Petrobras’ $320 Brent oil output hedge; Investors bet on European stock market volatility

Mar 22, 2019

Lead Stories

Brazil’s Petrobras to spend $320 million to hedge Brent oil output
Brazil’s state-owned oil company Petroleo Brasileiro SA said on Friday it was spending $320 million on put options hedging part of its Brent output at $60 per barrel, in a move to lock in some of this year’s price gains. “The strategy is to hedge the export operations expected for the year, that way partially protecting the company’s operational cash flow,” the company said in a securities filing. The options expire by the end of the year.

****SD: Last week Bloomberg reported on an uptick in oil options trading in Trading Surge in Oil Options Creates a Whirl of Speculation. Brent $60 puts surged in volume and speculation was that it was likely Petrobras. Looks like we have our confirmation.

As worries about populism in Europe rise, investors bet on stock market volatility
Josephine Mason – Reuters
Investors are betting on heightened political uncertainty and greater volatility in European stock markets ahead of European Parliament elections in May amid growing concerns about rising populism.
In one of the first concrete signs in financial markets that investors are bracing for political instability, VSTOXX futures, which reflect investor sentiment and economic uncertainty, have jumped in recent weeks.

****SD: Reuters with an update – European shares dive after grim flash PMI surveys.

The Yield Enhancement Strategy Hits Wealthy Investors Hard
Jake Zamansky – Seeking Alpha
Financial advisors pitched the so-called “UBS Yield Enhancement Strategy” – or YES strategy – to their mostly ultra-high net worth customers. They sold it as a supposedly safe and efficient mechanism to enhance yield from generally conservative portfolios. Wealthy investors were told that the YES strategy was a neutral or low-risk “Iron Condor” options trading strategy. Here is what we have found from reviewing dozens of investor portfolios and consulting with several options experts.

Trump Tariffs Vex Investors. Volatility Is the Proof.
Matthew A. Winkler – Bloomberg (SUBSCRIPTION)
Anyone perceiving the market turbulence of the past six months as a mere pothole on the road to the longest expansion in U.S. history should think again. The $6.7 trillion, 21 percent decline of the Russell 3000 from the high in September, and the $5.1 trillion rebound from the December low, are unprecedented and greater than the gross domestic product of Japan or the total U.S. trade with the world last year.

The Bond Market’s Blind Faith in a Do-Nothing Fed
James Mackintosh – WSJ (SUBSCRIPTION)
Just three months after an embarrassing policy reversal by the Federal Reserve, investors are now sure they understand both what the central bank has planned and what will happen to inflation and the economy. In short: Nothing much.

****SD: More on activity in the bond market in Bloomberg’s Simplest Fund Strategy Riding Stock-Bond Rally Is Under Threat, Reuters’ Skittish investors pull more than $20 billion from stocks, rush into bonds: BAML and Bloomberg’s U.S. Treasury Yield Curve Inverts for First Time Since 2007. If that still hasn’t sated your appetite, BloombergOpinion has Fed’s Pivot Marks a Major Break.

Exchanges and Clearing

Her Story: Arianne Criqui
Cboe Blog
Arianne Criqui, SVP, Head of Options and Global Client Services at Cboe, wanted a career that would harness the competitive spirit she developed on the swim team at Penn State. “I needed to do something with all that energy,” she says, and that led her to finance.

Challenges to Japan’s first all-in-one bourse
Reiko Sakurai – NHK World – Japan
The Japan Exchange Group (JPX) and the Tokyo Commodity Exchange (TOCOM) are working to reach a basic agreement by the end of March to merge and create the country’s first all-in-one bourse. JPX owns the Tokyo Stock Exchange and Osaka Exchange. The idea is to transform the Osaka Exchange into an integrated bourse that handles both stocks and commodity futures, such as metal and grain. The goal is to catch up with overseas rivals, but challenges will remain even after the deal is struck.

Dalian Commodity Exchange Strengthens Financial Supply-side Reform By Increasing Product Supply In 2019
… DCE should increase product supply and optimize product system. The derivatives market’s scope of serving the real economy and its basis and capacity of supporting the real economy lie in the supply of products and instruments. In 2019, DCE will accelerate the listing of polished round-grained rice, styrene and gas coal futures, speed up the progress of listing hog, shipping and dry red pepper futures, and develop scrap steel and other products. While cultivating the soybean meal and corn futures options, it will facilitate the listing of iron ore, corn starch, soybean oil, PP and RBD palm olein options and carry out the after-hours trading of energy and chemical products. It will boost the listing of swap spread, basis contract and other structural futures and options. More efficient and better financial service will be provided for the development of the real economy through the product supply.

Regulation & Enforcement

Short-Selling Ban on Fintech Giant Agitates Investors
An unusual ban on bets against the shares in one of Europe’s most valuable financial-technology companies is due to be lifted in April, reopening a battle between investors and regulators over when curbing short sellers is appropriate.

Getting the Inside Scoop on Outsider Trading
Stephen Anikewich, GRC Consultant – TABB Forum
I use the term “outsider trading” not in the context of its traditional use but, rather, in the context of trading where the stimuli for such trading is found in material, non-public information that relates not directly to the company of the financial instruments traded/positioned but instead to another company, whether public or private. Case in point: The recent news that a private pharma company was exploring bankruptcy as protection against the many opioid-related lawsuits it faces would have allowed anyone with advanced news of that information to hit a home run by shorting other public opioid pharmas or to unwind, or put on a delta-neutral hedge, against their long exposures.

Physical settlement may squeeze short-sellers
Economic Times
Short-selling — a strategy of punting on a stock’s fall — is risky and complicated. When experienced short-sellers go about their business, patiently waiting for the bets to play out, they are aware of the staying power required to bet against the majority. In India, their job is set to get only trickier starting October when all of 197 stock futures and options contracts will be physically settled on the expiry day. This means short-sellers in stock derivatives will have to bring in the shares for settlement if they allow the contracts to expire on the last Thursday of every month. The system may make it riskier or unviable for them unless the languishing Stock Lending and Borrowing mechanism picks up in a big way.

Sebi fines 4 entities Rs 27 lakh for fraudulent trading in BSE stock options
Markets regulator Sebi Friday imposed a total penalty of Rs 27 lakh on four entities for indulging in fraudulent trade in illiquid stock options segment of BSE.

****SD: I like the phrase “indulging in fraudulent trade.”


Here’s how the Mueller report could roil the stock market
Chris Matthews – MarketWatch
Investors have largely ignored the political drama that has accompanied the first two years of the Trump administration, but equity strategists and analysts say markets may soon have to deal with its ramifications, as Special Counsel Robert Mueller reportedly nears the end of his investigation into possible ties between the Trump campaign and Russia’s meddling in the 2016 election.
President Trump added to speculation over Mueller’s yet-to-be-submitted final report on the inquiry, when he endorsed the public release of the document on Wednesday.


March Madness Shows Just How Little We Understand Probabilities
RCM Alternatives
March madness is baaaaacccckkk. And so is FiveThirtyEight and others like them running boatloads of statistical analysis to arrive at probabilities for each team advancing through each round.

The Dilemma Facing a $358 Billion Investing Giant
You can learn a valuable lesson from the nation’s largest public-pension plan: Be careful how high you set your expectations. You might have to try to meet them.

****SD: American pensions need to smarten up like our neighbors to the north when it comes to options. Bloomberg has How Fast Can CalPERS’s $360 Billion Grow?

Inflation Alive and Well and Living in S&P 500 Income Statements
Sarah Ponczek – Bloomberg (SUBSCRIPTION)
The Federal Reserve may not see much inflation, but the stock market sure can, and its whereabouts helps explain why enthusiasm for equities continues to build.
To find it you must drill into the earnings statements of American companies — beyond sales and earnings and down to the lines that track profitability and pricing power. It’s in the row labeled gross margin, which the terminal defines as the percentage of revenue a company keeps after the costs of producing the goods and services they sell.

NYSE wins Uber, Pinterest listings: sources
Liana B. Baker, Joshua Franklin – Reuters
Uber Technologies Inc and Pinterest, two of the highest profile internet companies planning to go public this year, have picked the New York Stock Exchange as the venue for their stock listings, according to sources familiar with the matter.

****SD: I didn’t even realize Pinterest was going public…

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Seeing red: tricky times in the markets

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