Flash Rally' in Eurodollar-Futures Contract Hints at Unease Over Fed
12 February 2016 - 10:17AM
Dow Jones News
By Katy Burne
A brief surge Thursday morning in the price of a popular
derivative used to bet on central-bank rate moves is the latest
sign of markets reacting in unexpected ways under stress.
A eurodollar-futures contract expiring in December 2019 rose
sharply to 99.735 around 8 a.m. EST from 98.595 around half an hour
earlier, traders said. Such moves are rare over a period of days,
let alone half an hour, they said. By 9 a.m., the contract was back
below its opening level. A higher level implies a lower prospect of
Federal Reserve rate increases by the contract date.
Some attributed the rapid price increase, an event known as a
"flash rally" in Wall Street parlance, to sentiment changes around
two days of testimony in Congress by Federal Reserve Chairwoman
Janet Yellen. In her testimony, she addressed the potential for
negative interest rates as a policy tool. The adoption of negative
rates in Japan and the extension of rates further into negative
territory in Sweden have sent shudders through markets in recent
days.
Thursday's moves also coincided with big price increases in U.S.
Treasurys and gold, as investors flocked to haven assets amid a
fresh selloff in stocks and fears about the health of European
banks. The yield on the 10-year Treasury note dropped to 1.642%
from 1.706% on Wednesday. Gold futures gained 4.5% to $1,247.90 an
ounce, and the dollar fell 1% against the yen to Yen112.22.
Such moves show traders are nervous about the pace of
interest-rate shifts and the response of financial markets to Fed
policy weeks after the central bank lifted rates for the first time
in nearly a decade.
"Expectations for future Fed policy are very much in flux," one
interest-rate trader said.
They also underscore the perceived vulnerability of financial
markets to sudden moves that don't always seem supported by
economic data or other fundamentals, a perception that traders say
can increase investors' impulse during turmoil to sell riskier
assets and buy safer securities.
Recent episodes of apparent U.S. market instability include the
sharp stock selloff of Aug. 24, 2015, which included the halt of
hundreds of exchange-traded funds, along with the October 2014
flash rally in U.S. Treasurys and the May 2010 "flash crash" in the
stock market.
A spokeswoman for CME Group Inc., which administers the
eurodollar contract's trading on its futures exchange, declined to
comment.
Write to Katy Burne at katy.burne@wsj.com
(END) Dow Jones Newswires
February 11, 2016 18:02 ET (23:02 GMT)
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