VIX, “euro VIX” and Risk before the EU Summit
With markets having put in a nice rally going into the Euro summit, there could be nice opportunities playing the outcome via volatility. Both the VIX and the “euro VIX” EVZ, could be possibly good hedges. If you agree even the slightest with Soros, the market could move nicely after the summit. Some thoughts by Vix and more.
It is not that difficult to come up with data and charts that have many investors wondering if risk and uncertainty are being underpriced in advance of the euro zone summit. Earlier today, I offered up one possible example in Euro Volatility and Risk. Since the VIX receives top billing in this space (and not too long ago carried the mostly tongue-in-cheek moniker, “Your One-Stop VIX-Centric View of the World…”), I thought a VIX-specific example might also be of interest.
The chart below shows the last three months of VIX data, with VIX candlesticks on the main chart on the top. The second chart from the top compares the 20-day historical volatility of the VIX (blue line) with the 30-day implied volatility of the VIX (red line), with the yellow area chart just below it calculating the HV minus IV. Much to my surprise the current 20-day HV is 144, while the current IV is only 98. In other words, the markets expect the VIX to be considerably less volatile in the month ahead than it has been over the course of the last month. I am not surprised to see the gap, but do the markets have the direction of the gap right? In terms of trading opportunities, if you disagree with the market consensus, then VIX straddles probably look fairly cheap right now.
News That Matters
Ft.com
A top European Central Bank policy maker has publicly backed the rapid use of the eurozone’s bailout fund to buy distressed sovereign bonds on the open market, saying such action could ease the “very severe strain” being felt by Spain and Italy. Speaking to the Financial Times, Benoît Cœuré, the ECB executive board member who oversees financial market operations, also said a cut in interest rates was likely to be discussed at next month’s ECB rate-setting meeting, to help boost confidence. But he stressed that political agreement on fiscal integration was needed to tackle the eurozone’s underlying problems. http://www.ft.com/intl/cms/s/0/2007154e-baf0-11e1-b445-00144feabdc0.html#axzz1yOqI48tC
The Federal Reserve has extended “Operation Twist” – a plan to sell short-term bonds while purchasing longer-term securities – to support a slowing US economic recovery, but refrained from a more aggressive plan to ease monetary policy. At the end of a two-day meeting, the Federal Open Market Committee, which sets interest rates, offered a bleaker picture on Wednesday of the US economy than it had at its last gathering two months ago. It noted that employment growth had slowed and consumer spending was rising at a weaker pace. The Fed warned that global financial strains continued to pose “significant downside risks” to the economic outlook. Officials cut forecasts for US growth this year to a range of 1.9 to 2.4 per cent, from between 2.4 and 2.9 per cent in their previous projection in April.http://www.ft.com/intl/cms/s/0/5a7bbe52-baee-11e1-b445-00144feabdc0.html#axzz1yOqI6tZF
The government’s new “funding for lending” programme, designed to boost credit for British business, will cut banks’ costs to as little as 1.2 per cent, according to people briefed on the scheme. The supply of such cheap money to the banks is supposed to encourage them to lend to companies and stimulate the sluggish economy. Under current plans, which are still being revised the rate at which banks could borrow government money would start at the baseline Libor rate plus 125 basis points and fall to a minimum possible surcharge of just 25 basis points, according to one senior banker.http://www.ft.com/intl/cms/s/0/c8e3c988-bab8-11e1-83e0-00144feabdc0.html#axzz1yOqI6tZF
News That Matters
Ft.com
Eurozone members of the Group of 20 leading economies have committed to driving down borrowing costs across the single currency area, according to the communiqué from the summit in Mexico. On the day that Spain was forced to pay more than 5 per cent to borrow money for one year, the need for action to stem the spiral of rising government bond yields was accepted on Tuesday by Germany, France and Italy, the G20’s three eurozone members. http://www.ft.com/intl/cms/s/0/44c211c0-ba34-11e1-84dc-00144feabdc0.html#axzz1yIzGTwQi
Leading hedge fund managers are betting on a significant sell-off in German government bonds in the coming months after a sharp fall in yields on the debt paper driven by a flight to safety in the eurozone. More than 50 per cent of managers polled at an industry conference in Monaco on Tuesday said they expect Bund yields to double within a year. http://www.ft.com/intl/cms/s/0/fcde12c6-ba35-11e1-aa8d-00144feabdc0.html#axzz1yIzGTwQi
Faltering global growth has pushed UK inflation to its lowest since 2009, raising expectations that the Bank of England will restart quantitative easing to stimulate the economy. Falling commodity prices helped to lower the UK’s annual consumer prices index inflation rate from 3 per cent in April to 2.8 per cent in May as food price inflation slowed and fuel prices dropped.http://www.ft.com/intl/cms/s/0/6d0d7e3a-b9ee-11e1-aa8d-00144feabdc0.html#axzz1yIzGTwQi
Blink and you’ll miss it. As this month’s brief rallies in the wake of Spain’s bank bailout news and Sunday’s Greek elections show, wait too long to tap public bond markets and you might miss your opportunity altogether. Six months after the European Central Bank first offered hundreds of banks across the eurozone access to cheap loans, and with the Europe’s debt crisis far from resolved, bank funding markets are dysfunctional. According to Dealogic, European banks have issued just $40bn of senior unsecured debt since the start of April, well below the same period in previous years. Covered bond issuance for the quarter so far stands at just $27bn. http://www.ft.com/intl/cms/s/0/30221076-b921-11e1-9bfd-00144feabdc0.html?ftcamp=published_links%2Frss%2Fmarkets%2Ffeed%2F%2Fproduct#axzz1yIzGTwQi
News That Matters
Ft.com
An important gauge of China’s manufacturing sector has weakened sharply, adding to the pressure on the government to take more decisive action to support the flagging economy. The official purchasing managers’ index for manufacturing fell to 50.4 in May, its lowest in five months, from 53.3 in April. Although it was the Chinese PMI’s sixth straight month above the 50 level, which signals an expansion of activity, the fall in the index highlighted a clear softening of growth momentum. High quality global journalism requires investment. As the first item of official economic data for May, the PMI offers a timely glimpse into how the Chinese economy performed over the past month. Many analysts and officials had believed that China was on track for a “soft landing” until a raft of poor data in April led to a flurry of growth forecast downgrades. http://www.ft.com/intl/cms/s/0/d2f17014-ab87-11e1-b675-00144feabdc0.html#axzz1wQ4tZnA1
The dramatic drop in Indian economic growth isn’t bothering the likes of Mahendra Saraf. A farmer, he works in a sector that has seen growth shrink to 1.7 per cent in the first three months of 2012 against 7.5 per cent in the same period last year. But Mr Saraf, 26, is confident the blow to his profits will be cushioned by government agricultural subsidies. “Global and domestic demand was not been very strong,” he says, “but the government buys excess grain at a fixed price, so we will get that money anyway.” High quality global journalism requires investment. Such safety blankets – the size of which vary from state to state and industry to industry – are among the targets of those who say the government of Manmohan Singh needs to take radical measures to restore growth in the Indian economy. With growth in the first quarter of 2012 rising at 5.3 per cent, the slowest rate in nine years, policy makers are panicking about how to turn things around. “It’s an absolute disaster,” says Omkar Goswami, head of the Corporate and Economic Research Group in New Delhi. “We went from nearly growing at 10 per cent to 5 per cent in less than two years . . . it’s very, very concerning.”http://www.ft.com/intl/cms/s/0/d9928116-ab13-11e1-b875-00144feabdc0.html#axzz1wQ4tZnA1
Madrid was dealt a double blow on Thursday after it emerged that almost €100bn in capital had left the country in the first three months of the year and the head of the European Central Bank lambasted its handling of Bankia, the troubled Spanish lender. Data published by Spain’s central bank showed €97bn had been pulled out in the first quarter – around a 10th of the country’s GDP – as concerns mounted over Madrid’s ability to contain its twin economic and financial crises, which have forced government borrowing costs to euro-era highs. http://www.ft.com/intl/cms/s/0/25c39204-ab01-11e1-b875-00144feabdc0.html#axzz1wQ4tZnA1
and much more below…
News That Matters
Ft.com
Two of the best-known business dynasties in Europe and the US will come together after Lord Jacob Rothschild’s listed investment trust and Rockefeller Financial Services agreed to form a strategic partnership. RIT Capital Partners is to buy a 37 per cent stake in the Rockefeller’s wealth advisory and asset management group for an undisclosed sum, giving Lord Rothschild’s London-listed trust a much sought-after foothold in the US. The transatlantic union brings together David Rockefeller, 96, and Lord Rothschild, 76 – two family patriarchs whose personal relationship spans five decades. http://www.ft.com/intl/cms/s/0/efe93494-a9a3-11e1-a6a7-00144feabdc0.html#axzz1w8XyzKzt
A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said. News of the rejection came as Spain faces elevated borrowing costs in the bond markets, tries to persuade investors it can contain problems in a banking sector weighed down by €180bn of bad property loans and, on Tuesday, saw its central bank governor stand down early. Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB’s three-month refinancing window, avoiding the need to raise the money on bond markets. http://www.ft.com/intl/cms/s/0/7730ca10-a9b4-11e1-9772-00144feabdc0.html#axzz1w8XyzKzt
The decline in Facebook’s market value since its initial public offering earlier this month increased to 24 per cent as the social network’s shares dropped a further 9.6 per cent on Tuesday to a new low of $28.84. Facebook’s stock options, which traded for the first time on Tuesday, indicated that the stock’s volatility is expected to continue. The stock options were already among the most heavily traded in the US market, demonstrating the frenzy around the eight-year-old company and its May 18 IPO. http://www.ft.com/intl/cms/s/0/6769765c-a9a2-11e1-a6a7-00144feabdc0.html#axzz1w8XyzKzt
The Reality of the Situation
John Hussman is still bearish. With the massive expansion of central bank’s balance sheets, this could get nasty going forward. Thanks god they don’t need to use those mark to market models at the Fed…
For nearly two years, the massive interventions of central banks have repeatedly pulled a fundamentally weak and debt-burdened global economy from the brink of resumed recession. The Federal Reserve’s balance sheet is now leveraged 52-to-1, with assets having an average duration of over 5 years, suggesting that if those assets were marked-to-market, an interest rate increase of less than 50 basis points would wipe out the Fed’s entire capital base. Of course, the Fed takes no marks on its assets when it reports its balance sheet, though it does occasionally take down the value of the securities in the Maiden Lane shell companies that it illegally set up to bail out Bear Stearns and other entities (in violation of Section 13(3) of the Federal Reserve Act, which Congress had to amend and spell out like a See-Spot-Run book as a result).
At a 10-year Treasury yield of 1.7%, interest on reserves of 0.25%, and a monetary base now at about 18 cents per dollar of nominal GDP (see Run, Don’t Walk), further purchases of long-term Treasury securities by the Fed would produce net losses for the Fed in any scenario where yields rise more than about 20 basis points a year, or the Fed ever has to unwind any portion of its already massive positions. So further QE by the Fed would effectively amount to fiscal policy. Moreover, the benefits of central bank interventions are becoming progressively smaller and short-lived (nearly log-periodic in fact, to borrow a term from crash dynamics). None of this restricts the Fed from embarking on further interventions. It just emphasizes how far the Fed has already descended into the deep.
To the extent that our measures of market action improve on some possible future intervention, and until the point where the market reestablishes an overvalued, overbought, overbullish profile, we might have some latitude to take some speculative exposure in the event of another round of QE. But without substantially greater improvement in valuations here, there would be noinvestment basis for that exposure, so our latitude wouldn’t be very broad (we estimate the prospective 10-year total nominal return for the S&P 500 to be back down to about 5% on the basis of our standard methodology).
News That Matters
Ft.com
Russian billionaire Mikhail Fridman has resigned as chief executive of BP’s Russian joint venture TNK-BP, plunging relations between the UK oil group and its local partners into fresh turmoil. A person close to Alfa-Access-Renova (AAR), the consortium of Russian shareholders that owns 50 per cent of the company, said Mr Fridman quit due to a “breakdown in governance at TNK-BP”. “The Russian shareholders have lost faith in BP as a partner,” the person close to AAR said. “This partnership appears to have run its course and we are most likely heading towards some kind of disengagement.” http://www.ft.com/intl/cms/s/0/f334b2e4-a8aa-11e1-a747-00144feabdc0.html#axzz1w8XyzKzt
Spain’s prime minister has insisted his country will not need an international rescue for its banks as investors recoiled at a €19bn rescue of Bankia, sending the country’s borrowing costs over Germany’s to the highest level since the start of the euro. Bankia, Spain’s second-biggest bank by local deposits, would have collapsed if Madrid had not agreed to the rescue last week, Mariano Rajoy warned, adding that this would have risked bringing down Spain itself. http://www.ft.com/intl/cms/s/0/27f29710-a8a3-11e1-a747-00144feabdc0.html#axzz1w8XyzKzt
Steep declines in the euro symbolise the woes of Europe’s monetary union but could have a silver lining: the boost to exporters may offer some much-needed support to economic growth across the 17-country region. Last year, even as the euro crisis escalated, the currency’s value remained remarkably steady. In recent weeks, however, financial market sentiment towards the euro has turned decisively for the worse. http://www.ft.com/intl/cms/s/0/269aa5b8-a7dd-11e1-b8a9-00144feabdc0.html#axzz1w8XyzKzt
News That Matters
Ft.com
The technocratic government of Mario Monti has made significant progress towards overhauling Italy’s economy since it came to office last year, but has not done enough to combat tax evasion and the country’s sizeable black economy, an EU finding to be released this week has determined. The European Commission report, which is still in draft form and was obtained by the Financial Times before its publication on Wednesday, carries significant weight under new EU rules that give Brussels the right to fine and sanction eurozone countries that do not follow its recommendations.http://www.ft.com/intl/cms/s/0/960e4250-a7f2-11e1-b8a9-00144feabdc0.html#axzz1w8XyzKzt
In a country where wealth matters more than most – if only because of its extreme shortage – being a teacher once meant making a decent living. However, as salaries for corporates ector jobs have soared and those for professors have stagnated, the respect afforded to academics – and the subsequent desire of students to become them – seems to have done the same. A government panel said recently that India’s shortage of faculty staff could be “significantly higher” than the 40 per cent widely estimated. While the prestigious Indian Institutes of Management and Indian Institutes of Technology – which cater to less than 40,000 of India’s roughly 16m college students – are largely immune to the overall shortage, even they have come under fire for lacking top-quality professors.http://www.ft.com/intl/cms/s/2/6e5725ee-7cd0-11e1-9d8f-00144feab49a.html#axzz1w8XyzKzt
Newedge, a leading broker, is abandoning the Greek stock market in a sign of mounting concern over the country’s future in the eurozone. The broker has told clients that it will process only sell orders, and stop extending margin loans for existing positions in Greek securities, according to a memo obtained by the Financial Times. A list of securities subject to the new restrictions include foreign-listed shares and American depositary receipts for Greek companies including Alpha Bank, Coca-Cola Hellenic Bottling and Paragon Shipping, a New York-listed shipowner that is headquartered in Greece. http://www.ft.com/intl/cms/s/0/a2123114-a690-11e1-aef2-00144feabdc0.html#axzz1w8XyzKzt
News That Matters
Ft.com
Some of Europe’s biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the eurozone and single currency turmoil. The euro’s sudden fallthis month caught many investors by surprise. Europe’s single currency has lost 5 per cent in the past three weeks after barely moving against the US dollar for much of the year. On Thursday, the euro hit a fresh 22-month low at $1.2514. http://www.ft.com/intl/cms/s/0/92f5c37a-a5a1-11e1-a77b-00144feabdc0.html#axzz1vr0JKlSp
Europe’s political leaders need to make a “brave leap” towards greater fiscal union to address the eurozone’s deepening debt crisis, the head of the European Central Bank urged on Thursday. Mario Draghi said his institution may have bought the eurozone time through its massive injection of cash into Europe’s banking system and sovereign bond markets but now it needed to embrace much closer integration. http://www.ft.com/intl/cms/s/0/281e032c-a5b6-11e1-b77a-00144feabdc0.html#axzz1vr0JKlSp
Wholesale brokerages including Knight Capital and Citadel suffered trading losses that could top $100m as a result of computer glitches in Nasdaq OMX’s software on the morning of Facebook’s trading debut last Friday. Problems with the exchange’s trading software meant the brokers were unable to calculate their precise shareholdings in the social network through more than two hours of share trading, people close to the firms said. http://www.ft.com/intl/cms/s/0/68cc8164-a5c5-11e1-a3b4-00144feabdc0.html#axzz1vr0JKlSp
All news below.
News That Matters
Ft.com
European leaders are drawing up a series of crisis-fighting proposals to raise at an informal EU summit this week that have in the past been rejected by Germany putting further pressure on Chancellor Angela Merkel. The proposals, which could include empowering the eurozone’s €500bn rescue fund to directly recapitalise faltering European banks and commonly backed eurozone bonds, have been backed by some leaders in the past but forced off the agenda by the German chancellor’s objections. http://www.ft.com/intl/cms/s/0/0cc191dc-a293-11e1-a605-00144feabdc0.html#axzz1vTdMAajU
Hedge funds and private equity firms have amassed almost €60bn to buy loans from stricken European banks in coming years as many of the continent’s lenders seek to shrink their way to health, according to a PwC survey. PwC, which is advising many banks on asset sales, estimates European banks have almost €2.5tn of “non-core” assets they could sell. http://www.ft.com/intl/cms/s/0/10e07114-a105-11e1-aac1-00144feabdc0.html#axzz1vTdMAajU
Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets. The deferrals and defaults have only emerged in the last few days, traders said, and have contributed to a drop in iron ore and coal prices. http://www.ft.com/intl/cms/s/0/a1f5ddda-a26b-11e1-a605-00144feabdc0.html#axzz1vTdMAajU
Wsj.com
Asian markets moderated gains after an early bounce in early trading Monday as investors digested comments by leaders of the Group of Eight major economies affirming they want Greece to remain in the euro and Chinese Premier Wen Jiabao raising hopes of further policy easing. Japan’s Nikkei was up 0.3%, Australia’s S&P ASX 200 gained 0.3%, and Korea’s Kospi climbed 0.8%. Other key markets bucked the trend, with Singapore’s Straits Times Index dropping 0.2%, Hong Kong’s Hang Seng Index was down 0.7%, and the China Shanghai SE Composite falling 0.3%.http://online.wsj.com/article/SB10001424052702304019404577417051172580454.html?mod=WSJASIA_hpp_LEFTTopWhatNews
…and much more below.
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