Fear and Bitcoin; Goldlilocks conditions fraying; China bond put options

Jan 22, 2018

Observations & Insight

Investors shrug off U.S. government shutdown, dollar dips
David Randall – Reuters
World stocks and U.S. bond markets largely shrugged off a government shutdown in Washington on Monday, although the dollar pulled back and wallowed near three-year lows as the euro resumed its strong start to the year.
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****SD: The pre-open view from TD’s JJ Kinahan Shutdown Weighs, But Markets Seem to Take Stalemate In Stride So Far. Of course, as of this writing, it looks like the Senate is going to get a funding bill passed. So, see ya in a few weeks when we try to squib this can down the road again.

Reactions to the shutdown were kind of a yawn anyway. S&P up; VIX down; bonds meh.

Worth noting: if the government shuts down again soon, taxes are still due, though some functions (link via Forbes) are put on hold. You know, death, certainty, etc.

Lead Stories

Deutsche Bank: Correlation between bitcoin and Wall Street’s ‘Fear Index’ is increasing ‘dramatically’
Will Martin – Business Insider
There’s a growing relationship between the price of bitcoin and the VIX, the volatility index colloquially known as Wall Street’s “Fear Index,” according to analysts at Deutsche Bank.
/goo.gl/uZT7sq

****JB: From Bitcoinist – Bitcoin’s Wall Street Combo Of Greed and Volatility

Goldilocks conditions may be beginning to fray
Jamie McGeever – Reuters
Even in a world of increasing political uncertainty, you could have set your 2017 financial market clock by three certainties: rising stocks, falling volatility and a flattening U.S. yield curve.
As 2018 gets underway, one of these trends is still in play. Wall Street continues to power on and is already up 5 percent, with the Dow breaching 26,000 points and printing new record highs in all but three of its 13 trading days so far this year.
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****SD: So does this mean all the soup is too hot?

China Inc.’s Debt Bills Could Be Worse Than Thought in 2018
Bloomberg
This was supposed to be the year when Chinese companies caught a break, with the amount of local bonds coming due dropping to the least since 2014. But it’s no longer looking so clear cut.
The wrinkle? So-called put options, which give noteholders the right to demand repayment even though the securities don’t mature until later years. Rising interest rates are making it more likely that investors will do just that — using the funds to buy recently issued bonds with higher coupons. There’s a record 1.25 trillion yuan ($195.2 billion) of notes that could be put in 2018, more than three times last year, according to data compiled by Tianfeng Securities Co.
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Hedge fund trade in oil becomes very crowded
John Kemp – Reuters
Hedge funds added to their record bullish positions in petroleum in the week to Jan. 16, continuing the recent wave of buying, but the extra long positions were almost entirely confined to U.S. crude rather than Brent or refined fuels.
Hedge funds and other money managers increased their net long position in the six most important futures and options contracts linked to crude and fuels by a total of 41 million barrels.
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Mobile FX trading taking off even with banks’ reticence: survey
Saikat Chatterjee – Reuters
Increasing numbers of traders are using their smartphones to conduct foreign exchange deals, a JP Morgan survey showed on Monday.
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****SD: “…traders say there is a fair amount of volumes on currency swaps and options that have yet to migrate electronically.” Even if you have a smartphone with a large screen it still can be pretty difficult to look at an options interface. Firms need to get the creative department in on new projects early.

VIX Options and Futures Weekend Review for January 20 2018
Russell Rhoads – Cboe
Although still at a historically low level, VIX showed some signs of life this past week trading above 12.00 for the first time since December 1st last year. Standard January futures and options went off the board Wednesday morning settling well above 12.00. The futures moved up a bit, but not nearly to the extent of spot VIX. This may be taken as the market expecting VIX to return to historically low levels. Of course when this has been the case for so long, why wouldn’t the traders not push the futures higher.
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****JB: Also see Russell 2000 Options and Volatility Weekend Review for January 20 2018 and Volatility Indexes and ETPs Weekend Review for January 20 2018

Regulation & Enforcement

Six US market regulation predictions for 2018
Annette L. Nazareth and Gabriel D. Rosenberg – Financial Times
Now that most of the Trump-era US financial regulatory principals are in place, we predict this year will bring the beginnings of concrete changes to US trading and markets regulation.
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Strategy

How to Make Money From Volatility Rise: Morgan Stanley’s Ideas
Adam Haigh – Bloomberg
Prospects for a winding back of central bank stimulus this year, along with a potential pick-up in global inflation, have boosted the risk of greater fluctuations in asset markets that have largely moved in tandem in recent years.
Exactly how you can make money if indeed bigger swings in asset prices materialize is a tougher call than just buying and holding. Expensive financing — or carry — costs in many markets mean investors have to pay up for potential returns from price swings. Morgan Stanley analysts have mapped out several proposals, including using options to bet on higher oil prices and increased stress in the high-yield bond market.
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Versatility, Flexibility: The Continuing Allure of Listed Options
Scott Connor – The Ticker Tape
In 2018, the exchange-traded equity options market will celebrate its 45th anniversary in the U.S. Though 2017 marked another year of historically low volatility, with an average daily volume of 16.7 million contracts, the year still ranked among the top three ever, according to data from the Options Clearing Corp.
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Five stocks that could see the biggest swings on earnings
Keris Lahiff – CNBC
Fourth-quarter earnings season is kicking into high gear, and at least one Wall Street strategist thinks there are a handful of names that could cause waves in the market when they report in the coming weeks.
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Miscellaneous

ADM-Bunge Deal Would Create Cargill-Sized Agribusiness Giant
Mario Parker and Simon Casey – Bloomberg
The world of agricultural-commodity trading could be upended with the merger of two of its biggest names. Archer-Daniels-Midland Co. has sought deal talks with Bunge Ltd., a person briefed on the matter said at the weekend. That’s less than a year after Glencore Plc approached Bunge about a deal.
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SEC approves Cboe’s closing auction alternative
Automated Trader
The Securities Exchange Commission (SEC) has granted approval to Cboe to launch the Cboe Market Close, an alternative to closing auctions in the US stock market.
Cboe Market Close will match trades using the closing price set on the home exchanges which would otherwise be completed by the New York Stock Group Exchange (NYSE) and Nasdaq.
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