Minute Bubbles

The Fed minutes proved just the tonic for equity longs, as the magic red headline stating that SEVERAL FED OFFICIALS SAID FORECASTS OVERSTATED RATE RISE PACE sent stocks ripping higher.  The news was less comforting for USD longs and fixed income shorts, however.   Eurodollars have now corrected much of the sell-off from last month's Fed meeting, and while USD/JPY remained remarkably stable, USD/CAD crashed through the support highlighted yesterday.

A more thorough read of the minutes provided a slightly more balanced view than the all-powerful red headline.   For while a few of the market-savvy participants did indeed voice concern over the message sent by the shift higher of the infamous dots, some others apparently suggested that the move was warranted.  The solution to the problem of the dots was, of course, the insertion of the flimsy final paragraph in the statement, which was roundly ignored by the market.  It certainly feels as if the more the FOMC writes, the less they say.  (Readers who recognize a certain parallel with your author will be gratified at the relative brevity of today's offering.)

Moreover, there was discrete attention paid to financial stability concerns, with credit and equity valuations coming under scrutiny.  The departure of Jeremy Stein will no doubt quell and least some of those rumblings, though it seems unlikely to banish them altogether.   Coincidentally, a helpful reader pointed out the latest report from the Financial Crisis Observatory at Einstein's alma mater, which highlighted a strong tendency towards bubble-like behaviour in credit:



Source: http://www.er.ethz.ch/fco/FCO_Cockpit_1April2014.pdf

Also meriting a headline, of course, was the lack of specific discussion of the infamous "six months" definition of "considerable period", no doubt because the phrase was intended to be deliberately vague.  While some committee members were probably not terribly put out by the hawkish tint that the comment lent to the proceedings, it did little to calm the waters already muddied by the Fed's increasingly Byzantine communications strategy.   Perhaps someone should give Yellen a KISS?

In any event, the equity beta pain was forestalled as the 1830 level in Spooz has held like a champ yet again.   Macro Man's concern has thus far proven unwarranted, though of course two rallies do not a safe market make.  Hey, at least Polemic called this one right.

Fixed income, on the other hand, has reacted more along the lines that Macro Man envisaged.  The M5/Z5/M6 eurodollar fly, highlighted in this space last week, has broken down nicely having offered up an attractive entry point late last week.





From here, however, Macro Man reckons that the short end will have a trickier time of it.   EDZ5 is now closer to its highs of the year than its lows, and will quite possibly oscillate between the two for some time.   One strategy that Macro Man quite likes as an overlay on the fly is buying call ladders on 0EZ5 (options on the Dec 15 contract expiring in Dec 14.)  Something like the 99.00/99.12/99.37 can probably be had for a tick, which provides an at-expiry breakeven of 99.49.  Tasty!   The brave at heart could even roll the top strike down to 99.25 and earn a 3.5 or maybe even 4 tick credit with a breakeven that's well north of the all time high in the underlying.

Because for all the soothing words from these minutes, something tells Macro Man that we're not about to have a bubble in eurodollars any time soon.