Financial fragility rising; Clayton “not happy” with CAT delay; VIX action

Mar 20, 2018

Lead Stories

Goldman Sees ‘Financial Fragility’ Rising in Markets
Joanna Ossinger – Bloomberg
Early-February VIX spike might be a symptom of a larger issue; There are reasons to believe ‘liquidity is the new leverage’
Markets are becoming their own worst enemies, according to Goldman Sachs Group Inc.
The stock-market rout in early February that caused a spike in the Cboe Volatility Index is a symptom of growing “financial fragility,” or big swings in prices caused by breakdowns in markets themselves as opposed to changes in fundamentals, an economist at the bank wrote Monday in a note to clients. To make matters worse, Goldman says there’s reason to be concerned about liquidity drying up during periods when markets are distressed.

SEC Urges Exchanges to End Standoff on Trading Data; Consolidated Audit Trail is meant to help regulators spot market manipulation and explain incidents like the ‘flash crash’
Dave Michaels – WSJ (SUBSCRIPTION)
The chairman of the Securities and Exchange Commission on Monday pressed exchanges to end a standoff that has delayed the launch of a massive database meant to track all activity in the stock and options markets.

****SD: In the piece, Clayton says, “We can’t dilly around.” Thanks to Budweiser, I’ll never be able to hear that phrase the same way again. Dagnabbit. And to be fair, if a regulatory endeavor goes off without delays or a single hitch, is it even a regulatory affair at all?

Volatility Gauge Rises Most Since Last Month’s Market Rout
Asjylyn Loder – WSJ
The Cboe Volatility Index rose 20% Monday as Facebook and other technology companies dragged U.S. stocks lower, in its biggest gain since Feb. 8.
The volatility index, called the VIX, surged as much as 38% during the trading day, the biggest intraday gain since Feb. 5, when the gauge more than doubled.

****Bloomberg has Market Fear Gauge Shows Investors on Edge This Week and TheStreet has VIX Index Explodes on Ugly Day for Stock Market

As VIX Surged Again, Traders Bet on Credit Suisse’s Leveraged Note
Cecile Vannucci – Bloomberg
During Monday’s equity rout, investors were not only back to betting on volatility’s return, they were doing so using a leveraged security from the firm at the nexus of last month’s stock selloff.

****SD: What’s old is new again.

The Market Gauge of Tech Fear Keeps Rising
Luke Kawa – Bloomberg
Rougher seas lie ahead for technology stocks, according to trading in the derivatives market.

Exchanges and Clearing

LCH to start clearing vanilla FX options
Julie Aelbrecht – Global Investor Group (SUBSCRIPTION)
The London Stock Exchange Group’s clearing house LCH will start clearing vanilla FX options in eight currency pairs later this year.
According to a regulatory filing seen by FOW, ForexClear will introduce clearing of European-style vanilla FX option in eight currency pairs and associated hedge trades such as FX forwards, swap and spot trades.

Eurex Group – Equity Index Highlights
February was characterized by the sudden return of market volatility. Analysis suggests that fears over inflation and a new Fed policy stance, driven by Jerome Powell, has given markets a reason to adjust expectations. Across the Eurex equity suite, it is the EURO STOXX 50 Index Dividend Futures and Options that have seen significant volume growth. This would be entirely consistent with investors searching for an inflation hedge.

SGX to report 3Q FY2018 results on 20 April
Singapore Exchange (SGX) is reporting its third-quarter (3Q) results for Financial Year 2018 (FY2018) after the market closes on 20 April 2018.

Beyond MiFID II: LSEG focusing on the future
John Brazier – The TRADE
“In terms of trading, 2018 will be a period of adjustment and experimentation,” says LSEG’s global head of equity products, Brian Schwieger, referencing the sweeping changes the markets are adapting to under the new MiFID II rules.

Regulation & Enforcement

FIA refutes Commission’s post-Brexit clearing view
Louisa Chender – Global Investor Group (SUBSCRIPTION)
The Futures Industry Association (FIA) has refuted one of the European Commission’s statements regarding a possible post-Brexit scenario for UK central-counterparties (CCPs).
“We don’t agree with the Commission’s assertion in the notice to stakeholders that one of the consequences of hard Brexit is that UK CCPs will have to apply the non-cleared margin rules for example in Article 11 of the European Markets Infrastructure Regulation (Emir), because we don’t believe it is applicable in that situation,” Simon Puleston Jones, head of Europe at the FIA, told FOW.

****SD: More disagreement with the EC on regs in the wake of the Boca tiff. For more Brexit news, see The Guardian’s – Theresa May under fire over Brexit transition deal

U.K.’s biggest banks face higher capital hurdles in stress test
The U.K.’s largest lenders face tougher capital demands in this year’s stress test, as the Bank of England steps up efforts to avert a repeat of the financial crisis.

ECB’s Brexit Push for Derivatives-Clearing Power Gains Momentum
Alexander Weber – Bloomberg
The European Central Bank’s drive for greater power over the lucrative business of clearing financial contracts is gaining traction in Brussels.
A “strong majority” in the relevant European Parliament committees supports handing the ECB the clearing power it wants, Danuta Huebner, the assembly’s lead lawmaker on the issue, said on Tuesday. That will heat up the Brexit debate on clearing, with the U.K. keen to ensure that London continues to dominate the business.


Machines have replaced human stock market traders, Goldman Sachs says
Akin Oyedele – Business Insider
As the Dow Jones industrial average plummeted more than 1,000 points last month, many human traders blamed their automated counterparts for massive selling.
That’s unlikely to be the last of the finger-pointing or of flash crashes worsened by machines, according to Charles Himmelberg, Goldman Sachs’ cohead of global markets research.
“We suspect the Feb. sell-off is symptomatic of a broader risk, namely, the rising ‘financial fragility’ during the post-crisis period,” Himmelberg said in a note on Monday.


Regret risk and ways to manage it
Tom Goodwin – FTSE Russell
“Non, je ne regrette rien!” (No, I regret nothing!), the great French chanteuse, Edith Piaf, famously sang. It was the defiant declaration of a woman who had lived through many triumphs and tragedies but never second-guessed herself. She probably didn’t do much investing, however, because investors often second-guess their choices regarding the security or fund they could have invested in but didn’t before it soared in value, or the one they did invest in that dropped like a stone. In other words, they often have regrets.

How to sense market ‘buzz’ on the virtual trading floor
Raj Persaud and Adrian Furnham – City A.M.
Throughout history, people have traded, but they have done so face-to-face, in physical encounters, until quite recently, with the emergence of technology and the internet.
This meant that psychology was also in play, as dealers analysed the mental state of others, when trying to figure out trading strategy.

****SD: Old news to folks like Joe Gits of Social Market Analytics.

Trump Tariffs, GDP, and Market Direction
Sage Anderson – tastytrade blog
For the majority of February, equity markets shook off a prolonged period of depressed volatility, and made wide swings in either direction.
Due to this market action, the VIX finally popped above its historical average of 19, and even got into the high 30s.

Has The Market Already Peaked For 2018?
Doug Kass – Real Investment Advice
In my Bloomberg “Market Surveillance” interview on Thursday with Tom Keene and Jon Ferro I suggested that there is an increased probability that the S&P Index has peaked for the year.
Here are my Top 10 Reasons why the markets may have already peaked in 2018

Key VIX Levels In Play Ahead of the Fed
Todd Salamone – Schaeffer’s Investment Research
CoT large speculators are near their largest net long position ever on VIX futures

Volatility is not always a useful gauge of risk
Heightened volatility has a lot in common with the recent snowstorms in Europe. We know to expect them from time to time, we have a reasonable idea of what drives them, yet they still come unexpectedly and with a force that gets people talking.


Explaining Trades Is More Profitable Than Doing Them
Matt Levine – Bloomberg
I have found the best trade. Back in 2016, Bank of America Corp. paid $415 million to settle with the Securities and Exchange Commission over charges that its Merrill Lynch unit “misused customer cash to generate profits for the firm.” Merrill did derivatives trades, called “leveraged conversions,” that had no real economic substance but that did impact its calculation of “customer cash”: The leveraged conversions made it look like customers owed Merrill money, even though there were no real loans or credit risk, and those notional customer debts reduced the amount of cash that Merrill needed to keep untouched for regulatory reasons. So the trades freed up customer cash for Merrill to use, without having any other economic effect. (Also everything worked out fine and the customers were never harmed by this abuse of their cash.)

Dropbox IPO oversubscribed: sources
Cloud storage company Dropbox Inc’s initial public offering was oversubscribed, two people familiar with the matter said on Monday, indicating healthy demand for the first big tech IPO this year even as tech stocks opened the week on sour note.

****SD: Will this tech IPO actually work? Blue Apron IPO’d at $10, now around $2. Snapchat IPO’d at $17, started trading at $24, and now is around $16.5. Dropbox is looking at a similar price range per share – $16 to $18 according to this Reuters story.

Saudi Aramco expected to list first on Saudi stock exchange, delaying international debut
Tom DiChristopher – CNBC via Yahoo
Saudi Arabia is walking back plans for a massive public share offering for state oil giant Aramco, the world’s biggest oil company, on a big international stock exchange.

Metals trade proves more attractive than oil in trend reversal
Neil Hume and David Sheppard yesterday – Financial Times
For the first time in years, buying and selling metals is proving more attractive for the world’s top commodity traders than shifting barrels of oil — a dramatic reversal of the trend for much of this decade.
Strong global growth and supply constraints following years of under-investment by cash-strapped mining companies have created lucrative arbitrage opportunities for big metal traders as consumers have rushed to lock in supplies of aluminium, copper, zinc and other materials.

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