Market briefing
April saw a continuation of the global equity markets rally against a backdrop of positive economic data from the U.S. and China, the pricing-in of a near-term resolution to U.S.-China trade negotiations and the release of positive European growth and inflation data after a difficult start to the year.
Eurex volumes in fixed income were subdued in April, in line with the broader slow down seen in the broader fixed income markets. The options segment outperformed last April’s volumes by 15% and futures underperformed by 7%. It’s interesting when looking at the YoY numbers, as last year was a strong year for fixed income and we were well positioned to benefit from this.
German 10-year yields began the month in negative territory, going on to reach +8bps by mid-month before falling back to finish the month at +1bps. Germany continues to see weakness in manufacturing, though inflation data surprised to the upside. The volatility in German yields drove increased Bund option volumes for the month, but volatility remains under pressure, with bounces sold into. Positioning indicates that carry trades are still in vogue and continue to be adding to on pops higher in levels of volatility.
The Italian yield curve flattened with a 25bps increase at the 2-year point while 10-year yields only increased 7bps while Bund-BTP spreads remained stable. Italy managed to avoid a ratings-downgrade by S&P and Fitch during the month while quarterly growth reported for the region turned positive, rising to +0.2% after a 0.1% decline in Q4 2018.
Implied volatility for Germany in April remained low for the month in the 3.5-4% range, with 30-day realized around 4.5% as German yields burst above zero. Italy saw implied volatility remain below 8% for the month as realized fell to the lowest levels seen this year.
Looking ahead to the summer, it would look like volumes could remain under pressure as positioning remains crowded. To this end, it could be seen as complacency as risk premia isn’t fully priced in, should we see a correction.
Lee Bartholomew, Head of Fixed Income Product R&D, Eurex
Facts & figures
News
By 21 June 2019, Category 3 firms have to meet EMIR clearing obligations. Philip Simons, Global Head of Fixed Income Sales, Eurex, outlines the steps Category 3 firms need to take to get EMIR compliant.
BTP Options continue to represent an efficient tool for hedging and trading purposes in volatile markets with an average daily volume around 5,000 contracts in 2019. In the beginning of April, Italian bank Banca Akros has joined the four existing market makers in providing quotes to the order book. For larger sizes (minimum Block Trade Size is set to 100 lots), all market makers can also be contacted directly to enter bilaterally agreed trades via the T7 Entry Service for CCP clearing.
The first few months of 2019 have turned out to be very successful for Eurex Repo. “The banks that have joined our Partnership Program are now benefitting from increasing buy-side trading volumes,” comments Carsten Hiller, Funding & Financing Sales at Eurex Repo.
Risk management is all about identification, assessment and prioritization of risks, followed by a coordinated, economic use of resources to control the probabilities and impact of losses as well as new emerging risks. That all sounds good as a general definition, but what specifics risks is Eurex facing, how do we prepare for them and what risk management solutions do we have in place? We asked Thomas Laux, Chief Risk Officer of Eurex Clearing and Dmitrij Senko, his designated successor.