With our EU friends center stage, the rest is on the back burner but assuming (as we do) there will be no Armageddon, let’s get back to business and take a look at the US.
We had set an anchor weeks back and it remains in place - there is a flaw to consensus regarding US vigor ahead. Knowing that to be the case gives our clients a leg up.
Today’s Sep Durables print was consistent with our view, suggesting as it did that capital spending expanded strongly in Q3. We expect the GDP advance tomorrow, and the Claims print to further cooperate.
This reality can be worked in any number of ways, none of which call for complexity.
The option is one of the most versatile of tools in this regard. For example, the bear call spread on the 10 yr would be a nice fit. This is a vertical credit spread, with limited profit and loss potential. This is conservative, but of course options offer the alternative (uncovered call write, with unlimited loss potential) so it’s all there for the desk.
In this situation, we would be in no hurry to place a trade. Look for a window. For example, if the Michigan read on Friday is extremely weak the FI market will firm. Then consider that event to be a gift and set the trade. (A real window of course would be total EU failure. In that case, all bets are off.)
Robert Craven
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