I think the tone of the markets the second week [week of March 6] will be negative. You know all the “fake news” outlets will give the Women’s Strike good coverage – in fact, it could last more than a day.  It’s not implausible Trump throws gas on the fire with some inappropriate tweets.  And I can’t see the political news out of Europe getting any better any time soon.   (CA, Feb 26, 2017)
Watch for new features in coming weeks.

Weekly Essay – Calendar Thoughts:

I saw an interesting interview last week with Chris Cole (Artemis Capital).  He gave an example of the Cold War, where we had peace (low volatility) however any number of things could have happened that could have triggered a nuclear disaster.  Since he is a vol trader, he was referring to the current environment of high risk but low volatility.

I suppose I had been thinking something similar, in that I have been saying the tail risks to both sides have been quite large.  It’s somewhat unusual to think that we can get a huge move and not have a good feel on direction.  In fact, if we are 75+bps from here by the end of June (not my central prediction – just my range), it would not surprise me.  I just have no strong view on direction, so I have not done anything other than buy some cheap crisis protection.  I had been leaning slightly bullish, mostly because everyone is bearish and we haven’t been able to sell off.  Now I’m not saying to go out and buy vol.  You can’t exactly go out and buy straddles/strangles without a timing view because we have seen from past years that could be lighting money on fire.  But like Chris Cole, I do think about the extreme scenarios and rather than spend a lot of outright premium, think about what the curve would look like and position accordingly.

The calendar is action-packed right now, and so we could easily get some events to help shape our longer-term view.  We have a number of potentially critical turning points in the next two weeks:

Next Week: I discuss some takeaways from the run-up in the March FOMC hike probability.

Other Delayed Market Comments from the CA Newsletter:

From the Value on the Curve Section

  • EURIBOR: The reflation trade looks cheap there.  I realize we are about to get turmoil.  But a positive roll look at reflation seems attractive.

From the News Takeaways Section

  • The Fed had a very wide range of views in the minutes.  The key quote was “many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations.”  So we wait for the data to see if March could be “fairly soon.”  Apparently, the minutes will start showing the uncertainty in Fed projections.  That could be humorous, as the 2 standard deviation range could take up a massive range, from an ease to non-gradual hikes.
  • The open interest on FFJ7 has increased 146K contracts since a week ago.  OI increased +232K contracts from three weeks ago.  A gorilla either likes a March hike, or needs protection from it.  One of the things I’ve wondered in this “Fed won’t hike unless it is priced” world is… if a large enough hedge fund could “force” a Fed hike by causing it to be >> 50% priced.  Maybe if the data was a little stronger.  Yes – these are the random thoughts that cross my mind as I take my breaks.

Trade Summary from the Delayed CA Newsletter:

I discuss some additional calendar thoughts in the Trade Thoughts section.

FLIP TRADE UPDATE: I finally added another Flip Trade.  It is was a minor one, but they all add up.

OFFICIAL TRADE UPDATE: We took profit on a trade, added to some existing trades and suggested two new trades.  It was a busy week.

TO PURCHASE THIS ISSUE, CLICK HERE.  It also includes a Trade write-up of the Euribor fly trade that we put on last week.

Forum Update:

The most notable post from the Forum was:

I elaborate on viewer mail regarding how to look at the Fed Fund Effective Rate and tie it to The Fed Fund futures pricing.  CLICK TO READ THE REST OF THE POST ON THE CA FORUM

Let me know if you have any feedback on the format or content.
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