Agents price $421 million of structured products in uncertain market; S&P 500 index trades dominate

By Emma Trincal

New York, Feb. 8 – Agents priced $421 million in 108 deals last week, a relatively average volume size for the start of a month, according to data compiled by Prospect News.

But it was a week at the crossroad of the end of January and the start of February, complicating the assessment of volume strength. Volume was dwarfed by the prior week’s $2.13 billion, which closed January.

But many months have begun on a stronger footing, according to the data.

Uncertainty, yet low vol.

The markets were mixed last week, with president Donald Trump’s travel ban continuing to have negative repercussions on investors’ sentiment. But a strong jobs report on Friday helped the benchmarks jump back up, near record highs.

Some said different forces in the market may confuse investors and reinforce a sentiment of uncertainty, which technically should cause the market to trade in a range. Others state that the Trump pro-growth story is still driving a sustainable rally, pushing investors to buy bullish notes with return enhancement features such as leverage and to seek uncapped returns versus buffers.

This bullish sentiment is reflected in last week’s data on leveraged products: while leveraged notes with buffers or barriers accounted to12% of the total, leverage with full downside exposure made for 35% of the volume.

“Volatility is still low and that’s because the growth policy of Mr. Trump is supporting equity markets,” said a sellsider.

A second factor, he added was “a shift” from institutional investors, hedge funds and mutual funds to increase their equity allocations.

“That too reduces the vol.,” he noted.

“Finally you have relatively accommodating interest rates policies worldwide despite the U.S. shifting to higher rates, although the Fed has yet to implement it. It always takes longer than anticipated.”

Volatility skew

This structurer said that talking about implied volatility without taking into account the volatility term structure can be misguiding.

“It’s the short-term implied vol. that’s very low right now. The long-term maturity is not so much lower than a year ago,” he said.

“But with the front maturity so low, you can’t do very short-term deals anymore.”

This may be one among many of the reasons behind the weak volume in single-stock deals, which tend to be short-dated. Last week, only $14 million of such deals, or 3.30% of the total, came to market, according to the data.

European risk

In Europe, on the other hand, short-term volatility has surged as investors are positioning themselves for a series of risks in the upcoming months. This may make certain structures linked on the Euro Stoxx 50 index “optically” more appealing, he said.

“Despite the fact that none of the European political risks has the global scope of the U.S. presidency, you see a lot of short-term investors playing on the European market. These are bets on what’s coming up. European political uncertainty is huge right now with French, Dutch and German elections coming up and of course, Brexit.”

National elections will take place in France, Germany and the Netherlands, this year. Populist, anti-European parties have run higher in the polls.

U.S. centric week

But U.S. action remained prevalent last week as it is often the case in the U.S. structured products market although perhaps more than usual volume-wise. The top deals of the week were based on the S&P 500 index, which in itself is not extraordinary. More notable was the fact that such deals accounted for 35% of the total volume, a greater percentage than usual at the exception of closing weeks when block trades raise the proportion of S&P-based volume.

“Many people prefer their own market, so it’s not a surprise. But there are other reasons to favor the U.S. I think the uncertainty is more tangible in Europe right now,” said the structurer.

“If people like Le Pen are elected in France or in other countries, the European Union could implode. What happens if Germany takes back the Deutsch Mark or if France takes back the Franc? Germany would be punished big time.”

Marine Le Pen is the head of the Front National, a populist party in France that has been pushing for an exit from the European Union.

The Trump factor

In the United States the market seems to oscillate between news-related short volatility spikes in relation to the new president’s words or actions and bullish confidence based on deregulation and rate cuts expectations. Overall, the bullishness seems to prevail, which encourages investors to add to their U.S. equity exposure via funds or structured notes, said Paul Weisbruch, vice-president of options sales and trading at Street One Financial.

“So far there simply has not been a lot of volatility in the market, and we believe that it is warranted given the path equities have taken, especially from a technical stance,” he said.

“Can Trump make the news reporters freak out, yes, but we have not seen any market freak-out yet since he took office, none,” he said.

The market recorded several instances of “big moves” in a given sector, such as health care or defense, on comments the president may have made on Twitter, he noted.

“But nothing that has moved the S&P 500, say 1% or more, much less lower.

“We believe that the pro-growth policies and what they seem to be doing for stock fundamentals in a broad sense, especially small-caps for example, has far outweighed the risk of him injecting volatility into the broad market via comments where he seems to be shooting from the hip.

“So volatility is likely fairly priced here given what has happened and what has continued to happen since the November election.”

Greater risk abroad

Weisbruch said that the U.S. markets remain relatively safer than other regions in the world.

“There is definitely more volatility in Europe,” he said.

“They are still digesting Brexit and its implications, not to mention trying to stave off other potential future Brexit type moves by other E.U. members. Merkel has been on the ropes in Germany lately, and of course the other elections in France, the Netherlands and Italy are also potential impetus for volatile moves in Europe in general.

“This appetite for U.S.-based products is likely a combination of a flight to relative safety as well as this bullish U.S. sentiment.”

Top deals

Citigroup Global Markets Holdings Inc. priced the top deal with $32.54 million of two-year notes linked to the S&P 500 index. The notes are guaranteed by Citigroup Inc.

The structure offered a 300% upside participation rate up to a 24% cap with full downside exposure.

The second offering was a two-year buffered digital product brought to market by Wells Fargo & Co. The digital was payable if the S&P 500 index finished above a negative threshold of 85% of its initial level. It amounted to 10.4%. The 15% downside buffer was geared at a rate of 1.1765.

Finally, Morgan Stanley priced $25.27 million of dual directional trigger jump notes linked to S&P 500 index on the behalf of HSBC USA Inc. The five-year securities offered on the upside a return of par plus the greater of the index return and 30.5%. There was a 70% barrier on the downside.

The top agent last week was Morgan Stanley with 10 deals totaling $85 million, or 20.20%, of the total. It was followed by Citigroup and Wells Fargo.

“European political uncertainty is huge right now with French, Dutch and German elections coming up and of course, Brexit.” – A sellsider

“This appetite for U.S.-based products is likely a combination of a flight to relative safety as well as this bullish U.S. sentiment.” – Paul Weisbruch, vice-president of options sales and trading at Street One Financial

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