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Just when investors thought it was safe to step away for a well-earned August holiday, the markets decided to get interesting! Most of the negative equity returns struck in the first half of August as markets absorbed the one-two punch of an escalating Sino-American trade war with neither side backing down, combined with the US 2yr / 10yr yield curve inversion. The latter development has most participants concerned, as it’s a statistically reliable indicator of an impending US recession, albeit past experience shows us that the timing of any potential recession could materialize over an extended two-year timeframe.
Naturally, this heightened bearish sentiment and uncertainty over a significant market correction has seen demand for hedging with Eurex derivatives grow substantially; all major benchmark index futures volumes were, on average, +50% and index options +40% respectively, as compared to the same month last year. As investors rushed to execute hedges, it was the EURO STOXX 50® month-end index options that saw record volumes. The EURO STOXX 50® Total Return Futures also marked a record for daily volume in August as equity repo risk was repriced at the short-end and consequently term structure steepened. VSTOXX® futures as well were heavily traded as volatility spiked upwards in early August and remained elevated as markets bounced around in the subsequent weeks.
Dividend derivative volumes also remained robust, responding to the historically wide spread of European equity market yield to fixed income yield. Now in unchartered territory, this spread is on the radar of many participants either anticipating a mean reversion or a further breakout if a regime change is to be believed and the paradigm shift of negatively yielding debt is here to stay. As traders return to their desks, the next storm to navigate will likely come in the form of Brexit politics. All in all, it can be expected that hedging demand remains strong into the year-end as the painful last quarter of 2018 is still fresh in many memories.
Zubin Ramdarshan, Head of Equity & Index Product Design, Eurex