Tuesday, June 2, 2009

The Debts of the Spenders: CME and Eurodollar Positions Confirm Bullish Environment

As I said in an earlier post,


Bullish positions in Eurodollar futures are a key sign of resurgent market sentiment. Stronger credit markets = more originations and fees for financials. This latest article confirms my thesis:

Signs Of Resurgence Seen In CME
UPDATE: Signs Of Resurgence Seen In CME Rate Futures Business
PROVIDED BY Dow Jones & Company, Inc. - 7:57 PM 06/01/2009

(Updates with comments from CME CEO.)

By Jacob Bunge and Howard Packowitz


CHICAGO (Dow Jones)--Derivatives exchange operator CME Group Inc. (CME) is seeing signs of a rebound in its beleaguered interest rate futures complex, after trading activity last week reached the highest levels seen since October 2008.

Growing confidence among Wall Street banks and steepening in the interest rate yield curve is bringing investors back to Eurodollar and long-end Treasury futures, key product groups for CME hit hard by the credit crisis. " We're seeing some return to normalcy," said CME Chief Executive Craig Donohue in an interview with Dow Jones Newswires.

Strengthening of the credit markets and stabilization in the relationship between key interest rate benchmarks have helped, Donohue said.

As a result, the market is seeing more mortgage originations and refinancings, drivers of activity in CME's fixed-income markets.

May rate futures volume remained 33% lower from a year earlier at CME, where the products have represented 60% of growth in the past, according to a Fox-Pitt Kelton report.

But that's a marked improvement on April, when trading was down 48%, and the January nadir, when rate futures trade was off about 68%.

Heated market activity in the latter half of May, including back-to-back trading sessions last week in which about 9 million contracts changed hands each day, have sparked hopes for the market's return.

At Chicago-based futures brokerage PFGBest, President Russ Wasendorf Jr. said the firm is seeing activity in 30-year bond futures approach pre-crisis levels.

"We're not quite back to the levels prior to Black October, but we're very close," Wasendorf said.

CME's share price has climbed more than 12% in the last week, closing at $ 329.68 Monday. CME is due to report May volume figures on Tuesday.

Mark Hawkinson, a Chicago floor broker for Newedge USA, said May was his best month since December, with particular strength seen in Eurodollar futures and options.

Hawkinson counts major banks among his customers and said the stress test results brought measured confidence back to Wall Street.

"The banks felt they could take a little more risk," he said.
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