Stock Turmoil Sparks Hunt for Cheap Hedges; Fragile U.S. Rates Market Braces for Volatility

Aug 15, 2019

Lead Stories

Stock Turmoil Sparks a Wall Street Hunt for Cheap Hedges
Joanna Ossinger – Bloomberg (SUBSCRIPTION)
BofA recommends ‘put fly’ trade; MRA touts bearish ETF options; Pockets of value remain despite high level of S&P 500 skew
The bad news for investors who waited this long to buy equity hedges is they’ve become eye-wateringly expensive. The good news is Wall Street thinks there are a few cheap strategies left.

Fragile U.S. Rates Market Braces for Volatility From Everywhere
Vivien Lou Chen – Bloomberg (SUBSCRIPTION)
Inversion in swaps reflects expectations for near-term turmoil; Obscure event may be trigger for next crisis: Academy’s Capelo
The fragility of the U.S. bond market was fully exposed Tuesday as U.S. President Donald Trump’s tariff delay pushed rates higher and a ramp-up of tensions in Hong Kong helped pull them back. The widely followed spread on the 2-year and 10-year Treasury yields went back to teetering on the edge of inversion, and a second indicator within swaps continued to flash a dire warning.

SA-CCR switch cuts leverage of two Japanese banks
Louie Woodall and Abdool Fawzee Bhollah – (SUBSCRIPTION)
Japanese banks Norinchukin and Nomura switched to a new system for calculating their counterparty risks, which cut trillions of yen from their leverage exposures. The effects on risk-based capital, however, were different for each. The two banks adopted the Basel Committee-mandated standardised approach for measuring counterparty credit risk (SA-CCR) in Q1.

****SD: We just had a blog post in yesterday’s newsletter from Cboe about the shortcomings of the Current Exposure Methodology (CEM).

Traders See Price Errors at Close in Apple, Google, Others
Nick Baker, Elena Popina and Rachel Evans – Bloomberg (SUBSCRIPTION)
Apple Inc., Google-parent Alphabet Inc. and other major stocks had a bizarre last few minutes of trading Tuesday, as data glitches hampered U.S. markets for a second day.

Inaccurate earnings guidance is on the rise
Mushir Shaikh and Rachel Stone – S&P Global Market Intelligence
Earnings guidance has become a key indicator for investors and analysts, but the forecasts S&P 500 companies present to the market are getting less and less accurate. An S&P Global Market Intelligence analysis found that 16.75% of the index’s member companies that issued quarterly EPS guidance in 2018 went on to report results within their guided range. The percentage of companies with results within their guided range has declined on an annual basis every year since at least 2014.

****SD: This ties in nicely with yesterday’s ORATS Blog about straddle sellers this earnings season.

The Death of Trading: Why More Big Banks Think the Business Is a Losing Bet
Rey Mashayekhi – Fortune
The news last month that Deutsche Bank was axing its global equities trading operationsóand cutting roughly one-fifth of its total workforce in the processóshook the banking world to its core.

Why Don’t Call and Put Implied Volatilities Match?
There are many situations where call and put implieds do not match up. Usually this has to do with a poor assumption in the inputs to the options pricing model, like which dividends or interest rates to use.

Exchanges and Clearing

Fixed Income Highlights – August 2019
Fixed income markets saw European government bonds continue to rally in July as Central Banks increasingly evaluated dovish monetary policy to combat a weakening growth outlook and low inflation. The increased volatility during the usually quiet holiday period saw Eurex fixed income futures and options volumes 30 percent higher than July 2018.

****SD: Options on euro-bund futures volumes were up 46.1 percent YoY.

Expect more exchange data deals – analysts
Andrew Neil – Global Investor Group (SUBSCRIPTION)
Stock pickers at Deutsche Bank expect to see more data deals in the exchange space following LSE’s agreement to buy Refinitiv

NSE’s clearing corporation to start interoperability in currency derivatives from August 19
In November 2018, Sebi laid down broad guidelines for operationalising the interoperable framework among clearing corporations which were required to be adhered to by June 1, 2019.


5 Signs the Stock Market is Terrified
Andrea Kramer – Schaeffer’s Investment Research
It’s been a rocky month so far for the U.S. stock market. After hitting an all-time high above 3,000 in late July, the S&P 500 Index (SPX) plummeted to a two-month low in early August, amid concerns about the U.S.-China trade war, future Fed policy, and a global recession. Against this backdrop, several sentiment indicators are lighting up — and here’s what that could mean for stocks, if past is prologue.

Israel seeks new brokerages to expand retail trading base
Israel’s securities regulator and the Tel Aviv Stock Exchange (TASE) on Wednesday called on investment houses and financial technology firms to offer retail brokerage services to expand investors’ trading options and cut the cost of services.

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