Fw: Key themes & trades
Happy New Year Jeffrey -
Below please find key themes and trade ideas from Vinit and Nav's DB KCP Global Capital Markets team. In short:
Continue to press euro short
Long Indian rupee vs. euro
Sell S&P puts to buy 4x S&P calls
Long Nikkei via risk reversals [could do rr on your DXJJ
Please see below and we will refresh any trades that resonate with live levels.
Regards,
Tazia
----- Forwarded by Tazia Smith/db/dbcom on 09/25/2014 01:32 PM -----
Key themes:
• Divergence in monetary policy between the Fed & Bank of England on the one hand and ECB & Bank of Japan on the other
• Continued capital inflows into Asian countries where financial conditions are easing (eg, Japan) and/or structural reforms are being implemented (eg, India)
• US recovery - buying into dips as US anchors global growth
EURUSD continues to break down -- if you're looking to reload:
• Trade: A 1y EURUSD 1.25 put financed by selling the 1.30 call has zero net premium (spot ref: 1.2740)
• EURUSD has broken below 1.28 during the last 24 hours
• With US data continuing to firm, the market is recalibrating when the Fed will deliver hikes - earlier rather than later
• On the other hand, given the ECB's stated determination to spur inflation in the Eurozone, full-blown QE looks likely next year
This chart shows the correlation between EURUSD and the spread between EUR and US interest rates (yellow)
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| Date | EUR BGN Curncy - Last Price (R1) | EUSA2 CMPN Curncy - USSW2 Curncy (R2) |
|---|---|---|
| 09/25/2013 | Approximately 1.36 | Approximately 1.36 |
| 09/25/2014 | Approximately 1.27 | Approximately 1.27 |
Source: Bloomberg 25-Sep-2014
EURINR lower as a combined play on continued inflows into India and ECB activism:
• Trade: A 6m EURINR 78 put (at-the-money spot) financed by selling the 83 call has zero net premium (spot ref: 77.95. forward: 80.50)
• With the Modi government showing decisiveness in pursuing its reform agenda, capital inflows into India look likely to continue for the foreseeable future
• Indian equities are at all-time highs and the entry point is not very attractive
• The rupee also embeds carry of 7%/year, cheapening risk reversals
Chart of EURINR spot
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| Metric | Value |
|---|---|
| Last Price | 77.9904 |
| High on 08/28/13 | 91.8093 |
| Average | 69.9526 |
| Low on 05/18/10 | 55.6350 |
Source: Bloomberg 25-Sep-2014
S&P 500 Put options dislocated relative to Call options
• Trade: A 6m 110% calls financed by 6m 90% puts in a ratio of 4 calls bought per put sold has zero net premium (spot ref: 1998)
• Very high demand for SPX puts makes it possible to buy multiple calls for each call sold
• Across major indices, the ratio of calls-to-puts is highest for US equities
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Skew (y-axis) vs ATM vol (x-axis) is stretched
| Regression Statistic | Value |
|---|---|
| Raw BETA | -0.059 |
| ALPHA (Intercept) | -4.381 |
| R^2(Correlation^2) | 0.017 |
| R(Correlation) | -0.131 |
| Std Dev of Error | 0.534 |
| Std Error of ALPHA | 0.359 |
| Std Error of BETA | 0.028 |
| t-Test | -2.096 |
| Significance | 0.037 |
| Last T-Value | -2.030 |
| Last P-Value | 0.022 |
| Number of Points | 10.3 |
Source: Bloomberg 24-Sep-2014
Renewed interest in Japanese equities ahead of GPIF re-allocation and policy momentum
• Trade: A 6m 110% call financed by 6m 90% put has zero net premium (spot ref: 16374)
• Investors are waiting for the giant Japanese pension funds to re-allocate away from bonds to equities
• The Abe administration is looking for additional ways to stimulate the economy
• Nikkei vols are high and skew is poor — no easy way to get into the trade, best to do calls vs puts 1-to-1 struck around major technical levels
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Chart showing NKY history with strike of 90% put highlighted
| Metric | Value |
|---|---|
| Index | NKY Index |
| Start Date | 09/28/2009 |
| End Date | 09/25/2014 |
| Last Price | 16374.14 |
| High | 16374.14 |
| Average | 14715.89 |
| Low | 12445.38 |
Source: Bloomberg 25 -Sep -2014
Past performance is not a reliable indicator of future results.
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