Our Jan SPY options double, Euro broken, money comes home, financial stress remains high and the hunt for yield has begun!
In our last post, we urged the need to buy Jan vol, our options have almost doubled in price with the surge in Santa taking the reins of the bull into the xmas close. However, we feel the need for front month vol complemented with a short long dated vol (curve flattener) will perform beyond the current rally.
The market has broken the EUR.USD vs SPX to an extreme. This was mentioned in our Euro Obituary post and now we see a even further dis-allocation after the ECB’s LTRO failed. The market is not stupid, the ECB will need to print money and buy bonds in the open market in size and write them down on it’s balance sheet. Currently, the banks are not willing to rent crash on their balance sheets no matter how attractive the carry trade is with huge leverage available. With the banks getting the cheap funding and collateral swaps, they still need the free CDS (back stop of ECB) to take on this trade. At the end if given, it’s the same as forward print of cash (prevent banks from large capital raises). Otherwise they let the situation get worse, and print on demand. You end up at the same spot, and the EUR.USD is reflecting this. This is reflective of a solution, rather then a shock.
1. Nothing is fixed, money is still leaving EM and coming home to DM
2. Financial Stress continued to be high
3. The hunt for yield and risky duration has begun. This bodes will for a vol flattener
4. SPY Jan 130 Calls and 134 Calls