Wednesday, June 4, 2014
If Tomorrow ECB Critical, Why Big Move Yesterday
Reprint from 7:20am cst: Treasury and Eurodollar futures are lower again currently after a slight retrace overnight. Open interest from yesterday’s trade was again lower in Eurodollar and Treasury futures. All contracts found traders collectively reducing net positions. There was a 141K reduction in 10yr open interest with much coming from TYM4 roll-off. Otherwise, the 2 yr treasury was the only future finding new positions (+24K).
Early yesterday we discussed the decline in open interest from Monday, noting that the decline did not strengthen the bearish argument but advised; ‘Remember that a newly developing trend is allowed some patience that a mature trend is not afforded. A short position holder would rather have seen growing open interest in yesterday’s trade. Some patients in seeing today’s price action may give a better read on the prospects for the new bearish trend.’
The same patience will be advised despite the decline in open interest from Tuesday’s trade. We shall look to be more demanding for the trend following ‘rules’ when the trend becomes more established.
The next two days have news (ECB/U.S. Employment) that some argue will be the pinnacle news events of the year. As such, we should expect price action to consolidate as all other information over the preceding 24-48 hours beforehand should be considered ‘noise’ against this backdrop.
This begs the question; if the ECB rate and policy decision are so important then we should have seen a consolidation yesterday in Bunds. That did not happen. Instead, Bunds had one of their biggest declines (open to close) in the contract life. This may be telling us that positions are offside. The ramifications for overbought and correcting Bunds is global in nature as discussed in a note from yesterday.
Bottom Line; the trend for usfi (and bund) has turned bearish. This trend is in infant stage. It has few believers.
We look to Eurodollar calendar spreads (EDZ5-EDZ6) and (EDM5-EDU5) to continue to steepen from current 110.5 and 20. We like lower risk short in USU4 through 134-135 and 135 136 put spreads. We expect 5yr to underperform 30yr. oh, and much, much more...