June 30 (Bloomberg) -- Investors should buy ``crash protection'' against a plunge this year in European stocks because losses are likely and insurance costs are low, according to Goldman Sachs Group Inc.
The world's most-profitable securities firm recommended Dow Jones Euro Stoxx 50 Index puts that expire in December and have a strike price of 3,000, or 11 percent less than the measure's closing level today.
``High inflation/low growth is an increasing downside tail risk,'' London-based derivatives analysts at Goldman, which had the second-ranked equity derivatives research team in Institutional Investor magazine's 2007 survey, wrote in a report dated June 26. ``If that risk crystallizes, we think it means material rather than modest downside.''
The Euro Stoxx 50 plunged 24 percent to 3,354.20 in 2008 and closed at the lowest since November 2005 last week. The December 3,000 puts on the index fell 6.7 percent to 83.50 euros today. They cost as much as 189.30 euros in March.
European-style puts convey the right to sell a security for a certain amount, the strike price, on a given date. Some investors buy or sell options to guard against changes in the prices of securities they already own. Others use the contracts to bet price swings, or volatility, will increase or decrease.
Monday, June 30, 2008
Volatility Drops Most Since 2001 as Dollar Fall Slows
June 30 (Bloomberg) -- Currency volatility fell by the most since 2001 this quarter, reducing the chances central bankers will seek to bolster the dollar.
JPMorgan Chase & Co.'s index of implied volatility on dollar options against the euro, the yen, the British pound, the Swiss franc and the Australian and Canadian dollars declined 2.21 percentage points to 10.28 percent. It's the biggest drop since the second quarter of 2001.
Diminished price swings are a sign to Goldman Sachs Group Inc., Mizuho Corporate Bank Ltd. and Australia & New Zealand Banking Group Ltd. that central banks will avoid intervening in foreign exchange even after the dollar depreciated 25 percent against its biggest trading partners in the past five years.
Currency swings were muted after finance ministers from the Group of Seven nations said on April 11 they were concerned about the impact of ``sharp fluctuations in major currencies'' and the ``implications for economic and financial stability.''
``Policy makers have been trying to engineer more stability in foreign exchange markets and they've succeeded,'' said Tony Morriss, a Sydney-based currency strategist at ANZ, Australia's third-largest bank. ``They need a stable dollar to ensure commodity prices don't continue to rise.''
The euro traded at $1.5759 at 8:46 a.m. in New York from $1.5794 late last week when it strengthened 1.2 percent against the dollar. The U.S. currency rose 0.7 percent against a basket of six currencies since March 31, ending a 16 percent slump that started Sept. 30, 2006. The Dollar Index traded on ICE Futures U.S. in New York rose to 72.366 from 71.802 on March 31. The last time central banks stepped in to arrest a slide in the greenback was 1995.
`Warming Up'
``More players are warming up to the idea that the dollar will remain in a range,'' said Ryousei Ishida, senior vice president of foreign exchange options in Tokyo at Mizuho, a unit of Japan's second-largest publicly traded bank. The outlook is spurring traders to use strategies that benefit when currencies are little changed, he said.
The median estimate of 46 strategists surveyed by Bloomberg is for the dollar to trade at $1.54 per euro by Sept. 30. The median yen forecast is 104 per dollar. It last traded at 105.49 against the dollar.
Double-No-Touch
Some traders are buying ``double-no-touch'' options to bet the dollar will be little changed against the yen, Ishida said. Another strategy is to sell ``straddles'' with strike prices near the current level in the spot market as they would benefit from a further decline in volatility, he said.
A double-no-touch pays the buyer a fixed amount should the underlying currency remain between two levels during the life of the option. A straddle is a call and put with the same strike price and duration. Calls grant the right to purchase currencies, while puts allow sales. The strike price is where an option may be exercised.
Finance ministers and central banks object to rising volatility because it complicates the assessment of economies, interferes with monetary policy and gives companies little time to adjust by cutting costs. The dollar's plunge also contributed to rising prices for raw materials that sent oil, copper and iron ore to record highs.
`Getting Close'
``I thought that around $1.60 we were getting close'' to intervention, Jens Nordvig, a strategist with Goldman Sachs in New York, said of the possibility central bankers would buy and sell currencies to influence exchange rates. ``But after the recent events I would say we're not getting close until we reach $1.65.''
Volatility implied by dollar-yen options expiring in one month fell to 12.4 percent from 17 percent on March 31, the biggest quarterly percentage drop since the second quarter of 2000.
Volatility may rise as credit market losses from the U.S. subprime mortgage collapse spread, according to Sean Callow, senior currency strategist in Sydney at Westpac Banking Corp., Australia's fourth largest lender. Financial companies posted $400 billion in losses related to subprime-contaminated securities, according to data compiled by Bloomberg.
``We're expecting a very volatile quarter,'' Callow said. ``There are plenty of signs of ongoing stress in capital markets. We're bearish on the dollar.''
Bernanke's Attentive
The dollar decline ended this quarter as Federal Reserve Chairman Ben S. Bernanke said on June 3 he is ``attentive'' to the possibility that the dollar's slump will cause inflation expectations to rise. Treasury Secretary Henry Paulson said June 9 he hasn't ruled out intervention to prop up the U.S. currency.
The Fed ended a run of seven interest-rate cuts last week, keeping its target rate for overnight loans between banks at 2 percent. The dollar traded between $1.5303 per euro and $1.5843 since June 3.
``The market appreciates the unusual nature of Bernanke's and Paulson's comments,'' said Takeharu Miki, a currency options manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender. ``This should help support the dollar and keep volatility stable.''
Miki said he is looking for opportunities to sell options to profit from further declines in volatility. The dollar will swing between 105 yen and 110 yen next quarter, he said.
JPMorgan Chase & Co.'s index of implied volatility on dollar options against the euro, the yen, the British pound, the Swiss franc and the Australian and Canadian dollars declined 2.21 percentage points to 10.28 percent. It's the biggest drop since the second quarter of 2001.
Diminished price swings are a sign to Goldman Sachs Group Inc., Mizuho Corporate Bank Ltd. and Australia & New Zealand Banking Group Ltd. that central banks will avoid intervening in foreign exchange even after the dollar depreciated 25 percent against its biggest trading partners in the past five years.
Currency swings were muted after finance ministers from the Group of Seven nations said on April 11 they were concerned about the impact of ``sharp fluctuations in major currencies'' and the ``implications for economic and financial stability.''
``Policy makers have been trying to engineer more stability in foreign exchange markets and they've succeeded,'' said Tony Morriss, a Sydney-based currency strategist at ANZ, Australia's third-largest bank. ``They need a stable dollar to ensure commodity prices don't continue to rise.''
The euro traded at $1.5759 at 8:46 a.m. in New York from $1.5794 late last week when it strengthened 1.2 percent against the dollar. The U.S. currency rose 0.7 percent against a basket of six currencies since March 31, ending a 16 percent slump that started Sept. 30, 2006. The Dollar Index traded on ICE Futures U.S. in New York rose to 72.366 from 71.802 on March 31. The last time central banks stepped in to arrest a slide in the greenback was 1995.
`Warming Up'
``More players are warming up to the idea that the dollar will remain in a range,'' said Ryousei Ishida, senior vice president of foreign exchange options in Tokyo at Mizuho, a unit of Japan's second-largest publicly traded bank. The outlook is spurring traders to use strategies that benefit when currencies are little changed, he said.
The median estimate of 46 strategists surveyed by Bloomberg is for the dollar to trade at $1.54 per euro by Sept. 30. The median yen forecast is 104 per dollar. It last traded at 105.49 against the dollar.
Double-No-Touch
Some traders are buying ``double-no-touch'' options to bet the dollar will be little changed against the yen, Ishida said. Another strategy is to sell ``straddles'' with strike prices near the current level in the spot market as they would benefit from a further decline in volatility, he said.
A double-no-touch pays the buyer a fixed amount should the underlying currency remain between two levels during the life of the option. A straddle is a call and put with the same strike price and duration. Calls grant the right to purchase currencies, while puts allow sales. The strike price is where an option may be exercised.
Finance ministers and central banks object to rising volatility because it complicates the assessment of economies, interferes with monetary policy and gives companies little time to adjust by cutting costs. The dollar's plunge also contributed to rising prices for raw materials that sent oil, copper and iron ore to record highs.
`Getting Close'
``I thought that around $1.60 we were getting close'' to intervention, Jens Nordvig, a strategist with Goldman Sachs in New York, said of the possibility central bankers would buy and sell currencies to influence exchange rates. ``But after the recent events I would say we're not getting close until we reach $1.65.''
Volatility implied by dollar-yen options expiring in one month fell to 12.4 percent from 17 percent on March 31, the biggest quarterly percentage drop since the second quarter of 2000.
Volatility may rise as credit market losses from the U.S. subprime mortgage collapse spread, according to Sean Callow, senior currency strategist in Sydney at Westpac Banking Corp., Australia's fourth largest lender. Financial companies posted $400 billion in losses related to subprime-contaminated securities, according to data compiled by Bloomberg.
``We're expecting a very volatile quarter,'' Callow said. ``There are plenty of signs of ongoing stress in capital markets. We're bearish on the dollar.''
Bernanke's Attentive
The dollar decline ended this quarter as Federal Reserve Chairman Ben S. Bernanke said on June 3 he is ``attentive'' to the possibility that the dollar's slump will cause inflation expectations to rise. Treasury Secretary Henry Paulson said June 9 he hasn't ruled out intervention to prop up the U.S. currency.
The Fed ended a run of seven interest-rate cuts last week, keeping its target rate for overnight loans between banks at 2 percent. The dollar traded between $1.5303 per euro and $1.5843 since June 3.
``The market appreciates the unusual nature of Bernanke's and Paulson's comments,'' said Takeharu Miki, a currency options manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender. ``This should help support the dollar and keep volatility stable.''
Miki said he is looking for opportunities to sell options to profit from further declines in volatility. The dollar will swing between 105 yen and 110 yen next quarter, he said.
Loser Wins, Winner Loses
Once again, the wisdom of the markets rules, finding favor with France Telecom, whose stock rose after it scuttled its $42 billion takeover bid for TeliaSonera, whose stock promptly crashed on word it would not be transforming into Europe's largest telecom by revenue. Odd that it was TeliaSonera that kicked and screamed so hard, when it looks like it had the most to lose…
France Telecom abandoned its $42bn bid for TeliaSonera on Monday after failing to agree a price with the Nordic telecommunications company and its main shareholder, the Swedish government.
“Following its proposal for a friendly combination with TeliaSonera announced on 5 June, France Telecom has today decided not to submit a firm offer to TeliaSonera’s shareholders,” the French group said in a statement.
France Telecom abandoned its $42bn bid for TeliaSonera on Monday after failing to agree a price with the Nordic telecommunications company and its main shareholder, the Swedish government.
“Following its proposal for a friendly combination with TeliaSonera announced on 5 June, France Telecom has today decided not to submit a firm offer to TeliaSonera’s shareholders,” the French group said in a statement.
Friday, June 27, 2008
Selling Resumes
The stock market has made a precipitous drop and is now trading in negative ground. The Dow Jones Industrials Average is at its worst level of the session and the Nasdaq is testing its session low.
A day after Goldman Sachs noted that Merrill Lynch (MER 32.48, -0.57) may incur additional write-downs, other reports are indicating the same notion. Also likely to incur write-downs is financial services giant American International Group (AIG 27.48, -0.61), according to Bloomberg.com. The report also indicated that AIG's write-downs may push the company to a quarterly loss.
The financial sector is trading lower, currently down 0.6%.
A day after Goldman Sachs noted that Merrill Lynch (MER 32.48, -0.57) may incur additional write-downs, other reports are indicating the same notion. Also likely to incur write-downs is financial services giant American International Group (AIG 27.48, -0.61), according to Bloomberg.com. The report also indicated that AIG's write-downs may push the company to a quarterly loss.
The financial sector is trading lower, currently down 0.6%.
Thursday, June 26, 2008
Dow Down Over 200 Points
The stock market has trended further downward to hit a new session low. The S&P 500 is now down approximately 1.9%, while the Dow is down by the same percentage and the Nasdaq is down 2.5%.
All ten of the major economic sectors are in the red. Eight have losses in excess of 1.0%. Four have losses in excess of 2.0%.
Dow component General Electric (GE 27.16, -0.83) is struggling this session as its stock hits a new 52-week low. Reports indicate the company is having difficulty finding a buyer for its credit card business.
All ten of the major economic sectors are in the red. Eight have losses in excess of 1.0%. Four have losses in excess of 2.0%.
Dow component General Electric (GE 27.16, -0.83) is struggling this session as its stock hits a new 52-week low. Reports indicate the company is having difficulty finding a buyer for its credit card business.
Wednesday, June 25, 2008
Crude Stockpiles Unexpectedly Rise
Crude inventories for the week ended June 21 unexpectedly rose 803,000 barrels, compared to the expected decline of 1.1 million. Just prior to the release, Crude was trading down 1.0% to $135.69 per barrel.
Stocks bounce to session highs on the crude data. The Dow is up 0.4%, underperforming the S&P 500's gain of 0.8%.
Boeing (BA 70.62, -4.17) is the largest drag on the Dow, falling more than 5%. According to reports, Boeing was added to the Conviction Sell List at Goldman Sachs, citing the weak economy and record fuel prices. American Express (AXP 41.70, -0.40) is also in the news, after announcing it will receive $1.8 billion from MasterCard (MA 293.94, +13.57) after settling an antitrust lawsuit. American Express claimed that MasterCard had illegally blocked AXP from the U.S. bank-issued card business. AXP had previously settled its lawsuit with Visa (V 83.89, +1.23) for $2.25 billion.
Stocks bounce to session highs on the crude data. The Dow is up 0.4%, underperforming the S&P 500's gain of 0.8%.
Boeing (BA 70.62, -4.17) is the largest drag on the Dow, falling more than 5%. According to reports, Boeing was added to the Conviction Sell List at Goldman Sachs, citing the weak economy and record fuel prices. American Express (AXP 41.70, -0.40) is also in the news, after announcing it will receive $1.8 billion from MasterCard (MA 293.94, +13.57) after settling an antitrust lawsuit. American Express claimed that MasterCard had illegally blocked AXP from the U.S. bank-issued card business. AXP had previously settled its lawsuit with Visa (V 83.89, +1.23) for $2.25 billion.
Wednesday, June 18, 2008
Royal Bank Of Scotland Issues Crash Alert and BIS Warns of Great Depression
Global stock markets are braced for one of the worst crashes in 100 years, according to the Royal Bank of Scotland (RBS) credit strategy team. RBS credit strategy team, in a special report for clients, said it expects inflation to paralyse economies and spark the crash. The report advised investors to be prepared for a severe downturn in global stock and credit markets, saying the S&P 500 index is likely to fall by more than 300 points to around 1,050 points by September.
Mr Bob Janjuah, the report’s author is highly respected in the City after his foresighted warnings last year about the credit crisis proved accurate.
Meanwhile, the Bank of International Settlements (BIS) has continued to warn of a possible second Great Depression. The Bank for International Settlements, the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s. In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the U.S. sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.
According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.
Mr Bob Janjuah, the report’s author is highly respected in the City after his foresighted warnings last year about the credit crisis proved accurate.
Meanwhile, the Bank of International Settlements (BIS) has continued to warn of a possible second Great Depression. The Bank for International Settlements, the organisation that fosters cooperation between central banks, has warned that the credit crisis could lead world economies into a crash on a scale not seen since the 1930s. In its latest quarterly report, the body points out that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the U.S. sub-prime mortgage crisis, may not have grasped the level of exposure that lies at its heart.
According to the BIS, complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.
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