are at the 111/111-04 level, we will be in a corrective move.
Today we didn't have any economic news, but tomorrow we are up for S&P/CS index (loss expected here), Richmond Fed Index (another loss there too) and home sales ( guess what? another loss too!). If the news come out on the weak side we might very well end our corrective move.
Next week will be rather calm in terms of economic news. Wednesday, we have durable good orders and Thursday, we have GDP. Both these numbers will be looked at in an attempt to define how much is the economy slowing. Is it a recession slowdown or just a little pause slowing?
Also next Friday is the last day of the month, so we could see some buying activity with index extension...
After a week of heavy selling, we saw some good short covering to close the week. The market opened on a strong foot in the early morning but met some resistance when Warsh talked about inflation. This quickly sent the market to yesterday's electronic closing at 110-01 but speculators were unable to break through it as some strong bids came in to lift the market. At that point buyers just clicked in and from there on we had some smooth sailing to the upside.
The question right now is: Was this just a slight short covering for the week-end before restarting to the downside next week or are we retracing a bigger part of the late downslide ? Right now, there is no reason to root for a bigger retracement as long as we haven't taken out the 111-00 level so this means it looks that there is more room to the downside.
Today was expiration day for options, people who bought there iron butterfly on the first day and sold the most expensive option of the butterfly on September 7 have cleared a hefty profit....
We confirmed the bearish strategy we outlined yesterday and that was simmering for the past week. Early last night, we opened below the 112-16 level and from there on, we just went lower. With equities on the strong side the market tanked more than a buck until 11h30. This is when equities stopped climbing and started to give some ground. From there, we partially reversed the loss on the T-bond but still, the long bond is bleeding lot more than its shorter comparses...
The reasons behind this fall are inflation and slowing economy according to me. We're just finished with inflation reports and yes they were not very scary at first look. But dig in deeper and what do we see? Inflation ramping up in food, medical services and services. This kind of inflation is harder to kill of than energy inflation and that is not good for a 30 years bond as you might expect. The second pressuring factor on the T-bond is the belief that the economy is going to slow and maybe enter in recession. This factor coupled to a Fed rate cut and you obtain curve steepning. How do you put a curve steepner? you sell the long end and buy the short one. In addition to these fundamental reasons we were also running out of steam on our bull summer bull run.
We do not have any other major economic release for the week. Friday is option maturity day so we might stick to the 112 figure which was where we were on the first trading day of september
Well the FOMC came and went and where are we standing at the bell ? Just over the 112-16 level... Granted we went to see much lower post FOMC, but this problem was only in the T-Bond. Notes went barely down before going much higher and firmly rejecting the breach of the 109-20/22 support. Now the only big news until the end of the week is the CPI tomorrow morning so this could smell foul for vega buyers as the options are expiring on Friday. The real question now, is were are we headed for the near future? The answer to this question may be lying on an intraday chart. If you look at a multiple intradays chart you will notice that we have a nice descending triangle. The horizontal line, forged by the lows, lies at 112-16 and the descending line is made by lower highs (114-02, 113-16, 113-06...). This picture is pretty compelling and indicates that we have more room to the downside than the upside...
Very low volume in front of the Fed tomorrow. We had, as we might have expeected, a very uneventful day. Like we did on Thursday and Friday, we tested supports in the morning before bouncing up after failing on the 112-16 level. This level has to be put in parallel with the level of
109-20/22 on the T-note. If we break that, we are ending the bull run started inJune. Otherwise, we stay in our double bottom scenario we outlined in our September 1st post.
Next week, Monday and Friday are dead or almost! But that is about it. We have PPI/CPI numbers on Tuesay and Wednesday. These numbers will be important as we will see if inflation continues to dampen or not. In that line of thinking, there has been much talking about food inflation and Chinese inflation. Lots of people say that China does not says thruth about their inflation. If both of the preceding assumptions turns out to be true (higher food and Chinese inflation) we could see the market tumble by a fair amount.
But lets not fret about such rubbish for now, because all this is dwarfed by tueday's FOMC rate decision. A cut is more than widely accepted but much talking and hagglingis going on about the size of the cut. 25 or 50 bps . Right now, market probabilities are slightly in favor of the 50 bps cut (46.4% against 45.7%). Another interesting possibility would be a 25bps cut in the overnight rate but a 50 bps cut in the discount rate. This might be a very effective way to lower the Libor without lowering the overnight rate by too much.
Again we tested higher levels and again we failed and went lower to try important support levels witout breaking them decisively. We opened to the upside this morning on bad news from Europe. Stocks were getting hit after Northern Rock announced it had liquidity problems. This pushed the T-Bonds higher toward the 113 line. 8h30, the durable good orders came out on the weat side and propulsed the market higher still. We were going for the 113-17 level on which we failed yesterday, but before arriving there UoM came out as expected and the equities decided there was no more credit crisis for the time bieng and shot upward. This killed our little rally in the blink of an eye. In 45 minutes we lost almost a buck to come and sit on yesterday's support just below 112-2. After that, the market got stuck between 112-16/22 on low volumes and looked like it was going to stay there, but the market initiated a little rally for the 3 o'clock close and went to 112-27. A possible explanation for this, is market participants covering their shorts for the week-end in case any bad happens.
We are in a trading range ! This morning we tried the upside of the zone and we failed to overpass the 114-5 area. From there on, we traced lower while stocks were going higher and several market players were cashing in on long positions. The fall was pretty straightforward with a little battle around 113-20/22 (yesterday's support area). We went all the way down to the support we designed on Monday morning at 113-8/10. After that we were getting late in the morning and liquidity died out while we kept bouncing off the support area.
Mid trend followers had another nice day after yesterday as the market gave very clear bearish signal. Talking about that, the best time of the year to do this kind of trading is in the second part of the year and 2007 is no exception to this rule. Of course for this to work, you wait for the liquidity to come back after the summer!
If the 113-10 level holds, these last two days could very well be a little breather before going higher. Otherwise, the huge bull run we started around 106-20 is coming to an end... We must not forget that the usual summer run generally dies out at the end of September/ beginning of October, when we have one.
Tomorrow, we have claims, 10y reopening and the montlhy budget statement at 2.
We had a breathing day today, after two days of heavy trading to the upside. Liquidity was not very good all day. We opened this morning with bearish intentions but this was quashed at 113-21 (This level would actually turn out to be a support for the rest of the day). Afterwards, we drifted aimlessly while waiting for Bernanke. His speech had a bullish impact on the market but he basically just repeated what has already been said for the last few weeks. Like yesterday, the upswing got stuffed at 114-05. From there on, we started to go lower on very low volume. Again we touched the 113-21 level before bouncing back up to the 113-27 area.
The behavior of the T-Bond has been a bit peculiar over the last two days.... It is as if some heavy curve flatners were put on and the market rather well supported in comparison of the T-Notes 5 and 10y. The problem is that we are not hearing anything about curve flatners being put on. Another alley is that pension funds are buying longs bonds to match their maturity and getting the hell out of riskier investment while the loss is not too nasty.
On the news front, we had a rather ok day. Equities in Europe and Asia showed healthy gains and the US followed the same path when it was its turn to play. Credit indexes (Itraxx and CDX) stayed flat to a bit tighter and the Libor tightened again ! We will see if the market can sustain good news/momentum for two days in a row...
Talking about the current liquidity crisis, we just brushed the positive side of the picture so let's dwell a bit on the darker side to be fair. On the negative side, we still have serious problems inthe commercial paper market (ABCP included). It is rumoured that up to 700 bln comes to maturity this week. This could put a lot of pressure on the Libor as well as on the balance sheets of banks that could find themselves in the obligation of taking some off the balance sheet items on their balance sheet... Hello funding/lending activities. The Libor US might be fixing lower but have you looked at the Libor CAD ? Not pretty. Finally, housing sectors is still underpressure with Countrywide rumoured to be in need of more cash after Bank of America's infusion. In addition to that, we had our first subprime casualty in the UK where Victoria Mortgage announced it is going into administration. If the subprime crisis transports itself to Europe, it could get really nasty...
By the way, our elasticity index seems to be getting a bit overextended so it would not be surprising to see the T-bond head lower... But let's wait and see for now...
Yesterday, we put our bull hat and today we had our bear outfits.... Lately the market has been totally unsure of which way to go... We are oscillating between 110 and 112. Volatility buyers are bleeding while the sellers have been feasting for the past month. Even if the volatility has been huge on an intraday basis, we are not moving on a daily basis.
We opened the day virtually unchanged compared to the preceding close. After testing lows overnight, the market bounced up and actually looked like it was going to make new highs, but pretty soon it became clear that the 112-10/11 was going to contain at least for now bullish advances. At 8h30, we had claims, unit labor cost and productivity. The data was maybe a bit on the bullish side but after a small dip, we again tried to take out the preceding highs but failed. Market players though, if we can't go to the upside let's try the downside ! But bids were waiting in the corner and they came out at 112-01 and eventually moved to 03, 05 and 07. Again we failed to the upside and during lunch time, the formerly big bids were shot dead in seven minutes on 16k traded. After that the market died out and we broke the 112 line before coming back and hugging it for the end of day picture.
A point to keep in mind is that even if we have crossed to the upside the 112 line on the T-bond, the resistance area on the T-note hasn't been broken... Since both market are inter-related, we should keep a sharp eye on that. The resistance area is the 109-20/110-00 zone.
Tomorrow, we have NFP data!!! The ADP index was a bit low, but the correlation between both indexes has not been terrific up to date. All the economic numbers have been on the strong side lately, we will see if the trend continue tomorrow.
