It's called "Putting your money where your mouth is" ...



ref : " Traders Ramp Up Bets on a Hawkish Fed Surprise at Jackson Hole " , Bloomberg Markets


There's no shortage of commentators forecasting a nasty surprise on the inflation front and the effects it might have (rates up, markets down). So many in fact that one wonders it would be right to call it "a surprise" at all. On the face of it however, investors, especially in stocks, aren't too worried as they they force indices up to repeated record highs.


Of course, FOMO's got a lot to do with that -- Fear Of Missing Out. That particular phenomenon has led to those happy to bank their profits and exit the market being pretty scarce. As for the idea of taking a directionally opposite view ... well, you can just hear the chorus of investors shouting the old adage about not standing in front of runaway trains. And let's face it, for a very long time now they'd have been absolutely right.


That doesn't mean the band's going to keep playing forever, however, and the music's got to stop sometime (hasn't it ?). It's a good idea to keep an eye on who's waving the warning flags, and yesterday was interesting in that regard. The Fed has been getting sweaty about asset valuations getting stretched for some time even whilst denying that they're anywhere close to doing anything to upset the applecart. But Fed Governor Lael Brainard gave the cautious view a little extra oomph by saying that high levels of corporate indebtedness could exaggerate a "re-pricing event" (these euphemisms are a riot, aren't they ?)


No doubt the stock market bulls will shrug it off, but there is meaty evidence in another market-place that some people are taking the chances of unforeseen and sharper rate rises -- with all their implications -- very seriously indeed. Right now, Eurodollar futures (which reflect 3-month Libor expectations) imply a little less than five 25 basis point rate rises by Sept 2024. But a look at the open positions on Eurodollar options reveals that a position of 400,000 contracts (a notional $40 billion) has been built up in contracts that expire from this September onwards. The put options purchased have a strike of 98.00, which would reflect rates of 2% which is 50 bp more than current expectations.


Check the Bloomberg piece for details, but it's interesting that the purchase of the first 150,000 put options was financed by selling call options.... which of course means a double-whammy for whoever's behind it if they're wrong. And the significance of the date of the contracts being this September onwards? The annual Jackson Hole get-together for central bankers takes place in August, and the speculation is that that the Fed -- which has form in announcing monetary policy changes at Jackson Hole -- may spring a surprise by ramping rates in the face of an overheating economy and the sharper than expected rises in inflation that would result.


Well, it's a theory.... and it's credible at least.... but is it right? The thing that strikes us is how would the Fed look if they raised rates by an extra 50 bp in 3 months' time after repeatedly denying that that sort of action is not part of their game-plan. Mind you, that doesn't mean they won't or can't. Indeed, it's certainly within the bounds of possibility that they might have to......

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