Halister News

(Bloomberg) -- The U.S. Environmental Protection Agency and California Air Resources Board approve a remedy proposed by Volkswagen to reduce excess nitrogen oxide emissions from Generation 3 diesel 2 liter vehicles.

• Approval for about 70k cars with 2.0-liter diesel engines
• With today’s approval, VW can offer vehicle owners the choice to keep and fix their car, or to have it bought back
• Models covered by approval are model year 2015 diesel Volkswagen Beetle, Beetle Convertible, Golf, Golf SportWagen, Jetta, Passat, and model year 2015 diesel Audi A3
• NOTE: Dec. 20, VW Reaches Deal for Emissions-Cheating Audi, Porsche Models

--KRISTIN JENSEN

(Bloomberg) -- Whether positioning is short enough “could get tested” in coming weeks if 4Q data is better than expected, BofA strategists Shyam Rajan and Carol Zhang say in note.

• There are 3 main indications that “the market is still uncomfortably long duration or at the very least not short enough”
  • While Dec. price action was poor, real-money buying was strong as measured by Fed custody holdings and asset manager positioning in 10Y futures
  • Payer skew “remains bid” across tails and expiries, indicative of market “that is core long duration and craving protection in option space to protect its core position”
  • Investor positioning as measured by SMR Money Manager Survey “remains steadfast neutral to slightly long,” in contrast to during the 2013 taper-tantrum selloff, when it “shifted sharply to a short-duration stance”
• BofA’s preferred short bias trades are to be short real rates or belly of nominal curve

(Bloomberg) -- The volatility of iTraxx Main may be set to rise given the diminishing risk/reward for further credit tightening as peripheral spreads face widening pressures from rising political risks, Bloomberg strategist Tanvir Sandhu writes.

• Legal hurdles faced by the ECB due to risks of contravening the Maastricht Treaty’s prohibition of monetary financing may also push up volatility in the iTraxx Main index
• 1-month realized vol on iTraxx Main, an index of credit- default swaps on investment-grade companies, is in the lower quartile of 5-year range and may move higher as local vol shocks may become more common, see chart here
• While the ECB protects the extreme right tails with CSPP and with any widening likely to be contained, investors may become reluctant to sell vol given the rising political risks
• BTPs may trade more like credit instruments vs duration assets in the second half of 2017 to price further QE tapering risks in 2018
• Realized 1-month volatility of BTP futures is at ~8 vs ~4 in September, which was near the lowest levels on record
• Regression analysis for BTP/bund vs 5Y iTraxx Main prior to ECB QE had R^2 = 0.955, y = 2.387x-21.228 , while after R^2 = 0.056, y = 0.359x+98.518, see here
• Other risks that may squeeze longs include acceleration in issuance offsetting ECB buying, oil volatility and a dollar- strength driven weakness in emerging markets
  • 1y regression analysis for WTI vs 5Y iTraxx Main prior to ECB CSPP announcement on March 10, 2016 had R^2 = 0.608, y = -0.599x+96.755

• NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

(Bloomberg) -- Factory orders seen falling 2.3% in Nov. after rising 2.7% in Oct. (forecast range -3% to -1%); includes durable and non-durable goods

• Preliminary data Dec. 22 showed Nov. durable goods orders fell 4.6%, first decline since June, reflecting a drop in commercial aircraft orders