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As expected, yesterday was a relatively quiet session and we may be set for another. A number of surveys are released today, with the UK CBI industrial trends and German ZEW the most important among them. The market was expecting a further slight decline in the CBI’s total orders index, from 14 to 12 whereas the actual prints outpaced the expectations to produce this at 10, but this would still be a historically elevated level, benefiting from strong global demand.
For the German ZEW, streets’ consensus was falling the expectations (from 20.4 to 16) but the actual prints are at 17.8.
Given that this is an investor-centric survey, it may potentially have been affected by the rise in financial market volatility over the last few weeks.
While we are in no rush to sell vol immediately, it is useful to maintain a watch list of potential dislocations that can be faded once the dust settles on the equity market wobble. The following caught our eye:
CNH vol: CNH vols and risk-reversals blew out sharply last week - 1M ATMs spiked 1.5 pts. intraday above 8.0, 1M 25D riskies with a full vol to 1.5 and the 1Y/1M curve inverted before settling a little lower by the close of the week.
The move is outsized in relation to the relatively modest adjustment in the spot (1.8% trough-to-peak intra-week) and was supposedly sparked by hedging of heavy CNH FX longs and typical low-delta USD call/CNH put protection buying from equity investors that in particular contributed to the skew move.
JPMorgan’s macro view on the renminbi continues to be sanguine based on solid growth differentials and policymaker tolerance for a stronger currency in light of international trade politics, so it is difficult to argue for any appreciable degree of macro risk premium to be priced into CNH options at present.
Hence the spike in ATM vols this week to near August 2015 devaluation highs looks technical rather than fundamental in nature, especially when taking into account relative valuations vis-à-vis forward points that suggest options are priced near the most expensive they have been in many years (refer above chart).
CNH risk-reversals are nowhere nearly as expensive either vis-à-vis ATM vols or adjusted for carry, so are better holds on the surface than flat vega.Courtesy: JPM
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