Sat, 22nd July 2017

Anirudh Sethi Report


Archives of “Analysis” Category

Treasury “Strangler” Just Made A $10 Million Profit In Under 10 Days

On June 12, the rates market was fascinated with what was then described as an “unprecedented” vol trade: as Bloomberg described at the time, an unknown trader bought $10 million of out-of-the-money puts and calls on 10Y Treasury futs (i.e., a strangle) when the 10Y was yielding 2.38%, which immediately grabbed the market’s attention as it involved huge block trades of about 63,500 on either side: “a strangle of that magnitude is rare, and possibly unprecedented” according to several rates traders who spoke to Bloomberg.

The theta on the trade was so high that just to recoup the premium, the yield on the 10Y would have to rise or fall about 10 bps from 2.38%, and preferably very soon. Once the 10Y were to move beyond 10bps, gains were unlimited, and the trader “stands to gain about $50 million on a quarter-point move in either direction from the starting level, which would involve approaching this year’s highs and lows for 10-year yields.”


Emerging Markets :An Update

  • South Korea proposed resuming military and humanitarian exchanges with North Korea.
  • The European Union may sanction Poland over its controversial judicial overhaul.
  • Turkish Prime Minister Yildirim announced a cabinet shuffle after meeting with President Erdogan.
  • Turkey’s worsening relations with Germany will come with economic costs.
  • South African Reserve Bank surprised markets by starting the easing cycle with a 25 bp cut to 7.0%.
  • Brazil will raise fuel taxes and freeze spending in an effort to meet its fiscal targets
  • S&P raised the outlook on Mexico’s BBB+ rating from negative to stable.
In the EM equity space as measured by MSCI, South Africa (+1.8%), Chile (+1.6%), and China (+1.5%) have outperformed this week, while Indonesia (-1.8%), Russia (-1.5%), and Colombia (-1.5%) have underperformed.  To put this in better context, MSCI EM rose 1.2% this week while MSCI DM rose 0.5%.
In the EM local currency bond space, Brazil (10-year yield -23 bp), South Africa (-17 bp), and Russia (-10 bp) have outperformed this week, while Chile (10-year yield +10 bp), Colombia (+4 bp), and China (+4 bp) have underperformed.  To put this in better context, the 10-year UST yield fell 10 bp to 2.33%.
In the EM FX space, BRL (+1.9% vs. USD), KRW (+1.3% vs. USD), and THB (+0.9% vs. USD) have outperformed this week, while ARS (-3.0% vs. USD), PLN (-1.4% vs. EUR), and ILS (-0.4% vs. USD) have underperformed.

S&P raises Greece’s outlook to positive

Greece may return to the bond market

S&P affirmed Greece’s credit rating at B- but increased its outlook to positive from stable. The rating still reflects a severely depressed borrowing capacity but it’s a slice of good news as Greece thinks about launching bonds again.

There is talk they could attempt to raise money as soon as next week.

Overnight US Market :Dow closed -32 points.

Nasdaq string broken at 10 days

The Nasdaq string of higher closed was broken at 10 days.  The index fell today by a modest -0.04%. The S&P and Dow were also marginally lower today.
More specifically:
  • The S&P is ending down -0.91 points or -0.04%. Yesterday the index also declined by a small amount (-0.02%). The closing value is 2472.54.  The index managed to close above a topside trend line at 2470.51  after being below it for most of the trading day (the low reached 2465.06).
  • The Nasdaq string was broken but the index was only lower by -2.25 points or -0.04% at 6387.75.  The low reached 6365.11 today. The high is near the close at 6388.77.
  • The Dow fell by -31.71 points, down -0.15% to 21580.07.
For the week, the Nasdaq led the charge higher. The Dow ended lower.
  • The Nasdaq rose by 1.19%
  • The S&P rose by 0.54%
  • The Dow fell by -0.27%

European Indices end the week on a sour note (for longs that is)

Declines across the board

The higher EUR is continuing to weigh on the European stocks today.
  • German Dax fell -1.7%
  • France’s CAC fell -1.5%
  • UK FTSE fell -0.4%
  • Italy’s FTSE MIB fell -1.1%
  • Portugal’s PSI20 fell -0.3%
  • Spain’s Ibex fell -1.4%
For the week, most of the indices were lower (UK FTSE the exception):
  • German Dax down -3.10%
  • France’s Cac down -2.25%
  • UK FTSE up 1.01%
  • Italy’s FTSE MIB -1.35%
  • Portugal’s PSI20 -0.12%
  • Spain’s Ibex -2.11%
In the European 10 year debt market today,
  • German 0.505%, -2.5 bp
  • France 0.751%, -2.5 bp
  • UK 1.174%, -3 bp
  • Italy 2.07%, -4 bp
  • Portugal 2.911%, -9 bp
  • Spain 1.457%, -3 bp
  • Greece, 5.26%, unchanged.

US Urges All Nationals In North Korea To “Depart Immediately”, Bans Tourists From Visiting

Dennis Rodman will be disappointed to learn that the US is set to ban all citizens from traveling to North Korea, according to two agencies that operate tours there. Koryo Tours and Young Pioneer Tours said the ban would be announced on 27 July to come into effect 30 days later, the BBC reported. “After the 30-day grace period any US national that travels to North Korea will have their passport invalidated by their government.” The ban comes one month after US student Otto Warmbier died following his imprisonment by the Kim regime.

China-based Young Pioneer Tours, which had taken Warmbier to North Korea, and Koryo Tours said the ban will come into force on July 27 – the anniversary of the end of the Korean War – with a 30-day grace period. Koryo Tours added that the Swedish embassy in Pyongyang, which handles consular affairs for the United States in the North, informed it of the ban, but did not say how long it would last. The U.S. embassy in the South Korean capital, Seoul, did not immediately respond to a request for comment.

Rowan Beard said that the 30-day grace period would “give leeway for any [Americans] currently in the country as tourists or on humanitarian work”. Simon Cockerill, of Koryo Tours, said: “It remains to be seen what the exact text is, but the indication is it’s just a straight up ban on Americans going.” Mr Cockerill told the BBC the agency would still conduct tours and take Americans until the ban came into effect.

OPEC July oil supply to rise 145k bpd vs June

So say PetroLogistics in their latest report 21 July

  • OPEC 14 supply is expected to exceed 33mln bpd in July
  • increase driven by higher supply in Saudi Arabia, UAE and Nigeria

The firm is one of many that tracks OPEC supply and this latest f/cast suggests lower compliance with the OPEC/non-OPEC oil output deal.

Compliance has been relatively high up until now but undermined by output from Libya and Nigeria who are exempt from the output cut requirements.

Oil prices falling further helped by this latest news with WTI posting $48.80 from $49.60 retreating further from its $50+ highs yesterday,

‘Unusual Activity’ Detected in North Korea May Indicate Submarine Missile Test

North Korean leader Kim Jong Un guides on the spot the underwater test-fire of strategic submarine ballistic missile in this undated photo released by North Korea's Korean Central News Agency (KCNA) in Pyongyang on April 24, 2016US defense officials say that North Korea’s next missile test could happen under water, as Pyongyang appears to be gearing up for submarine-based launches in the near future.

Over the last 48 hours, a 65 meter-long North Korean submarine has exhibited “unusual deployment activity,” according to what two unnamed officials told CNN on Thursday. The vessel has sailed farther than it has before into international waters, travelling 62 miles to the Sea of Japan.

According to one of the officials, the submarine’s atypical behavior has caused South Korean and US forces to raise their alert levels slightly, as Washington keeps an eye on the vessel through reconnaissance.

This activity comes weeks after Pyongyang completed what Washington has deemed its first successful intercontinental ballistic missile (ICBM) test launch on the Fourth of July, with North Korea leader Kim Jong-un calling the launch a “gift package” for the US on the anniversary of its Independence Day. 

North Korean state media reported that future launches were likely, quoting Kim telling scientists that they should “frequently send big and small ‘gift packages’ to the Yankees.”

Kim also claimed that the Hwasong-14 missile tested most recently is capable of carrying a large nuclear warhead, and some experts say that a missile from the North could have the capability to reach the US west coast in only a couple of years.