Fourth of July, blackout period, market rally set tone for sluggish structured products issuance

By Emma Trincal

New York, July 11 – A combination of factors in the shortened Fourth of July week in the United States contributed to one of the weakest periods for weekly issuance seen in a long time.

Agents priced $28 million of structured products in 36 deals, according to preliminary data compiled by Prospect News.

To be sure, these figures will be revised upward and the added notional bridging the gap between current estimates and final data could be significant. Still, compared to last year’s Fourth of July week, whose holiday fell on a Tuesday, showing $345 million, last week’s preliminary record doesn’t bode well, especially as the depth of the slow summer season nears.

Some remarked that things have not gotten better this week.

“We’re almost out of the market,” said a sellsider on Wednesday.

“The Fourth being in the middle of the week put a damper on sales, especially in the beginning of the month since deals go out on a calendar basis.

Good news

The equity markets continued to swing up and down or rather down then up. On Tuesday, the S&P 500 index dropped as the trade war rhetoric between president Donald Trump and the Chinese government escalated.

But the trend reverted sharply after the holiday with the benchmark finishing the week up 1.5%. The sudden rally was due to an upbeat job report released on Friday, which reinforced investors’ confidence in the U.S. economy.

Range bound

The market has been trading sideways since May. As trade tariffs and geopolitical tensions dominate the news, stock prices are vulnerable. But so far signs of a stronger economy have allowed investors to shrug off fears of protectionism. The market has been swinging up and down under those two factors as if the Federal Reserve’s trajectory was already priced in.

Bad setup

“You had the Fourth falling on a Wednesday. Then the timing of this sharp rally in the middle of the week...it made it worse. Just those two things led to a pretty bad setup,” said this sellsider.

The rally made the entry points on autocallables less attractive for investors, he explained.

“To top it off, the U.S. banks are in blackout for earnings.

“You had a series of problems all at the same time,” he said.

More worst-of deals

From the available data, it appeared that worst-of deals made a comeback.

“The VIX came down...it’s still in the low teens,” the sellsider said.

When volatility decreases, firms look for other sources of premium. The dispersion risk inherent to worst-of is one of the reasons those structures can provide higher coupon with more premium, making them popular again.

“It helps when volatility is lower,” he said.

But other factors are at play, especially in the rate market.

“The yield curve flattening is also flattening a lot of volatility out of the curve. That’s got more impact on rates products. But it also affects equity. Anytime a product is monetizing a call option, you’ll see volatility come in across the board.”

Tech still hot

The worst-of deals that priced last week continued to be structured around equity indexes. The pair most commonly used was S&P 500 index combined with the Russell 2000 index.

Separately, UBS priced a myriad small single-stock-linked notes at less than $2 million. Those were autocallable contingent coupon notes in a maturity range of one to two years.

The most commonly used underlying stocks belonged to the “FANG” group with the “G” of Google, now Alphabet Inc., missing. Those were Facebook, Inc., Amazon.com, Inc. and Netflix, Inc.

Tech and internet stocks were the most popular, with deals based on Alibaba Group Holding Ltd., Apple Inc., Micron Technology, Inc. and Nvidia Corp.

Stocks

The data is too inconclusive to determine whether stocks will regain momentum. But some predict that it is possible.

“Having low correlation plus low volatility in addition to rising markets, these are factors that make stock picking more exciting,” an industry source said.

GS Finance’s top deal

The top deal based on the preliminary data was a worst-of on three equity indexes: GS Finance, Corp. priced $17.26 million of contingent income callable notes linked to the S&P 500 index, the Russell 2000 index and the MSCI EAFE index.

The notes callable after six months will pay a contingent quarterly coupon at an annualized rate of 8.35% if each index closes at or above its 70% coupon barrier on the observation date for that quarter. The barrier at maturity is 60% of the initial price of the worst-performing index.

“The yield curve flattening is also flattening a lot of volatility out of the curve.” – A sellsider

“Having low correlation plus low volatility in addition to rising markets, these are factors that make stock picking more exciting.” – An industry source

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.