Burned Bets on Fed ‘Patience’ Leads to Surge in Rates Volatility

Jun 17, 2019

Observations & Insight

The Spread – Numbers On The Board


More options litigation, some poor “Game of Thrones” guesswork, Mexican oil hedging, and other topics await viewers in this episode of “The Spread.”

Watch the video and see the stories referenced here »

Lead Stories

Burned Bets on Fed ‘Patience’ Leads to Surge in Rates Volatility
Stephen Spratt – Bloomberg (SUBSCRIPTION)
Volatility in interest-rate options is spiking as traders scramble to cover short positions before this week’s Federal Reserve decision. The turnaround reflects the market switching to price in rate cuts from earlier expectations policy makers would stay on hold.

****SD: Reprinted w/o paywall on Yahoo Finance. Bond market volatility, as measured by BAML’s MOVE Index, surged to its highest since December 2016.

Markets Send Mixed Signals on Trade Battle
Akane Otani and Gunjan Banerji – WSJ (SUBSCRIPTION)
Markets are sending conflicting signals about how big a threat the global trade rift presents, underscoring the difficulty investors face in sizing up the fallout from the U.S. and China’s spat. As the trade standoff has intensified and the Federal Reserve has suggested its next move might be a rate cut, some investors have turned to safer assets, sending Treasury yields to their lows for the year. But relatively risky assets like stocks have continued to climb toward fresh highs, with the S&P 500 finishing Friday just 2% off a record.

Markets May Be Underpricing Major Risks in Fed, G-20 Events
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
Financial markets are signaling investors see little risk of disruption from upcoming events, despite the potential for major shifts in the course of Federal Reserve policy and U.S.-China trade negotiations.

****SD: An update to Ossinger’s Saturday column. Reprinted w/o paywall on Livemint.

Deutsche Bank to set up 50 billion euro bad bank
Deutsche Bank is planning to overhaul its trading operations by creating a so-called bad bank to hold tens of billions of euros of non-core assets, a source close to the matter said on Monday.

****SD: The creation of the bad bank itself isn’t really in this newsletter’s wheelhouse, but the overall restructuring is as the “bank is planning cuts at its U.S. equities business, including prime brokerage and equity derivatives, to win over shareholders unhappy about its performance, four sources familiar with the matter told Reuters in May.” A Reuters opinion column on this development had this to say: “It’s hard for outsiders to know what other horrors lurk in Deutsche’s 1.4 trillion euro balance sheet.” More on Deutsche Bank’s equities trading via Bloomberg – Deutsche Bank Considers Closing US Equities Trading in Revamp. From the employment perspective, see efinancialcareer’s JPMorgan, Deutsche Bank get ruthless.

Exchanges and Clearing

TRADERS Q&A: OCC’s Davidson Talks Options, Clearing Tech
John D’Antona – Traders News
The Options Clearing Corporation (OCC), founded in 1973, is the world’s largest equity derivatives clearing organization and pays heed to the aforementioned. As it faces the new decade, the market utility remains dedicated to promoting stability and financial integrity in the marketplaces that it serves by focusing on sound risk management principles.

Regulation & Enforcement

EU tries to revive plan for financial transaction tax
Francesco Guarascio – Reuters
European Union finance ministers have discussed on Friday a plan for a 0.2% tax on shares, which Germany sees close to be agreed, although further work remains to be done.

****SD: Bloomberg on the development here.


Machine Learning and AI Are Raising New Questions and Pushing Boundaries in the World of Fintechs
Bloomberg via TABB Forum
The implementation of artificial intelligence and machine learning has become ubiquitous across the financial landscape. Every major bank is currently building AI and data science groups, and mentions of the technology in company filings have increased 1,700% in the past two and a half years.

CME Group Named to IDG’s Computerworld List of Best Places to Work in Information Technology
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that is has been selected by IDG’s Computerworld as a 2019 Best Places to Work in Information Technology (IT), one of the 100 top organizations that challenge their IT employees while providing great benefits and compensation. The recognition is part of the publication’s annual Best Places to Work in IT survey, which is available online at computerworld.com.


JPMorgan has cut nearly two-dozen people in a group responsible for preventing traders from making risky bets
Alex Morrell – Business Insider Prime (SUBSCRIPTION)
JPMorgan Chase has cut more than 20 people in a group responsible for preventing traders from making risky bets.
Nearly two-dozen executive directors in the bank’s Model Risk Governance & Review Group were culled this month, according to people familiar with the matter.
The group, which is in charge of overseeing and independently reviewing the firm’s risk and trading models, grew significantly following the bank’s 2012 “London Whale” trading debacle and ensuing sanctions from the Federal Reserve.


Stock Options to Dig in for a Long Trade War
Steven M. Sears – Barron’s
U.S. and China are acting as if they have no plans to end the trade war. Investors should consider ‘overwriting’ with stock options to wait it out.
China President Xi Jinping recently told a cheering crowd that “now there is a new Long March, and we should make a new start” as the trade war with the U.S. shows no sign of ending.


How to Invest and Profit in the Next Recession
Barry Ritholtz – Bloomberg (SUBSCRIPTION)
Ever since the Great Recession ended in June 2009, investors have been treated to a stream of forecasts warning that another slump is right around the corner. As we have seen, none of these predictions have come to pass. Smart investors paid little heed to predictions that were subjective and of little value.

TP ICAP Enters the Crypto Business to Trade Bitcoin Derivatives
Alastair Marsh – Bloomberg (SUBSCRIPTION)
Facing a slowdown in its core brokerage business, TP ICAP Plc has joined the handful of traditional finance firms opening the door to Bitcoin.
The ICAP unit of the world’s biggest interdealer broker is now acting as an intermediary between customers wanting to buy or sell Bitcoin futures. The firm’s new venture, which is run from London by Simon Forster and Duncan Trenholme, expects to add non-deliverable forwards tied to the largest cryptocurrency and then plans to open desks in Asia and the U.S.

****SD: In other bitcoin news, see Bloomberg’s JPMorgan Says Importance of Bitcoin Futures Has Been Understated.

Why the French excel in masters of finance courses
Ian Wylie – Financial Times (SUBSCRIPTION)
…Prof Olivier says the [masters in finance] course was launched at the school in response to the French financial sector’s demand for expertise in new products such as options and derivatives. “It has allowed us to develop a strong expertise, and the network of finance alumni we have built over those years is a unique asset for incoming classes,” he says adding that HEC uses this network to inform programme content and help students find internships and jobs.

Hunt begins for the cause of huge South American blackout
Luis Andres Henao and Paul Byrne – Associated Press
The lights were back on Monday across Argentina, Uruguay and Paraguay after a huge blackout that affected tens of millions of people, but authorities remained in the dark about the cause of the grid collapse and continued to calculate the economic damage.

****SD: How’s your disaster recovery plan look?

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