Article / 13 October 2016 at 8:00 GMT

From the Floor: Vols spike as risk retreats — #SaxoStrats

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From the Floor
By  Michael McKenna

History, said Arnold Toynbee, Henry Ford, or possibly someone else (it's one of those quotes), "is just one damned thing after another". This year's markets, in our view, present a similarly infernal spectacle as every time one risk-off factor retreats, another re-emerges.

With oil near its year-to-date highs and expectations of a US rate hike in December resting at 67%, today's bugbear is the recurrent "global slowdown" narrative that has returned to the forefront in force following a shockingly poor September exports print out of China.

With exports posting a 10% year-over-year decline (versus minus 3.3% expected), Saxo Global Sales head Christoffer Moltke-Leth reports on today's Global Morning Call that Asian equities are "a sea of red" as China's woes are not isolated but rather point to a broader slowdown in trade volumes.

"The issues (editor's note: explosions) with Samsung's Note 7 will hurt South Korean exports as well," says Moltke-Leth, adding that the country's central bank stood firm on rates overnight while pointing to the need for further easing in its statement.

Back in Beijing, the Singapore-based Saxo director says that a currency devaluation could be on the table as it is "probably the most straightforward move" if China wishes to regain some of its lost exports.

The soft print's melancholy roar has since spread to markets as a whole with the consequent outbreak of risk-off sentiment spiking vols in major FX pairs.

"The move is supportive for vols," says Saxo bank FX Options trader Jeppe Norup. "One-month USDJPY is up 0.3 to 11.6 and one-week EURUSD is up 2.5 vols today as expiry now covers the upcoming European Central Bank meeting".

In sterling, vols charts continue to reflect the recent nervousness sparked by UK prime minister Theresa May's (partially rescinded) 'hard Brexit' talk from the conservative party conference, as well as the recent "flash crash" in GBPUSD.


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Source: Saxo Bank, Bloomberg

In stocks, Saxo Bank head of equity strategy Peter Garnry notes that the US election polls are being reflected in the ETF market as a negative correlation has developed between biotech shares (as measured by the IBB ETF) and Democratic Party candidate Hillary Clinton's increasingly robust support.

"IBB dropped 2.5% yesterday and now sits at 270; further risk-off could see this fund trade down to the 240 level", says Garnry.

In Garnry's view, the selloff may ultimately result in a buying opportunity as he does not believe that Clinton, if elected, will go "all-in" on measures such as drug price caps.

Beyond the ballot, Garnry reports that the Norwegian and Swedish governments are selling their shares in jointly-owned (with Denmark) Scandinavian flag carrier SAS.

(A Bloomberg report published this morning also claims that the decision marks the first step of a move towards full divestment.)

"We would not be surprised to see SAS shares gain on this news as a private equity takeover could well clear the way towards harsher negotiations with labour unions", says Garnry.

Finally, Garnry says that he is looking at short positions in both the Hang Seng and the Dax, with the latter serving as what he terms "insurance for an ugly session".

Dulle Griet by Pieter Bruegel the Elder
If  it's not one damned thing, it's another. 
Source: Detail of 'Dulle Griet' by Pieter Bruegel the Elder (1562)

Michael McKenna is an editor at

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.


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