Goldman Reveals "Top Trade" Recommendation #2 For 2014: Go Long Of 5 Year EONIA In 5 Year Treasury TermsSubmitted by Tyler Durden on 11/26/2013 07:27 -0500
If yesterday Goldman was pitching going long of the S&P in AUD terms (the world renowned Goldman newsletter may cost $29.95 but is only paid in soft dollars) as its first revealed Top Trade of 2014, today's follow up exposes Top Trade #2: which is to "Go long 5-year EONIA vs. short 5-year US Treasuries." Goldman adds: "The yield differential between these two financial instruments is currently -61bp, and we expect it to reach around -130bp. On the forwards, the differential is priced at around -95bp at the end of 2014 at the time of writing. We have set the stop-loss on the trade at a spread of -35bp. The choice of Treasuries over OIS or LIBOR on the short leg is motivated by the fact that yields on the former could underperform more than they have already in relative space as the Fed scales down its asset purchase program."
It's gotten beyond silly: with less than a day to go until the first X-Date, beyond which if Jack Lew is correct (he isn't) all hell will break loose if the US doesn't have a debt deal in place, stocks couldn't care less, Bills continue to sell off, carry traders only care how big the central banks' balance sheets are, all news are generally shunned and yet stocks have soared 600 DJIA points on Harry Reid's relentless optimism a deal will get done, even though so far none has. Today, as we observed on Monday, we expect more of the same: stocks and futures will ignore the reality that the midnight hour will come and go with no deal in place, but will continue to explode higher as Harry Reid's latest set of "optimism" headlines hits the tape in low volume trading. We expect the first big hope rally around POMO time, then shortly after Senate comes back in Session, around noon. Then for good measure, another one just before market close. Why not: it's not like the "market" even pretend to be one anymore. Keep an eye on today's 4-Week bill auction before noon. It should be a far bigger doozy than yesterday's longer-dated bills.
In a world devoid for the past two weeks and certainly for foreseeable future of most US economic data (this week we get no CPI, Industrial Production and New Home Sales among others), markets are now reliant on China for an indication of how the economy is doing, which is why this weekend's weaker than expected Chinese exports (ignoring the fact that China trade data is largely made up) and higher than expected consumer price inflation (driven by higher vegetable prices), even as new yuan loans soared to CNY787 billion, well above the CNY675 billion estimate despite broader M2 slowing from 14.7% in August to 14.2% in September, means the Chinese economy is once again in a vice and following the summer's liquidity driven boost, is set to roll over. Which in turn means that once again the PBOC is flying blind: unable to inject more liquidity without risking broader inflation, while most indicators are already rolling over. In short, ugly and certainly rolling over Chinese economic indicators for the market to mull over on Columbus day, even though all this will be promptly forgotten once the Washington debt ceiling song and dance resumes and the now traditional 10:30 am surge grips the algotrons as the latest set of "imminent deal" rumors is unleashed.
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.
There appears to be 3 big lies (among many other smaller ones) currently driving the flow of speculative capital around the world. First, Bernanke said the Taper was off due to 'worsening' financial conditions (except financial conditions remain very near all-time highs). Many mean-reverting extrapolators are calling for a renaissance in emerging markets and Asian growth that will lead us out of this 'temporary' slowdown (except consensus growth expectations for Asian economies are tumbling in reality) and most people assume US economic 'escape velocity' growth is around the corner and the Fed will normalize policy 'just right' (but a glance at Eurodollar futures suggests the market is far more dovish than previous tightening cycles would suggest). With normaliation implying 600bps rates rises, we suspect the reality of these 'lies' will come back to bite sooner rather than later.
- Derivatives Broker 1: Make 6m go lower! They r going up. [Senior yen trader] will buy you a ferrari next yr if you move 3m up and no change 6m (February 29, 2008, via text message to personal mobile phone)
- Yen Desk Head: Lord Baliff, I would suggest a lunch over golden week. Monday or Tuesday if you are around. *** As for kick backs etc we can discuss that at lunch and I will speak to [Senior Yen Trader] about it next time he comes up for a chat.
Whether it was momentum traders doing what they do best, or just a market expecting Bernanke's "communication strategy" to pan out as expected, and follow through with more easing in demand for duration assets, is unclear and largely irrelevant, but as the following chart by JPM shows, net spec positions in UST futures are at their most short since May 2010 and are close to two standard deviations below their average since 2006. The chart shows a duration weighted composite of the net spec positions on the 10YR, 5YR, 2YR, the T-bond, the Ultra long bond and the Eurodollar futures - it is these specs that goes hurt the most by today's FOMC announcement. The question now is: will the scramble to cover shorts lead to a fresh push lower in yields (ending any talk of a rotation, great or otherwise), or following today's shock and awe move in the curve, will the move wider in rates continue.
September is likely to be dominated by a number of key event risks, in addition to ongoing uncertainty around the US growth outlook, the Fed’s reaction function and heightened EM volatility. We highlight the major events and likely market implications.
Much has been said about the recently announced (with the release of the Fed's July Minutes) proposal for a full-allotment overnight reverse repo facility, some of it confused, some of it desperate to read deeply into what the Fed is suggesting with this superficially tightening process, and most of it just plain wrong. What the Fed is simply trying to do with the O/N RRP, in a few words, is alleviate collateral pressures for "high-quality assets" - the same thing that the TBAC has been whining about for the past 2 quarters - by making available an elastic supply of risk-free assets to a fairly broad set of investors. As BofA adds, "The full-allotment feature would mean that eligible investors could effectively place as much cash as they wished at a fixed rate, which would be determined in advance by the Fed." In brief, a Fed O/N RRP facility would substantially reduce or even eliminate concerns about the lack of high quality liquid assets.
Following the market's shocking realization that the taper is coming prompting a kneejerk to the kneejerk reaction after the FOMC minutes, and yet another painful session in Asia, stocks were desperate for some good news from somewhere, which they got thanks to a Goldilocks PMI from China printing by the smallest possible expansionary quantum, or 50.1, and well above expectations, as well as a continuation of better than expected European PMI data with the August composite rising from 50.5 to 51.7 vs. Exp. 50.9, based pm a Services PMI rising into expansion to 51.0 from 49.8, (Exp. 50.2), and Manufacturing at 51.3 vs. Exp. 50.8 up from 50.3, the highest since June 2011. It is perhaps stunning just how conflicting this "improving" data is with private sector industrial and manufacturing company metrics, but with the credit creation situation in Europe (read: all that matters) at record lows, and with banks retrenching and needing to delever by trillions, it is only a matter of time before this latest propaganda wave is exposed for what it is. The net effect of the overnight data is to push the USDJPY to nearly 99.00 which thanks to the ubiquitous correlation algos has dragged US equity futures higher, if only briefly (the 10 Year is at 2.91% - under 10bps from redline territory), while slamming the offsetting EURUSD despite the "better" than expected European data.
UPDATE: S&P futures collapsing quickly - now down from Payrolls
The initial kneejerk reaction in stocks was oddly 'good-is-good' higher after the better-than-expected headline data on payrolls - which perhaps signalled that Taper is nearer - but FX, bond, and precious metals markets were clearly in Taper-On mode. Treasury yields cracked 13bps higher, Gold and Silver dropped 1-2%, outdates for Eurodollar futures dropped notably, and the USD jumped around 0.5% almost uniformly. As an illiquid equity market soaks in the reality, some of that initial surge is fading...
And just like that things are going bump in the night once more. First, as previously reported, the $100+ WTI surge continues on fears over how the Egyptian coup will unfold, now that Mursi has a few short hours left until his army-given ultimatum runs out. But it is Europe where things are crashing fast and furious, with the EURUSD tumbling to under 1.2925 overnight and stocks sliding on renewed political risk, with particular underperformance observed over in Portugal, closely followed by its Iberian neighbor Spain, amid concerns that developments in Portugal, where according to some media reports all CDS-PP ministers will resign forcing early elections, will undermine country's ability to continue implementing the agreed bailout measures. As a result, Portuguese bond yields have spiked higher and the 10y bond yield spread are wider by over a whopping 100bps as austerity's "poster child" has rapidly become Europe's forgotten "dunce." The portu-litical crisis has finally arrived.
Overnight newsflow (which nowadays has zero impact on markets which only care what Ben Bernanke had for dinner) started in Japan where factory orders were reported to have risen the most since December 2011, retail sales climbed, the unemployment rate rose modestly, consumer prices stayed flat compared to a year ago, however real spending plunged -1.6% significantly below the market consensus forecast for +1.3% yoy, marking the first yoy decline in five months. This suggests that households are cutting utility costs more so than the level of increase in prices. By contrast, real spending on clothing and footwear grew sharply by 6.9% yoy (+0.6% in April) marking positive growth for a fourth consecutive month. Simply said, the Japanese reflation continues to be limited by the lack of wage growth even as utility and energy prices are exploding and limiting the potential for core inflation across the board.
The last time Hilsenrath tried to be relevant, back on May 22, he essentially said to ignore anyone who tried to time the Taper (but don't call it a Taper) when he said: "when the Fed shuts off bond buying, it won’t be abrupt and it won’t be predictable." So just to make sure market expectations of tapering are actually very predictable, if at least on the short end, moments ago Hilsenrath once again hit the tape with the following: "Fed Likely to Push Back on Market Expectations of Rate Increase: Federal Reserve officials have been trying to convince investors for weeks not to overreact when the central bank starts pulling back on its $85 billion-per-month bond-buying program. An adjustment in the program won’t mean that it will end all at once, officials say, and even more importantly it won’t mean that the Fed is anywhere near raising short-term interest rates. Investors aren’t listening." So here comes the Hilsenrally to save the day by making investors listen, even if not so much for the benefit of stocks this time, as for bonds, which little by little are starting to lose it.
- 550,000 SPY shares
- 10,000 June 2013 eMini futures contracts
- 1,400 Nasdaq 100 futures contracts
- 800 Dow Jones futures contracts
- 350 Russell 2000 futures contracts
- 125 S&P 400 Midcap futures contracts
- 300 Crude Oil futures contracts
- 900 Dollar Index futures contracts
- 800 Gold futures contracts
- 10,000 10yr T-Note futures contracts
- 2,500 5yr T-Note futures contracts
- 3,500 T-Bond futures contracts
- 5,000 Eurodollar futures contracts
- 750 Japanese Yen futures contracts
- 600 Euro futures contracts