Wednesday, September 28, 2016

Large Spec Holding a Bag of Eurodollar Shorts



Not since October 2014 has CFTC described ‘non-commercial’ accounts been as short Eurodollar (futures and options).  These sometimes called ‘large spec’ accounts have ratcheted up their net short positions even as economic data has become less overwhelmingly positive.  Employment growth has been constructive, but consumer consumption and business investment and other data series have been lackluster.  

 

 

Most traders thought it nearly impossible that the Federal Reserve would raise policy rates at the FOMC meeting last week (Sep 20-21).  Weeks ago, that was somewhat more under debate.  And so, as the FOMC meeting approached many altered their expectations from prospects for a rate hike to likelihood for a more hawkish statement from the Fed in its place.  Those expectations for a more hawkish Statement and post-meeting Press Conference were not entirely met and yet, ‘large spec’ accounts had built up positions that stood to benefit from higher implied rates than currently exist.  

A short position in EDZ6 going into the FOMC meeting (99.05) would be underwater today, almost a week later.  Below is a look at what a 1,000 lot position would look like in EDZ6, EDZ7, EDZ8 and EDZ9 from settlement Sep 20 to current levels:



Contract Settle Sep 20 Current Price Price Change Loss per 1000 Contracts
EDZ6 99.050 99.090 -0.040 -$100,000
EDZ7 98.900 98.950 -0.050 -$125,000
EDZ8 98.755 98.830 -0.075 -$187,500
EDZ9 98.600 98.710 -0.110 -$275,000



Clearly this not a good situation for the short.  Even if the large spec accounts put their entire new 268K net short position into only EDZ6, their cumulative loss since Sep 20 would be $26.8m, more than twice that if positioned in EDZ9.

More important is where the contract is likely to go from here.  I will argue that there is room for further strengthening of Eurodollar future prices over the coming sessions as shorts exit positions into moderate to slightly weaker production, inventory, housing income, spending and sentiment data. 

The FOMC Statement was not as hawkish as many had assumed it might be.  Clearly, December is a live meeting and we are suppose to assume that November is as well, but I don’t think it would be easy to find ‘that guy’ who is looking for a November hike.  There is a lot of data coming over the next weeks and the one particularly bright spot of employment will have to carry an even heavier load for the bearish contingency if it is to overcome the bullish impulse of otherwise weaker data, heavily bearish positioned hedge funds and continued growing open interest. 

Open interest in Eurodollar futures has grown by about 74,000 since bottoming on September 20th at 10.44m contracts.  Note that Sep 20 - the day before the September FOMC Statement was released marks up smartly with the CFTC ‘Commitment of Trader’ data noted earlier.  Generally speaking, we tend to see positions added to over the weeks following the expiry of a quarterly contract in Eurodollars.  This is consistent with what has been happening over the last week.  Below you can find a table that shows the change in aggregate open interest for Eurodollars through the expiry of a quarterly contract.  Note that in the most recent period, the bounce from post-quarterly expiry to today is only half the average seen over the last 4 years.  

Eurodollar Future Open Interest Data Around Quarterly Expiry


Open Intererst High Date
 millions
Open Interest Low Date
millions
High to Low
%H to L
Open Interest One Week Recovery Date
millions
Low to Bounce
% Bounce
9/17/12
8.584
9/18/12
7.981
0.603
7.02%
9/25/12
8.177
0.196
2.46%
12/13/12
8.939
12/21/12
7.866
1.073
12.00%
12/28/12
7.898
0.032
0.41%
3/18/13
9.75
3/19/13
8.95
0.8
8.21%
3/26/13
9.072
0.122
1.36%
6/17/13
9.387
6/21/13
8.616
0.771
8.21%
6/28/13
8.74
0.124
1.44%
9/12/13
9.659
9/18/13
8.798
0.861
8.91%
9/25/13
8.779
-0.019
-0.22%
12/12/13
10.846
12/17/13
9.993
0.853
7.86%
12/24/13
10.274
0.281
2.81%
3/13/16
10.711
3/18/14
10.047
0.664
6.20%
3/25/14
10.382
0.335
3.33%
6/11/14
11.904
6/17/14
11.228
0.676
5.68%
6/24/14
11.52
0.292
2.60%
9/12/14
13.515
9/16/16
12.908
0.607
4.49%
9/23/14
13.167
0.259
2.01%
12/11/14
11.586
12/18/14
10.318
1.268
10.94%
12/29/14
10.342
0.024
0.23%
3/12/15
11.384
3/18/15
10.315
1.069
9.39%
3/25/15
10.615
0.3
2.91%
6/12/15
11.869
6/16/15
10.785
1.084
9.13%
6/23/15
10.993
0.208
1.93%
9/9/15
12.218
9/16/15
11.093
1.125
9.21%
9/23/15
11.117
0.024
0.22%
12/12/15
11.442
12/17/15
10.175
1.267
11.07%
12/24/15
10.228
0.053
0.52%
3/10/16
10.907
3/17/16
9.463
1.444
13.24%
3/23/16
9.581
0.118
1.25%
6/10/16
10.873
6/14/16
9.941
0.932
8.57%
6/21/16
10.01
0.069
0.69%
9/16/16
11.721
9/20/16
10.781
0.94
8.02%
9/27/16
10.918
0.137
1.27%
Avg
10.899706

9.9563529
0.9433529
8.72%
41906.471
10.106647
0.150294118
1.48%
 




We should expect additional positioning into Eurodollars over the coming sessions and this could help the current short contingent exit their position with less bullish disruption than might otherwise be the case.  At the same time however, I would argue that the weaker additions to open interest over the last week may be an indication that it is hard to find new shorts willing to position at these levels; that only higher prices will attract new shorts. 

Someone might argue that the same data indicates that bullish participants are equally unwilling to add to new longs.  This appears true at first glance.  However, be reminded that it is the weaker shorts who’s positions is more likely to drive price action that the longs are more complacent with their winning positions.

To sum, the above indicates that ‘large spec’ accounts are nearly as short as they have ever been.  The short was not delivered the monetary policy news they might have expected from the Fed.  The short is ‘in the red’ with positions they had prior to the Sep 21 FOMC meeting.  Data has not been particularly strong enough to encourage additional short positions.  The open interest data indicates that short positions have not covered though price action is well above recent post-FOMC lows.  A burden is assumed by the short and he is likely growingly anxious for relief.  Coming data is unlikely to satisfy that concern and the strongest data series, employment, is still over a week and a half away. 

My sense is that short position holders at the margin will not be willing to wait on the prospects for continued strong labor market data to right their positions.  Rather, I consider the advance since the FOMC meeting as rather modest, plodding and controlled.  The prospects have however grown for a more excited advance as short positions are on the edge and likely to run to the sideline if prices firm any further from here.  


 














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