There are major macroeconomic events taking place at this point in time. The Chinese stock market collapse and Yuan currency re-balancing, the collapse in oil prices, Greek default, Japanese inflation, etc. The recent softness in the global equity markets, especially, China's has led many to believe that Chinese growth may not be what we thought it was. This has dealt a serious blow to global GDP forecasts as the Chinese economy has been charged with the task of staving off global deflation. These recent events are undermining the market's faith in the Federal Open Market Committee's ability to raise interest rates, even nominally at the upcoming September 17th meeting. This confluence of uncertainty has driven the short end of the yield curve down as investors have sought liquidity and safety.
No futures market is more liquid than the Eurodollar futures. This week, we'll take a look at a peculiar quarterly expiration pattern that couldn't come at a better time for those looking to position themselves towards a higher interest rate structure ahead of next month's FOMC meeting. Looking at the chart below, you'll notice several points marked in blue. The first thing to notice is the consistency of the correlation between the marked data points. Deeper inspection shows that each data point matches commercial buying activity ahead of the quarterly contract's expiration. Finally, notice that as the Eurodollar futures in the top pane of the chart have climbed, the expiration triggered, commercial buying is declining.
|Commercial trader quarterly contract expiration buying has been a consistently bullish event. Our take is that this could be the last one.|
Declining commercial trader buying near the market's all-time high fits right in with their value based approach to trading. Furthermore, as Eurodollar futures are actually traded as an index with a ceiling price of 100, the degree of ultimate risk is simple to measure. We've listed Q3 '15 and Q1 '16 highs in the chart above. Our take is that commercial traders feel this market is overbought near the all-time highs. Whether the FOMC raises rates next month or, not the commercial traders are beginning to make the case for the best returns coming from the short side of the interest rate complex. We'll use their actions to determine the meaning of the chaos around us and read for context in the history books. When it comes to the markets, the commercial traders' actions have been more valuable to our trading than any talking head.
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