Monday, June 9, 2014

HF's Ready for Melt-Down Eurodollar Futures

It is hard to say where EDM6 will finish the day.  Currently it is 6 lower and the part of the green pack which is hardest hit along the Eurodollar 10yr strip.  Currently EDM6 forms a bearish ‘marubozu on today’s daily candlestick.  A marubozu is a strong trending candlestick that is all body, showing no upper or lower shadow.  In this case, the opening is at the session high and the last price is at the session low.  This would indicate strong selling pressure. 

Because the bearish trend is still developing, today’s strongly bearish formation may bring forth additional selling from weaker longs.  Many longs, encouraged by the price action on Wednesday/Thursday were willing to hold positions into this light data week expecting a better test of recent high from the end of May.  Those longs not taking advantage of the stronger price action immediately following the employment report on Friday may now come forward. 

There were many questions about the staying power of the bearish contingency against Eurodollar price gains since late March.  There was some moderate hedging of these Eurodollar short positions though we believe much of this Eurodollar short is against long positions in Europe, including the Euribor Futures, Bund Futures and periphery sovereign notes.  While the bullish Europe leg of the spread obviously benefited from last month’s price action, this may not be the case for June.   

Draghi made draconian policy changes last week and all global rates were sucked into the vortex of lower Euro yields.  While yield hungry investors may continue to favor U.S. notes over Bunds, stronger U.S. data may mean that at least the belly of the Stateside curve attracts some selling pressure as traders become more comfortable that the Fed will lift policy rates before too long.  The long end of the U.S. rates curve will continue to benefit from further Fed securities buying, a long to indefinite holding period for these securities and lower forecasted equilibrium real GDP and neutral policy rates.  More importantly for this analysis, the belly of the curve need not keep step with long rates at this juncture.  The 2-5 year sector of the curve can price in more Fed accommodation removal without disrupting the long-run prospects for U.S. long rates.  While expecting U.S. long rates to move higher, they need not move immediately along with the belly of the curve.  In fact, they are not expected to follow immediately, but rather move only after a longer series of above trend economic data is evidenced. 

Earlier today; James Bullard, president of the St. Louis Federal Reserve Bank,speaking at a conference in Palm Beach, Florida noted, "FOMC (the Federal Open Market Committee) is much closer to its macroeconomic goals than it has been in the past five years,".  There are more dovish Fed officials speaking later today, but they may not have enough to say to turn the market around. 

Just as last week we bandied about the prospects for a ‘melt-up' in S&P’s, there is the smallest chance we could see a ‘melt-down’ in red/GREEN/blue Eurodollars. 

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