Good morning,
Protection.
A major part of investing. Many a time have I said to our sales guys, "I'll protect at .50". With such large positions/expose to equities, and sentiment swinging like a Cathay pilot living in Discovery Bay, fund managers like to be able to use options to "protect" for both the downside and upside.
And this is the problem. With protection, such as options, trading cheap, additional risk can be cover quickly at relatively low rates. The current environment, however, is miss priced and wrongly represented.
Many market commentators use the VIX as a bench mark for volatility. Now, despite being a major gauge, I have searched high and low for options that trades close to the VIX. For example, the VIX is currently priced at 15, however, ICBC, currently valued at 218b US$, and trades over 140m US$ a day, has its options priced with implied vol at 24.
It gets worse, look at companies like China Mobile, one of the worlds largest mobile telco providers, currently with implied vol of 32, and Yanzhou coal's implied vol at 43, it certainly put me off from buying derivatives to 1. get exposure and 2. hedge my current existing long futures position.
Despite being a complete loner, in this case I'm not alone. Speaking to a number of funds that have used warrants and options in the past, they too share my predicament. The problem is, cash currently trades at a premium. Tight credit markets dont just hit 35yr old, middle income Mr Jones looking for a $400k mortgage, it also hits every single aspect of everyday life, including derivatives.
"Then if its too rich Stoddart, sell it" I was told by a good friend last night (after a few glasses of the demon, Rum). "No" I retorted. With credit markets looking tight for the near future, implied vol could quite easily rally another 20-30% from here, making not just outright directional views pointless and hedging like having to buy a condom for $500. Any value you have in the options, will be hit by an adjustment of the implied vol.
This is impacting volumes globally. Last night saw European and US volumes down 30% vs daily averages. Given the strong run this week in equities, I was expecting some degree of pull back, but markets continue to remain strong.
Big bond auction today in Spain..."Show me the moneyyyyy"
FTSE +0.1% v.low volume; O/P: tech, utilities U/P: telco, basic materials
CAC +0.4% v.low volume; O/P: telco, utilities U/P: health, basic mateials
DAX +0.2% v.low volume; O/P: tech, telco U/P: industrials, cons.services
IBEX +0.3% v.low volume; O/P: oil & gas, financial U/P: health, cons.services
Despite a strong performance from European equity markets, volumes were shockingly low. Equity indices opened and the lows, trending firmer throughout the session, and closing at day highs. We also saw the Euro rally against the US$, now trading at 1.2858 but this run done nothing to support crude oil, which saw the WTI trade $2 easier at $87. Sentiment clearly looking for strong CF/NI, highlighting limited interest in near/medium term growth.
US markets traded relatively flat over the session last night, which given its thanks giving today, is not surprising. Interest is clearly focused on "how to make the best gravy" and what the spread is going to be on the Skin's vs Cowboy's. Happy thanks giving.
S&P +0.2% v.low volume; O/P: oil & gas, telco U/P: utilities, health
Despite crude easing, oil and gas was the top performing sector...finally. Rotation into laggers will increase into year end as shorts are covered and fund managers move to a more neutral based portfolio. My optimism remains high for GDP to pick up the pace in 3Q 2013, not 2015 as quoted by one of the Tier 1's (based in Switzerland, and gave a 50b US$ book to a 25yr son of a diplomat), which means oil & gas is the sector you want to be long. Its priced in US$ and demand is directly correlated to growth.
Financial's remain toppy here.
Markets.Expect equity markets to open relatively strong today. China retested the 2000 level again and guess what? it then rallied sharply from there. More and more investors are coming to the thinking that the JPY rally is now in a reversal, which is great for exporters, but they need it back at 100y before they start ordering the 1982 petrus.
Expect a strong run in recent laggards. Shipping, commodities and oil should all see increased volume. Exporters should also remain hot. Selling should occur in banks and China property, which have been huge outperformers over the last 3 months.
Spain auction today, bond have been firming recently, now at 5.68, but with talks of a Greek fail, we could see some negativity once again. However, the French finance minister played this down...ish.
Data. 09:45 China HSBC flash manufacturing
16:00 PMI manufacturing/services
16:30 German PMI/services
16:30 HK CPI
17:00 EU PMI
19:00 UK CBI
23:00 EU consumer confidence
Events.15:00 German finance ministry monthly report
17:00 Italy possible pass of budget law
EU's Barnier visits Barcelona, EU Xstrata ruling
Bonds.11:00 Thailand 3yr auction
17:30 Spain 3,5,9 year auction
Earnings.Daily mail(UK), SABMiller(UK), Sparkle roll(HK), Ascendas Hos Trust(SP), Lafarge Malayan(MK), Genting Malaysia(MK)
Stoddart
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