Archive - Oct 10, 2013

UPDATE: *CBOE: CFE WILL OPEN THE VX FUTURE PRODUCT AT 8:10 AM CT

It would appear that the overnight melt-up exuberance of an optimistic investing public has been stymied as the exchanges break once again. Following record volume levels on VIX options this week, we are told this morning by CBOE:

• *CBOE: CFE EXPERIENCING TECHNICAL ISSUES
• *CBOE: CFE EXPECTING DELAYED OPENING FOR THE VX
• *CBOE:CFE WILL BUST ERRANT VX, VXT TRADES FROM 7:00-7:12:01 CT

SSDD... Let's hope Jack Lew has something positive to say and doesn't "surprise" an unhedged market.

Nearly exactly five years after Hank Paulson appeared before Congress dangling a 3 page term sheet ultimatum warning it was his way or the apocalypse, it is time for the sequel. Since we all love the smell of a good Mutually Assured Destruction spectacle in the morning. Which is why we can't wait for Treasury Secretary Jack Lew's presentation before the Senate Finance Committee discussing the Debt Limit, in which he will rain fire and brimstone on anyone who suggests that the Treasury can enter the X-Date without a debt ceiling deal in place, and will most certainly seek to crucify anyone who points out the logical, namely that payments can be prioritized and interest expense is a fraction the revenue the Treasury brings in, and that the end of the world would be nigh should the US actually be forced to live within its means.

While there is hope that DC will engage in its favorite, can-kicking activity any minute and if not resolve then at least push back the funding and debt ceiling stalemate by a few weeks, the reality is that without a deal in seven days, there may be no cash to pay down maturing Bills starting with the October 17 issue whose yield soared to nearly 50 bps yesterday. The reason for the capitulation as was revealed yesterday, is that various money market funds such as Fidelity's have been selling all paper around the X-Date. This morning the contagion surrounding the use of Bills as collateral has crossed the Pacific, following news that the "Hong Kong’s futures and options market operator will require traders to put up more collateral when using some Treasury bills to back their positions, citing concern that the U.S. is at risk of a default." In other words, as we forecast on Monday, the debt-ceiling confusion in cash-land has now openly engulfed the repo market, which only makes the states of a debt deal that much higher. Because if the repo, $2.5 trillion money market, and subsequently, the entire $80 or so trillion custodian market freeze up, what happens next will make Lehman seem like a quiet walk in the park.

• The ice breaks; fiscal talks set (The Hill); Ryan steps up to shape a deal (The Hill), as predicted here yesterday
• Republicans consider short-term U.S. debt ceiling increase (Reuters)
• Shutdown Standoff Shows Signs of a Thaw (WSJ)
• JPMorgan Clients in Cash as Schwab’s Options Hedge Default (BBG)
• Mitch McConnell, Senate GOP search for way out (Politico)
• Meredith Whitney Winds Down Brokerage Unit After Setting Up Fund (BBG)
• Washington Budget Chaos Keeps Fed Rates Low for Longer (BBG)
• Chinese Premier Outlines US Debt Concerns (FT)
• Saudis brace for 'nightmare' of U.S.-Iran rapprochement (Reuters)
• Obama Urges Action on Yellen’s Fed Nomination (Reuters)
• Libyan Prime Minister Ali Zidan Freed After Kidnap (WSJ)

As reported previously, the latest meme surrounding the D.C. impasse is that Obama is suddenly willing to compromise on a short-term, supposedly six-week funding and debt ceiling extension, on the verge of his latest talks with republicans at the White House scheduled for this morning, as previously floated by the GOP. Throw some additional headlines such as "Ryan steps up to shape a deal" (in line with what we predicted yesterday) and "The ice breaks; fiscal talks set", by The Hill, and "GOP quietly backing away from Obamacare" from Politico, and one can see why futures are in breakneck soaring mode this morning, driven as usual by the two main JPY cross (USD and AUD), the first of which is less than 100 pips now away from being Stolpered out.  So will a compromise deal finally emerge 7 days ahead of the first X-Date, or will a last minute snag once again derail the (non)-negotiations? We will know quite soon.