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Nic Lenoir Twofer - A Look At The Market, Front ED Contracts And LIBOR
Some market commentary first from Nic Lenoir of ICAP:
Following up on yesterday's comments: equities are so far unbelievably resilient in the face of atrocious economic data. Keeping our eyes on the prize, we have been calling for this slow down in economic activity since April, and the work of my friends Julian Brigden and Jonas Thulin on the economic roll over has helped solidify that belief and time this turn. Now that the data is playing ball and confirming our sentiment, we turn to the technical picture where I have had this uneasy feeling that the equity markets could bounce here before selling off properly. With higher rates for European sovereign bonds today after Ireland's downgrade, all time lows in new home sales on the heels of a knock-out drop in existing home sales that will dry up your green shoots and make you wish it's just a double dip, and a huge miss in durable goods orders, the fact we just made it in positive territory back from the abyss this morning is the kind of price action that makes me feel better about yesterday's technical observations against our bearish fundamental outlook.
We extend these observations for equities to US treasury futures today. The attached charts show a possible complete impulse, and at least on the 3-hour chart these recent highs come along with a quite a bit of divergence and a rejection of the channel resistance. I see at the very minimum 125-07 tested, and more likely a test of the channel support currently around 123-28. Then if my Elliott Wave analysis is accurate that this impulse is complete, the target on the downside becomes 122-06. My view for equities coincides with a strong USD and lower yields, but for the near term the technical picture is resolutely bearish and this is supported by our observation for other asset classes. This is also comforting to note that volumes in Fixed Income are very high today and there is a lot activity both in options and futures space. This morning's analysis of EDZ0 flows highlighting that no profit taking had taken place as of yet and that weakness was driven by fresh shorts expressed via options is completely validated by over 510K contracts traded today already when Monday at the same time of the day we had not breached 100K for any of the contracts of the strip...
And a Look at Front ED Contracts and LIBOR
We have recently recommended selling EDZ0 against buying ERZ0. Our rationale was both a technical trading observation of the spread, cross-currency funding considerations between the futures' spread and the EURUSD currency pair, and risk reward with Libor rates being so low that the upside of longs is relatively small. Subsequently the trade has benefited greatly of the sell-off in front Eurodollar contracts this past couple days. Yesterday morning the 99.50/99.25 put spread on EDZ0 traded as low as 2 basis points, and we felt that was resolutely too cheap. Sure enough they were trading 4 earlier this morning.
With the large flows observed yesterday in Eurodollar options, my colleague Mike Lawrence and I decided to look into open interests. A fact that immediately grabbed our attention is that EDZ0's open interest went up the past 2 days instead of down when compared to the two previous sell-offs for the contract in November 2009 and April/May 2010. That meant what we were looking at was not profit taking. So we summed up all the flows for strikes 99.00 or above for both EDZ0 and EDH1 and weighted the change in open interest for puts and calls using the options' delta. The results are attached for those who want to look at things at the strike level, but basically the conclusion is that the large increase in open interest for puts concurrent to lower open interest for calls equates to 80,000 fresh shorts in futures. This is something the market must digest and it is no surprise the market is under pressure today again, especially if you start factoring in gamma considerations.
We also heard from money markets traders that while CP rates were still trading inside Libor yesterday, the rush by money funds to chase yield no matter how dismal has abated. These money flows reinforce the thought that risk reward, whether it's from lending at these levels or holding Eurodollar long positions is tilted towards higher rates.
Good luck trading,
Nic
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Larry Summers just moved us Green everybody. Yee-hah.
One of the worst news days in recent memory, durable goods down, housing down and guess what Mr Market just got a hard on!
Truly beyond belief!! Oil went ballistic on just universally bad numbers, and equities today are blatantly goosed.
it makes no sense to me either but this broker told me well they figured the worst was over and the bad news already figured in. buy the rumour sell the news...
also there are many who contend reality and common sense have nothing to do with markets. that there is no logic whatsoever and that you will never figure it out. they call information and news just noise. lol. i should have never gotten involved with this financial crap.
Skynet has one variable that is missing in its calculations that humans can't shake. Skynet doesn't know the market can get completely wiped out. If the Dow does fall of a cliff, that means civilization is in for terrible times. Everyone will have more to worry about than where their worthless fiat money is at 4 pm everyday. Where is my next meal coming from? How do I heat my home with no gas to fuel my furnace? How do I stop my neighbor from killing my dog for food?
It's real simple, if skynet and the fed fail, we can all kiss our ass goodbye. I really don't mind having a few more months to prepare. If the fed does walk the tightrope, and miracles do happen, to keep the system together for a couple more years... Even better.
Peak oil is very real.... The worst economic depression since the thirties and oil is still roaring. Supply and demand... It's real simple... There is no demand, so obviously supply is falling...
What about the snp? Are you still targeting 1085?
are you surprised?
Here they come again.
Must be a leak from J-Hole.
ROw BOat, using cheeky's charts.
Hang on - 10-years are up to 2.53 (from 2.41 earlier today). That money has to go somewhere.
Having said that, in the "old" days, the news of today would easily have led to a 2-3% drop.
You're right. The money has to go somewhere. But don't you think if you just got 100 million to spend you'd find a better investment than stocks?
Why do I think there was some sort of "Gentlemans Agreement" between Lawrence Summers and the Primary Dealers to park their money in S&P Futures.
You're really right!
All thei words are just synonyms for their words in their dirty speeches.
It's all priced in. Hence no sell-off. Victory for bulls. Must buy buy buy. There is a bubble in bonds. So equities are soooo much cheaper. Must buy buy buy. People pulling out money from 401Ks to survive. That's capitulation. Buy buy buy. Market shrugging off bad news. Start of another bull market. Buy buy buy. Very impressive price action - means bottom is here. Buy buy buy.
I love that excuse that, "it was priced in" (not saying you are in that camp). My response is always, "if it was priced in why did the markets move". There is truly some BS about to happen. We cannot be getting a QE2 if the dollar is strengthening against the EUR. I think the market is trying to price in another QE2 again like before FOMC meeting notes. Some bulls will find they having been buying too much of their own s#it come Friday. Ought to get interesting.
No, it won't get interesting - it's all priced in already.
I understand how being "priced in" is an easy excuse to cover up otherwise unexplainable market actions; but with many of these data that have been coming out, the number has been far worse than the worst analyst expectations. If it is worse than ANYTHING expected, how could it possibly be priced in?
I expect an EOD selloff just to "price in" tomorrows 500k+ unemployment numbers.
Negative. It's just "Ass Backwards Day". If the PPT can close this bad boy with a positive hammer I can see this circus melting up to around 1075-1080 with a short squeeze before pain resumes again. But who am I to say? I'm just nucking futs.
when you have all the money (credit ) in the world you can always make short term bottoms
Not just short term, eventually they can own 100 percent of the market. Maybe that's the plan?
what's a market without manipulation now you know why they don't do antyhing. a real market would likely be revisiting much lower numbers
This is why retail is walking from the market if you don't understand it why be in it.
Masochistic market...
markets up on a day like this, terrible economic news, just reinforces public distrust of markets. When govt ramps the market like this, they are working against their goal of increasing confidence. Govt can not so easily deceive investors any longer, they have lost that power. It won't work. Economic reality (ultimately Cash Flow) will trump Govt manipulation abilities.
Ramp into the Hole Weekend. Reminds me of the 80's, 90's, 00's...
Go Bennie, its your b'day etc.
UK shut on Monday. Noone going in short ahead, I guess.
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