How the main futures reacted to the Non-Farm Payrolls, US wage growth and US unemployment rate

Introduction

The Non-Farm Payrolls is one of the most important macroeconomic releases of the month. According to my master’s dissertation, it’s the macroeconomic release that has the biggest effect on the markets.

If we look back 10 years, we can conclude that the biggest impact in the markets has been made by the monetary policy applied by the different central banks around the world.

The Figure

I expected a lower figure like the most part of Wall Street analyst… To my surprise, the US added 201000 jobs in August. The previous figure was 157000, so we saw an important increase. The unemployment rate was unchanged at 3.9%. Probably the most important release of the day was the US wage growth. It showed 2.9 % which is a level that we hadn´t seen since 2009. The US economy keeps pushing and probably we will see another rate hike in the next month. Considering this good news we should expect a sell-off on the fixed income futures.

Eurodollar

    Eurodollar Dec18 futures, 15 min, source: TradingView

The positive surprise on the US wage growth and the US Non-Farm Payrolls create an opportunity to sell for the traders.  Maybe you think that 7 ticks are not enough but considering the nature of this product is a big change. You can compare the daily range from the previous days in the chart above.

Fed Funds

    Fed Funds Jan19 futures, 15 min, source: TradingView

The traders reacted in the same way as the case of Eurodollars. It took this future to the previous support at 97.65. Considering the upcoming rise in the US interest rates, I expect this future to keep falling.

10Y T-Note, 5Y T-Note and 2Y T-Note futures

We saw a strong sell-off in the US bond futures. The main difference between them is the range of the movement. Obviously, the longer the duration, the bigger the volatility and the movement range as we can see in the following charts.

   10 Year T-Note Dec18 futures, 15 min, source: TradingView

The 10 Year T-Note Dec18 futures fell 49 ticks. It broke the previous support.

    5 Year T-Note Dec18 futures, 15 min, source: TradingView

Even if the chart seems similar, the 5 Year T-Note Dec18 fell 32 ticks.

    2 Year T-Note Dec18 futures, 15 min, source: TradingView

It fell 11 ticks and again we can see an important move.

An alternative

The main problem of trading the Non-Farm Payrolls is that the liquidity disappears just before the data is released. There is the possibility to execute at a bad price if we enter a market order.  Another problem is that you shouldn’t place a stop loss near the limit order because probably it will be triggered.

The alternative of trading the outrights would be trading spreads. The advantage is that we can trade a bigger position than in the outrights because we are hedged (or at least in part). If we take the spread between the 10 Year T-Note and the 5 Year T-Note at the ratio of 1-1, we can see that movement was only 17 ticks. If we decide to trade this spread and considering positive news for the US economy, we should sell the future that represents the future with longer duration and buy the other one.

Summary

We have seen how a macroeconomic release can affect the markets and how the traders interpret the data and execute the trades.  Nowadays, at least 70% of all the trades are executed by automatic trading systems and they are quicker than the point an click traders so making a profit in this kind of releases is getting really difficult. The only possibility would be position yourself with a small size in the right side of the trade and with a reasonable stop loss. If you don´t want to trade the outright, you can trade the spread. In this case, you need to make sure that you make enough ticks to cover the commission because you have double commissions. I hope you like it.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Eurodollar, looking to the year to date behaviour and the spreads

Introduction

I consider that we should follow the central banks' steps. It´s very useful to adapt your strategies to the economic policy applied and the central bank recommendations. This applies more to investing in a medium to long-term that for day trading. However, it can be interesting to test a trading system with a variable that tracks if the central bank is bullish on the economy or if it has a negative outlook. Today, I will focus on the Eurodollar futures situation.

Outrights

According to the Fed’s positive outlook on the US economy and due to the accelerating growth and rapid job creation, it’s expected that we will see two more interest rate rises this year. With this scenario, the futures should be falling at least  the  next expiries (December 18 and March 19)  

    Eurodollar Dec18, Daily, Source: TradingView

The front-month contract has behaved as expected during the last year. However, the uncertainty about the trade war between US and China has stopped the bearish trend.

    Eurodollar Dec19, Daily, Source: TradingView

This chart is similar to the previous one but this contract is more volatile. 

   Eurodollar Dec20, Daily, Source: TradingView

Again, the volatility is higher for this contract because it expires 1 year later than the previous one.  It closed at 97.06 which implies a lower interest rate than the Dec 19 contract. we will see later how this affects to the interest rate curve.

    Eurodollar Dec21, Daily, Source: TradingView

This contract is more interesting for trading purposes because the daily range his higher and it can offer more opportunities to go in and out.

Comparison

   Comparison Eurodollar Dec18-Dec19-Dec20-Dec21, Daily, Source: TradingView

In this chart, we can see the differences between the 4 contracts showed before. Probably, one of the most interesting aspects of this chart is that the closest expiry shows a smoother price than the other price. This is related with the volatility. At the beginning of the year, the contracts were trading as expected with widen spreads however the trade wars speculation from the middle of May has made the contracts to converge and the spreads have narrowed.

Spreads

    Eurodollar Spread Dec18-Dec19, Daily, Source: TradingView

We can see that that the spread Dec18-Dec19 widened in the first three months of the year and after that, it has been in the range 0.28-0.40. The main resistances for me are 0.38 and 0.40. The highlighted in yellow shows the reversal of the spreads due to the trade wars and the FOMC meeting that showed certain worries about the economy overhitting. The Fed officials didn’t give any indication about how willing they were to speed up the pace of interest rate increases. They weren´t worried about allowing the inflation to rise above 2% for a temporary period as far as the economy would expand. You can see this reversal in the previous charts as the eurodollar futures rallied on these days. 

   Eurodollar Spread Dec19-Dec20, Daily, Source: TradingView

In contrast to the last graph, we can see that the spread has narrowed and this means that the interest rate curve is flattening.  The closing price of -0.02 implies that the 3-month interest rates will be lower in 2020 than in 2019.

   Eurodollar Spread Dec20-Dec21, Daily, Source: TradingView

We can see the same pattern that the Dec19-Dec20 spread has. Again it implies that the 3-month interest rate will be lower in 2021 than in 2020. This can be temporary but in my opinion, it means that the US economy probably will slow down in the medium term. According to the spreads, it should happen in 2019-2020.

Sum up

We have seen some of the Eurodollar futures. We can see that the front months are moving in a different way than the back months. This implies narrow spreads and finally, an interest rate curve flattening. The ongoing uncertainty about the trade wars will continue. As far as the US economic growth continues and the labor data keeps as good as it is, the Fed will keep the interest rate increases expected. Hopefully, the Fed will act independently even if Donald Trump puts pressure to change its monetary policy. I don´t think that the international issues will affect to the US economy at least in the near term, however, we need to keep an eye on Argentina and Turkey. I hope you like it. Thanks.

Have a good trading!!

#trading #interestrates #Fed #inflation #US #macro #economicgrowth #eurodollar #GE #ED #spreads #opinion

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Europe situation, Euribor, one of the best trades from 2017

Mario Draghi didn’t surprise the market with his speech. He acknowledged a moderation in the pace of the eurozone recovery but he said that it´s early to change the monetary policy. Some analysts believe that the ECB will wait until July to provide forward guidance. I don´t want to speculate but maybe the dovish message was due to the strength of the euro. I would like to remind you that the ECB is buying assets for the value of €30bn a month. The question here is what is going to happen with these markets as soon as the central banks stop these quantitative easing programs.

Euribor Spreads

I will use the Euribor contracts listed in Eurex because I don´t have access to the ones listed on ICE. Sadly these contracts aren´t traded as much as the ones on ICE but they show similar prices. 

     Euribor Jun18-Jun19 spread, source: Barchart

The difference between these contracts is narrowing what indicates a flattening of the Euribor curve. It seems that the current level can act as a support.

     Euribor Jun19-Jun20 spread, source: Barchart

As you can see the curve steepened from September 2017 to March 2018. At the moment is near the support at 0.400. The Jun20-Jun21 spread has the same shape and this is very interesting for me. In the case of the Eurodollar, you can see how the spreads show that the curve is steepening for one period in flattening after 2020. The truth is that the ECB hasn´t changed the policy in the last 8 years and the inflation is still low. Can we see any movement in the outrights?

    Euribor Jun18 futures, source: TradingView

This contract changed the trend one year ago. In my opinion, the European economy looks pretty much the same as 2017.

     Euribor Mar19 futures, source: TradingView

This contract is more volatile but it shows exactly the same movement as the previous one.

Euribor Dec19 futures, source: TradingView

The last 3 charts show how the different futures went up in 2018. What are they discounting? Is the current European economy worse than in 2017? Will we have a global recession in 2020?

One of the best trades

We have briefly seen how the Euribor futures behaved during the last year. As I said the European Central Bank hasn´t changed the economic policy while the Fed has been raising rates for a while. Considering this, the idea was clear: long Euribor futures and short Eurodollar futures.

    Euribor Dec18 – Eurodollar Dec18 Spread, source: TradingView

This trade has been amazing (and I think that it can continue at least for a couple of months) and probably we will read about it in the next “Hedge Fund Market Wizards”.

Sum up

The ECB delivered the words that we expected. Draghi has a difficult job and the protectionism threaten doesn’t help. The Euribor futures are not moving at all, their movements are tied with the European Central Bank forward guidance and the data. The Euribor-Eurodollar spread has been one of the best trades from 2017. It has captured the different economic policy in two economic areas. 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Fed Funds vs Eurodollars futures

The interest rate markets offer a lot of possibilities and strategies. You can trade the outright, the intra-product spread (calendar spread or calendar spreads combinations) and you can create your own spread with different futures (inter-product spread) Sometimes I analyze the outrights and certain spreads but today I’m going to introduce a strategy used by some of the biggest market participants. 

      CME Interest Rate Products, source CME

The spread

I’m not going to focus on the back of the curve. The products to make this strategy are Eurodollar futures and Fed Fund futures. Before I explain the strategy lets define these products:

• Eurodollar futures are based on a 3 month LIBOR.
• Fed Funds futures are based on the average daily effective Fed Funds rate and calculated the last business day

Considering the different  value per basis point we need to calculate the spread ratio:

Spread ratio, own elaboration                                                  

In order to get the ratio, we should divide the Eurodollar value per basis point by the Fed Fund value per basis point. In our case, we will trade 10 Eurodollar contracts and 6 Fed Funds contracts. Considering the forward-looking aspect of Eurodollar futures, the Sep contract will cover from September to December. We need to choose 2 different Fed Fund contracts between these maturities, in the example October and November.

Spread calculation in basis points, own elaboration                 

In the example, the spread in basis points has been calculated as (Fed Funds average price – Eurodollar price) *100

    Eurodollar-Fed Funds spread, source TradingView

What and why are we trading on this spread? Basically, we are betting that the spread between these 2 products will narrow or wide in the future. Having in mind that the eurodollar is based in 3-month commercial loans will be more volatile (for the duration and the credit risk) than the Fed Funds (1-month loan between banks insideUnited States)

We can use this spread to bet that the interest rate curve will change. Let’s say that if there was a high probability of an interest rate hike, I would position myself short Eurodollars and long Fed Funds.

          Fed Funds Rate, source TradingEconomics

If you compare this chart with the previous one, you can see why you need to be right and always taking the direction of the market with the Eurodollar contracts.

Sum up

I hope you like this brief introduction. This spread will allow you to diversify the strategies. There are 2 main risks: taking the wrong side of the position and the execution risk. The second one is obvious because there are 2 different products on this strategy.  It´s easier to make a calendar spread because you can find them listed on the exchange. 

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

US Bond and Interest Rate Futures Spreads, US Interest Rate curve inversion

It’s been a while since my last post. I’ve been busy but I will try to write more frequently. Today, I’m going to talk about US interest rates and bonds. In one hand the US economy is performing pretty well, at least for now. The GDP is good but not as the government promised. The employment is strong but the figures show that it’s been driven by part-time jobs and this doesn’t help in the long term. The bank earnings usually reflect the economic performance, and they have reported better than expected profits. On the other hand, the Federal Reserve is tightening. The debt hasn’t been reduced. The protectionism won’t help. This is not new and I believe that you have already read about this.

Fed’s Williams warned earlier this week that the yield curve inversion can be seen as a warning signal. An inverted curve has always been a recession signal.

How can we understand if the curve is flattening or steepening?

Basically, if we simplify the process and we only do the yield difference between 2 different products or the same product with different maturities. If the difference grows over the time, the curve is in a steepening process. If the difference decreases, we will see the curve flattening. Once we understand this we can have a look at different markets:

US Bond Spreads

    5Yr T-Note  - 2Yr T-Note futures spread, Barchart 

In this case, I’ve chosen the price difference between the 5 Yr T-Note and 2Yr T-Note futures. It’s not as intuitive as if I had taken the yields but it’s easy to understand. Obviously, an investor would look for a higher return on a long duration investment than in a short duration investment. If I have 2 assets with a different duration that offer the same return, I will choose the short duration asset. The reason behind this is that I would be able to compound the returns. When there are good news and the economy is doing well, the traders sell the bond futures and considering that the longer duration is more volatile the spread between them will increase. In our case, we can see that the 5Yr-2Yr spread is decreasing.

    10Yr T-Note  - 2Yr T-Note futures spread, Barchart 

The 10-2Yr spread is decreasing and it’s very close to the 8 year low (12.71)

3 month Eurodollar futures

     Eurodollar Sep18-Jun19  spread , Barchart 

This is a 6-month spread in which is going up. You can think that the traders are discounting more interest rate hikes during 2018.

    Eurodollar Jun19-Jun20  spread , Barchart 

This is a bigger spread that covers 12 months. It’s more volatile than the previous one and it´s testing an important support. The most interesting thing is that shows how the interest rate curve is flattening between 2019 and 2020. 

   Eurodollar Jun20-Jun21 spread , Barchart 

If you were surprised with the last chart, take a look at this. Basically, the curve is flat between 2020 and 2021 and probably it will be inverted in the coming weeks or months.

Eurodollar quotes 

     Eurodollar futures quotes, CME

I would like to recommend this short article that offers a different perspective with the same conclusion:

https://www.ft.com/content/f24fbc80-431c-11e8-803a-295c97e6fd0b

Highlights and future questions

All the experts are warning about a possible recession between 2020 and 2022 and as we have seen the curve is inverting at this point. How will the central banks react? Will the Fed choose between fighting inflation or the job market? How will the governments try to reduce the debt? What will happen with the private debt? 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

US CPI is King, at least for the interest rate derivatives

I’m a big follower of the economic data. I follow closely the inflation figures because the interest rate markets usually move. It’s difficult to say what you should trade in this situation but it´s easy to predict the direction of the movement. Let’s see what happened and how the markets reacted.

US CPI surprise

I expected a figure in line with the expectations. Maybe, my expectation was driven by the lack of surprises in the European inflation, but I was wrong this time. The US CPI (YoY) was released showing a better than expected figure, 1.8% vs 1.7% expected. At the same time, the US CPI (MoM) showed 0.3% vs  0.2% expected. The party started and the futures markets started to move.

Market reaction

The sell-off in eurodollar futures was expected after the economic indicator release. Let’s start with the 10Y T-Note Futures.

10Y T-Note Futures March 18

    Source: TradingView, 10Y T-Note March18 future, 30 min

Good downside move, you can see the importance of this movement in the traded volume in the 30 minutes after the release. It’s not valid to sell at any point, as you can see this future went up after 14:00 London time.

Eurodollar December 18 future

    Source: TradingView, Eurodollar Dec18 future, daily

This is a great example of how the American economy has improved from 2016.As you can see it´s in a downtrend since September 2017.

    Source: TradingView, Eurodollar Dec18 future, 30 min

You can see the importance of the data and the scale of the movement in the 30 min chart. It´s funny to think that 7 ticks move is big but you should consider that the size of the trades is usually higher than other futures with more volatility. If there is not a release or news is strange to see big movements in this kind of products.

Different examples, across the interest rate curve 

     Comparison Eurodollar futures Dec19, Dec20, Dec21, Dec22, own elaboration

All the maturities behave exactly as the December 2018 contract shown before. The December 2021 is different, someone sold at market just in the moment of the release or a little bit before, this is why there is a big gap. The most important thing is that the dec21 move was smaller than the dec20 and dec22. I can see that in the volumes increased in the bounce back for Dec20 and Dec21. It means that the traders don’t want to be short in this maturities. It’s difficult to say if there will be a possible slowdown in the US economy in one year time but I  don’t dismiss this scenario.

Eurodollar Spreads

     Source: TradingView, Eurodollar spread Dec18-Dec19, daily

We can see that this spread is trying to go up from the min of 0.1400, this means that the outlook for the next year is positive. The main problem, and it will be highlighted in the next chart is that the long-term chart shows how the spread is tightening. 

     Source: TradingView, Eurodollar spread Dec20-dec21, daily

I´ve selected this spread because shows a clear downtrend. After checking, the Dec19-Dec20 spread shows the same pattern and we can think about the slowdown scenario mentioned before.

Sum up and opinion

I hope you like it. Following the economic indicators and how they affect the markets is one of my hobbies. I’m looking forward to bring this interesting subject and explain the concepts clearly. As you have seen, the better than expected US CPI generated a sell-off in the US bond futures and in the interest rate futures across the whole curve. This doesn’t mean that the rally in equities will last forever and there are signs that could be a slowdown in the US economy in the coming year or year and a half. In terms of the US equity market, I think that it will keep going up in 2018. I use the bank earnings as a leading indicator of the economy.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Eurodollar futures, examples and strategies to trade the interest rate curve

Introduction 

As you know, the Eurodollar futures represent the 3 months interest rate futures. I like the interest rate derivatives because they don’t usually have big movements like indexes, currencies or commodities. Another advantage is that there are a lot of contracts listed on the exchange and you can apply different strategies. The liquidity is very high, unfortunately, it’s not a fast market and getting filled is not easy due to the exchange algo.

We will talk about trading but understanding macroeconomics helps a lot in this kind of products. Let me show you why:

Current Macro view

The U.S. is showing its strength every time they release its macroeconomic indicators. Last week we showed a better than expected GDP growth (3.0%). October has been really good: strong durable good orders (2.2%), better than expected ISM manufacturing PMI, strong services PMI, an increase in Existing Home Sales, 4.2% as an unemployment rate. On the other hand, the Non-Farm Payrolls were worse than the market forecasted due to the effect of the hurricanes. The consumer price index wasn’t as good as the Federal Reserve would like it. But in general terms, the macro data was very good.

Considering all of these facts and a hawkish FED that expects three rate hikes in 2018, the Eurodollar futures should be falling at the moment.

Quick look at the Outrights

 Eurodollar December 2017

     Source: TradingView, Eurodollar Dec17, daily

This is the December 17 contract. It was lower at the beginning of the year because everyone expected a hawkish FED. The USD was really strong at this time. The FED delivered the first rate hike in March and obviously, the interest rate futures fell. After that, this contract rose to set up the maximums of the year in June. This movement was driven by the doubts about how a quick normalization and interest rate hikes could affect the economy. The main concern was the high level of personal debt and how the people could resist and pay in an environment where the interest rates were going up but the salaries were stagnant.  The Fed raised the interest rate in June for the second time of the year, and this contract fell until July. It seemed that everything was going well but the shadow of some geopolitical problems appeared. The front contracts rose. The Fed September meeting was a turning point and the confidence came back to the market. Janet Yellen announced that the Fed will start cutting its balance sheet in October, and she said that the normalization process would be gradual and predictable. At this moment, the sell side was the correct one.

 Eurodollar June 2018

     Source: TradingView, Eurodollar Jun18, daily

The June contract movement has been similar than the December 2017. The main difference is that the Jun18 is trading at the same levels of the beginning of the year, which in my opinion indicates that the market expects that the economy will continue growing in 2018.

 Calendar Spreads

If you think that trading outrights involves a lot of risks maybe you should consider calendar spreads and bet in the yield curve. Basically, you are betting that the difference between two contracts will wide or narrow. You can use technical analysis, macro analysis, quantitative analysis.

Eurodollar December 2017 - March 2018

    Source: TradingView, Eurodollar spread Dec17-Mar18, daily

Looking at the chart, you can see a clear trend that started in September. Does it sound familiar to you? The reason why this spread is going up is that the March 2018 contract has fallen more than the December contract. The economy is performing well, the market expects a rate hike in the beginning of 2018 and 2 more alongside the same year. At the moment, it’s trading at 0.1450, which I consider an important resistance.

Eurodollar March 2018 -  December 2018

      Source: TradingView, Eurodollar spread Mar18-Dec18, daily

This is a 9-month spread. You can see how well the spreads trend. It follows the same pattern as the other outright or strategies mentioned above. It was trending very well in September but it’s moving sideways and showing some weakness at the current levels.

Eurodollar September 2018 – June 2019

     Source: TradingView, Eurodollar Spread Sep18-Jun19, daily

This spread is different. The traders are pricing several interest rate hikes the yield curve is flattening. It has just crossed the 200 EMA and I think this movement will continue.

Eurodollar March  2019 – December 2019

     Source: TradingView, Eurodollar spread Mar19-Dec19, daily

This spread has been falling almost the whole year. The 200 EMA is very significant, every time that the spread closed above it the movement was reversed in a few days. As well as the previous one, it shows weakness.

Butterflies

If you agree that the spreads in 2018 are trending up while the spreads in 2019 are trending down and you would like to trade both, the best thing you can do it´s making a butterfly. This strategy consists of buying one spread and selling another one in which the middle leg is the second leg of the first spread. 

                       Butterfly structure, Step 1 and 2 are the spreads that create the butterfly, own elaboration

You can sell a butterfly if you do with 2 different spreads, you should sell the first one and buy the second one.

Let’s see these butterflies:

     Source: TradingView, Eurodollar Butterfly Mar18-Dec18-Jun19, daily

This is a very volatile butterfly but it’s a good example of this strategy. It supports the theory of buying the 2018 spread (Mar18-Dec18) and selling the 2019 spread (Dec18-Jun19)

     Source: TradingView, Eurodollar Butterfly Jun18-Dec18-Jun19, daily

This is less volatile than the first one. The best aspect is that it ranges all the time.It can rise to the levels drawn on the chart, but there is only my opinion.

Conclusion

I hope that you like. This is only a brief article but I hope that it will help you to understand how this kind of product behaves and the different strategies you can apply. Knowing about macroeconomics helps. I will be promoting this articles on the following twitter account: @fxfincomtrading

Thanks.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#trading #eurodollar #macroeconomics #calendarspreads #butterflies #InterestRates #US #Fed