Recap 2014-10-24


Despite the recent move in equities, the options market suggests that the ‘wall of worry’ remains high. The Put Call ratio, for example, remains very high, at levels last seen in mid 2012, late 2011, and mid 2010. The tone has clearly also shifted – equities were higher today despite the Ebola headlines as well as lower oil prices. The S&P is actually less than half a percent away from being UP for the month.

Oil prices are quite interesting here. Despite the price action last week, there was a rise in open interest which is unusual. There is limited timely, public data on this market, so for a financial markets person like me, it is hard to get a clear read on the underlying fundamentals. What seems somewhat safe to say is that 1) oil prices are not far from marginal costs, 2) oil prices are near long term support resistance levels, 3) global oil inventories appears to have been building for most of the year, but oil prices have not fallen due to the geo political headlines. It appears that headline fatigue has set in, and prices are reacting to the inventory build. This all suggests that we may need to see spot prices near here for a while to work off the excess. The futures strip is pricing this in – front contracts have fallen further, and the curve is fairly flat.

The move in the US rates market has also been quite interesting. In particular the curve has steepened on the week, with the 2y point actually roughly unchanged. This is actually all driven by the inflation expectations component. US 2y real yields, for example are actually only 5bps from their highs, and 5y real yields just 18bps from their highs. In other words, the market is pricing in delayed Fed hikes as a result of a fall in inflation:

Time will tell whether this winds up being correct or not – the Fed has historically looked through commodities driven price effects, but given that we’re at the zero bound, there is certainly a good chance that the Fed is more sensitive about that.


  • A second person in NYC has been isolated due to Ebola symptoms
  • US New Home Sales rose 0.2% MoM, but the prior month was revised lower
  • UK 3Q GDP rose 0.7% QoQ as exp
  • German GfK Consumer Confidence 8.5 vs 8.0 exp
  • 25 EU banks reported failed the stress test. Negotiations continue with about 10 banks shown to have net shortfall after 2014 capital measures. Full results are released on Sunday – Bloomberg
  • EU Commission demands more details on French budget. President Hollande confirmed yesterday that France received an official letter from the EU Commission asking for additional information on the French budget.


  • Mon: German IFOUS Markit Service PMI
  • Tue: US Durable Goods Orders, Consumer Confidence, New Zealand Business Confidence
  • Wed: Oil Inventories, FOMC, RBNZ, AU New Home Sales
  • Thu: UK House Prices, German Unemployment, CPI, US Jobless Claims, 3Q GDP, NZ Building Permits, Japan Employment, CPI, UK Cons Confidence