December 19, 2021
I FIND IT HIGHLY SIGNIFICANT, that with the Fed having completed their meeting on Wednesday, which easily might have produced some degree of a “sell the rumor and buy the fact” rally in Eurodollars…which had already been going down and already been raising short term interest rates in the REAL WORLD…there was no rally whatsoever and Eurodollars closed the week into new 20 month lows…AND…aside from that, with growing fears of Omicron potentially producing another shutdown in the economy, stocks finished the week on a heavy note, which also might have been expected to influence a rally in Eurodollars (the premise being that rates will need to stay low if the economy is weakening), but again, this was NOT the case.
The point is, both of these fairly big events could/should have given the Eurodollar market at least a bit of a reactive rally, but absolutely did NOT, reinforcing my observation the this market is enormously more self-driven than anything the Fed might want to talk about. As I have stated before, the Eurodollar market, where international short term rates are reflected, is by itself bigger than ALL of the other futures contracts on ALL of the futures exchanges on the planet COMBINED…It is a monster financial “organism” in which movement is determined NOT by what any particular individual, or central bank, might have to say…but simply by the supply and demand for borrowed money…And this market is “saying” is that short term interest rates are MARCHING higher…regardless of what the Fed’s own timetable might be…One more time, Eurodollars lead the Fed…not the other way around.
Furthermore, it is no longer a question of when rates are going up…They already HAVE started higher…but by how much, which for the sake of the current trade we are in, I would guess, at a minimum will be to the 1.5% (98.50 in Eurodollars) level within the next 12 months…eventually reaching at least the 2.5% area, as after all, I really don’t think 1.5% is going slow down activity anywhere.
I would also add that this idea of the Fed WAITING to make their first rate increase is a little bit mind boggling…in that they have already admitted they NEED to do so…and have already admitted that they misread the whole inflation issue…so why ARE they waiting? I don’t get it…At any rate, as noted before, the Eurodollar market made new lows this week, and to me, absolutely looks like it could be accelerating into a further next-stage, 30-40 point downswing.
I CONTINUE TO RECOMMEND BUYING PUTS IN JUNE EURODOLLARS…Right here. Right now.
I truly believe the REAL move is just starting now…that after spending the last two months of basically just inching lower, Eurodollars are now beginning a much bigger, fairly relentless downside leg…I mean, really, I cannot fathom a single reason why rates should still be almost at zero…In spring of 2020, yeah. The pandemic was a massive shock and nobody had a solution for it. Today it’s quite different…and while problems and variants will likely persist, Covid is no longer a surprise, and has more or less been accounted for, or assimilated into, the USA and world economies…which ARE, I firmly believe, now in the midst of a gigantic commercial and consumption driven boom…and not to mention all of the money that Congress is also now throwing into the mix.
Get in touch if you want to do something with this…Or to add to positions if you are already on it with me.
All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Eurodollars