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This document is page 19 of a 'Global Equity Volatility Insights' report produced by Bank of America Merrill Lynch on June 20, 2017. It provides technical market analysis on Asian indices (HSCEI, NKY, Nikkei, Topix), discussing volatility strategies, the impact of the Bank of Japan's yield curve control, and specific hedging recommendations. The document bears the Bates stamp 'HOUSE_OVERSIGHT_014990', indicating it was obtained during a Congressional investigation, likely related to financial records.
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| Location | Context |
|---|---|
Key Quotes (3)
"Calendar puts are attractively priced given the steep term structure"Source
HOUSE_OVERSIGHT_014990.jpg
Quote #1
"As our strategists think the Fed now appears concerned about surging asset prices, investors should consider downside hedges."Source
HOUSE_OVERSIGHT_014990.jpg
Quote #2
"The BoJ's ongoing yield curve control has capped the Nikkei/Topix ratio and its volatility"Source
HOUSE_OVERSIGHT_014990.jpg
Quote #3
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Chart 27: Both HSCEI and NKY term structures are near record steeps; we favor calendar puts to hedge downside risks
15%
10%
5%
0%
-5%
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
NKY 3M-12M ATM Vol
HSCEI 3M-12M ATM Vol
15%
10%
5%
0%
-5%
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17
NKY 3M-12M ATM Vol
HSCEI 3M-12M ATM Vol
Source: BofA Merrill Lynch Global Research Data as of 2-Jan-09 to 16-Jun-17
Calendar puts are attractively priced given the steep term structure
With the continuous low realized volatility environment, both NKY and HSCEI 3-month minus 12-month term structures steepened to -3.7 vol points, which are near multi-year lows.
As our strategists think the Fed now appears concerned about surging asset prices, investors should consider downside hedges. Calendar puts, i.e. buying short-dated ATM puts and selling long-dated OTM puts, are attractively priced given the steep term structure.
Currently, we still have an open trade on NKY calendar puts (buy Jul-17 19,500 puts vs sell Dec-17 17,500 puts) to hedge downside risks.
Chart 28: The Nikkei/Topix ratio and its volatility is capped with the BoJ's ongoing yield curve control
NKY / TPX Price Ratio
12.9
12.7
12.5
12.3
12.1
11.9
11.7
11.5
JGB 10-year yield (Inverted)
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17
NKY/TPX Ratio
10Y JGB Yield
NKY / TPX Price Ratio
12.9
12.7
12.5
12.3
12.1
11.9
11.7
11.5
JGB 10-year yield (Inverted)
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17
NKY/TPX Ratio
10Y JGB Yield
Source: BofA Merrill Lynch Global Research Data from 2-Jan-12 to 16-Jun-17
The BoJ's ongoing yield curve control has capped the Nikkei/Topix ratio and its volatility
Japanese government bond (JGB) yield has been on a downward trend over the last few years and has negatively impacted bank earnings. As the Topix has higher weightings in banks than the Nikkei, the NKY/TPX ratio has been grinding higher.
However, the NKY/TPX ratio appears to have flattened out since the BoJ's commitment to maintain the 10-year JGB yield at around 0% in September 2016. With global central banks increasingly advocating tighter monetary policies, the market may start to speculate BoJ's exit strategy and this may reverse NKY/TPX's upward trend. With TPX vol trading below NKY vol, buying TPX calls funded by NKY calls may perform well in such a scenario.
AS51 3M ATM IV over HSCEI is at its 4-year high
Table 4 lists Asian index pairs with the highest IV ratio vs their 4-year histories. For instance, the ratio of AS51 3M ATM IV over HSCEI is at its 4-year high.
Table 4 lists Asian index pairs with the highest IV ratio vs their 4-year histories. For instance, the ratio of AS51 3M ATM IV over HSCEI is at its 4-year high.
Bank of America Merrill Lynch
Global Equity Volatility Insights | 20 June 2017 19
HOUSE_OVERSIGHT_014990
Global Equity Volatility Insights | 20 June 2017 19
HOUSE_OVERSIGHT_014990
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