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Week in review (Europe)
The FTSE100 reached 13 months highs last week as the BOE exceeded market expectations by announcing a 25 bp rate cut (its first rate cut in 7yrs), a further £60bn of QE purchases (vs forecasted £50 bn) while also hinting at more potential stimulus in the autumn. Unsurprisingly, GBPUSD fell further on the back of this. The better-than-expected US nonfarm payrolls that beat all surveyed forecasts helped drive US markets to new all-time closing highs also helped European equities rebound from a mid-week trough. As a result, the V2X has retraced close to its 11 month lows as foreseeable catalysts are behind us for a potentially quieter end to the summer.

• Long dated ESTX50 var term structure is historically elevated; vol term structure is not: The dislocation of 3y var convexity (var strike/ATMf volatility) vs that of 1y, which in itself is near extremes, is particularly striking

• European Issuance of ESTX50-linked structured products picked up in July: We estimate issuance of ~€120Mn/day in July, which compares to €5Mn daily issuance in June and €55Mn daily issuance in 1H16 (excluding June).

• The current vega outstanding in SX5E-linked products is €143Mn, which is in its 97th percentile since Jan-14 (when our records begin). Moreover, this could rise to as much as €169Mn if the SX5E rallied to 3280.

Long-dated ESTX50 var term structure is steep; vol term structure is not
Despite a significantly steep longer dated ESTX50 variance term structure (vs its average since 2008), the volatility term structure is nearly flat. As a result, the level of ESTX50 long dated variance is historically elevated vs the level of long dated vol. The dislocation of 3y var convexity (varswap strike/ATMf vol ratio) vs 1y var convexity (which in itself is near its historic highs) is particularly striking.

Chart 21: Longer dated ESTX50 variance term structure is significantly elevated vs long term average – the extreme steepness is not mirrored in the ATMf volatility term structure
[Chart Graphics: Line graph showing percentages from 16% to 30% over timeframes 1m to 3y]
vol surface - Current
var surface - Current
vol surface - Avg since 2008
var surface - Avg since 2008
Source: BofA Merrill Lynch Global Research. Data: 02-Jan-08 to 5-Aug-16. Current represents snapshot as of 5-Aug-16

Chart 22: ESTX50 variance convexity (varswap strike/ATMf vol ratio) is near extremes – the dislocation of 3y var convexity vs that of 1y, which in itself is near extremes, is particularly striking
[Chart Graphics: Line graph showing ratios from 1.00 to 1.40 from Jan-08 to Mar-16]
99.7 percentile
96.1 percentile
SX5E 1y var convexity
SX5E 3y var convexity
Source: BofA Merrill Lynch Global Research. Data: 02-Jan-08 to 5-Aug-16.

Structured product Jul update: EU issuance picked up; Korean issuance lagged
We estimate issuance of ESTX50-linked structured products in Europe was ~€120Mn/day in July, much higher than the €5Mn daily issuance in June and €55Mn daily issuance in 1H16 (excluding June). This compares to ~€20Mn daily issuance in July out of Korea.

12 Global Equity Volatility Insights | 09 August 2016
Bank of America Merrill Lynch
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