Monday, April 13, 2015 6:41:19 AM
$9 Trillion Short Seen Sending the Dollar Even Higher
Photographer: Alexander Zemlianichenko Jr/Bloomberg
by Anchalee Worrachate
6:00 PM CDT April 12, 2015
Investors speculating the dollar rally is fizzling out may be overlooking trillions of reasons why it will keep on going.
There’s pent-up demand for the U.S. currency that will underpin years of appreciation because the world is “structurally short” the dollar, according to investor and former International Monetary Fund economist Stephen Jen.
Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years, data from the Bank for International Settlements show.
In addition, central banks that had reduced their holdings of the greenback are starting to reverse course, creating more demand. The dollar’s share of global foreign reserves shrank to a record 60 percent in 2011 from 73 percent a decade earlier, though it has since climbed back to 63 percent.
So, the short-term ebbs and flows caused by changes in Federal Reserve policy or economic data releases may be overwhelmed by these larger forces combining to fuel more appreciation, according to Jen, the London-based co-founder of SLJ Macro Partners LLP and the former head of currency research at Morgan Stanley.
Dollar ‘Power’
“Short-covering will continue to power the dollar higher,” said Jen, who predicts a 10 percent advance in the next three months to 96 cents per euro. “The dollar’s strength is not just about cyclical factors such as growth. The recent consolidation will likely prove to be temporary.”
The U.S. currency was at $1.0593 per euro at 12:09 p.m. in Tokyo. The last time it traded at 96 cents was June 2002.
Most strategists and investors agree on the reasons for the dollar’s advance versus each of its major counterparts during the past year: the prospect of higher U.S. interest rates while other nations are loosening policy.
Bloomberg’s Dollar Spot Index, which tracks the U.S. currency against 10 major peers including the euro and yen, has surged 20 percent since the middle of 2014. The gains stalled recently, sending the index down more than 3 percent in the three weeks through April 3, as Fed officials tempered investors’ expectations about the pace of rate increases.
Top Forecaster
Jen isn’t the only one who thinks short-dollar positions will cause the rally to extend.
Chris Turner, head of foreign-exchange strategy at ING Groep NV, sees the dollar surging through parity with the European currency by mid-year. He said gains will be spurred by bonds from Germany to Ireland yielding below zero.
“Central banks are re-accumulating their dollar reserves and low, or negative, bond yields in the euro zone will probably speed up that trend,” said London-based Turner, whose bank topped Bloomberg’s rankings for the most accurate currency forecasts in the past two quarters.
Not everyone thinks the dollar will keep on climbing. Billionaire Bill Gross of Janus Capital Group Inc. called his contrarian bet against the greenback “the trade of the year.” His short is premised on the spread between U.S. and European interest rates narrowing.
Adrian Lee, whose eponymous investment company oversees more than $5 billion, disagrees. He points to monetary policy as the biggest driver of dollar strength as the tightening bias of the Fed contrasts with a European Central Bank that’s expanding the money supply.
Rate Outlook
“The dichotomy between Europe and the U.S. is most interesting,” said Lee, chief investment officer at Adrian Lee & Partners, which has offices in London and Dublin. “If you ask where our strategy would be in a year’s time, we can easily have a forecast of the euro well below $1.”
He also sees another structural factor that’s underpinning the dollar: the U.S.’s shrinking current-account deficit.
The decline in oil prices -- even with the shale-gas revolution, the nation is still an importer -- has helped the U.S. reduce its trade shortfall to 2.3 percent of gross domestic product, according to data compiled by Bloomberg. That’s down from a record 5.9 percent in 2006.
For Jen, the rise in dollar-denominated debt across the globe is key. The $9 trillion owed by borrowers outside the U.S. has surged from $6 trillion at the end of 2008 -- when the Fed cut its benchmark interest rate to near zero, making it cheaper to issue in the currency.
Repaying Debt
Russian gas producer OAO Gazprom, Spanish phone company Telefonica SA and ArcelorMittal, the world’s largest steelmaker, have each raised about $12 billion in the U.S. currency since then, data compiled by Bloomberg show. France and Sweden are among the biggest sovereign issuers, borrowing more than $100 billion between the two.
Some of that will need to be repaid even if the remainder will be rolled over. And debt that will eventually be refinanced needs servicing in the meantime.
“After years of accumulating a huge amount of debt in dollars, borrowers will need to figure out how to repay” given the currency’s recent gains, Jen said. “People will either repay early or start hedging actively. There’ll be huge demand for the dollar that is much more than what’s consistent with growth or interest-rate differentials.”
©2015 Bloomberg L.P.
http://www.bloomberg.com/news/articles/2015-04-12/the-9-trillion-short-that-s-seen-sending-the-dollar-even-higher
--
It’s Getting Expensive to Be a Bear as U.S. Rules Pinch Options
by Callie Bost
11:00 PM CDT April 12, 2015
More than just a casino for day traders, the options market is where institutions pay millions of dollars a day to hedge investments. Lately, amid a crackdown on risk-taking, they’ve been paying a little more.
Prices for Standard & Poor’s 500 Index put contracts, the options that act like insurance policies on stocks because they gain value when shares sink, have jumped this year to the highest levels on record relative to bullish calls, six-month data compiled by Bloomberg show. In one example, an option that appreciates if the market slides 10 percent by July has seen its cost shoot more than 120 percent above the corresponding bet on a rally. That’s twice the average spread since 2005.
In a bull market that hasn’t seen a 10 percent correction since 2011, it makes sense that prices are higher to protect equity holdings. But more may be at work. Rocky Fishman, an equity derivatives strategist at Deutsche Bank AG, says hedging costs are going up as dealers are crimped by regulations and self-imposed risk controls stemming from the financial crisis.
“The pricing of downside options is the most visible sign for this trend in periods when markets have not been very volatile,” Fishman said in a phone interview April 1. “It might be good business, but you can’t do it as much. The constraints are getting more aggressive.”
Liquidity Squeezes
Fishman is describing a concern similar to one that is raised in bond markets, where dealers have warned of liquidity squeezes due to restrictions prescribed by the Dodd-Frank Act. While banks have largely ceded their market-making role on equity exchanges to automated traders, they’re still among the biggest suppliers of stock hedges.
Divergences in price between bearish and bullish options can be seen all around the market. Puts expiring in July on the SPDR S&P 500 ETF Trust, the most popular U.S. exchange-traded fund, cost on average 105 percent more than calls this year, compared with 81 percent in 2014, Bloomberg data show.
Three-month protection against a 10 percent drop in the Powershares QQQ Trust, the largest fund tracking technology stocks, were priced 93 percent above bullish options as of April 10, Bloomberg data show. That spread has averaged 51 percent since 2009.
“Said simply, insurance costs more today than in the past since there are less folks carrying the insurance book,” Scott Maidel, an equity-derivatives portfolio manager in Seattle at Russell Investments, said in an interview April 7.
Too Expensive
Something’s making it more costly for managers who want to protect gains from a rally that has added $17 trillion to U.S. share values, according to Sean Heron, who helps oversee $30 billion for Glenmede Trust Co.
Because banks “are willing to sell less or put less on their books, risk protection has gotten a little expensive,” Heron, who manages options strategies for the firm, said by phone April 8. “People selling options right now may benefit from this and people buying options may reconsider because of prices.”
Not everyone is convinced shrinking dealer supply is the main reason bearish options have gotten more expensive. While measures of overall market turbulence such as the Chicago Board Options Exchange Volatility Index are hovering below their historical averages, equities have had a rougher ride in 2015.
The S&P 500, which never went more than three days without a gain in 2014, has twice fallen [ http://www.bloomberg.com/news/articles/2015-03-16/back-to-normal-in-stocks-feels-like-trauma-as-u-s-bull-run-ages ] five straight times since the beginning of this year. Average daily S&P 500 moves have widened 50 percent from last year and shares tumbled 3 percent or more over four different stretches in the first quarter.
Nervousness Increases
Nervousness in the market is growing [ http://www.bloomberg.com/news/articles/2015-04-01/u-s-bull-run-losing-fans-as-traders-load-up-on-s-p-500-hedges ] as investors try to figure out when the Federal Reserve will raise interest rates, according to Barclays Plc’s Maneesh Deshpande. That’s the primary reason for higher hedging costs, he said.
“Increased bank regulations have probably resulted in tighter risk limits,” Deshpande, head of equity derivatives strategies at Barclays, said by phone April 7. “So it appears logical that it is one of the reasons skew is high. However, based on data, that does not appear to be the only explanation.”
Shifts in market-making are part of the process of risk reassessment that was forced on banks by laws aimed at curbing excesses that led to the 2008 financial crisis, according to Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.
“Certainly everyone benefits from a safer financial system, but no one likes higher prices,” she said by phone April 9. “All of the biggest banks are spending enormous amounts of time optimizing capital and each choose to do so in different ways.”
Shoulder Tap
Getting a handle on how large a business options are for investment banks is an imprecise science because they don’t break out the results separately. Revenue from the derivatives businesses at the 10 largest banks globally made up 12 percent of their equities revenue last year, according to a February report from Coalition Ltd., a London-based research firm.
The Fed examined how the biggest U.S. banks’ trading units, including equity derivatives, would handle a market shock in annual stress tests [ http://www.bloomberg.com/news/articles/2015-03-05/fed-stress-tests-show-31-largest-banks-meet-capital-targets ] that were completed last month. The annual inspections are the cornerstone of the U.S. central bank’s efforts to prevent a repeat of the 2008 financial crisis and to gauge the ability of banks to withstand economic turmoil.
The tests, including the Comprehensive Capital Analysis Review, have constrained dealer supply at equity derivatives businesses, according to Krag “Buzz” Gregory, an equity derivatives strategist at Goldman Sachs Group Inc. Larger banks have become reluctant to hold short positions generated from selling hedges to clients, he said.
“The Federal Reserve checks all of your trading books on a given day and they say ‘what’s the risk ?’” Gregory said at a CBOE Holdings Inc. conference in Carlsbad, California, on March 6. “The last thing you want to do is sell $5 billion in downside puts the day they tap you on the shoulder. This is having an impact in pushing skew up.”
©2015 Bloomberg L.P.
http://www.bloomberg.com/news/articles/2015-04-13/it-s-getting-expensive-to-be-a-bear-as-u-s-rules-pinch-options
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Photographer: Alexander Zemlianichenko Jr/Bloomberg
by Anchalee Worrachate
6:00 PM CDT April 12, 2015
Investors speculating the dollar rally is fizzling out may be overlooking trillions of reasons why it will keep on going.
There’s pent-up demand for the U.S. currency that will underpin years of appreciation because the world is “structurally short” the dollar, according to investor and former International Monetary Fund economist Stephen Jen.
Sovereign and corporate borrowers outside America owe a record $9 trillion in the U.S. currency, much of which will need repaying in coming years, data from the Bank for International Settlements show.
In addition, central banks that had reduced their holdings of the greenback are starting to reverse course, creating more demand. The dollar’s share of global foreign reserves shrank to a record 60 percent in 2011 from 73 percent a decade earlier, though it has since climbed back to 63 percent.
So, the short-term ebbs and flows caused by changes in Federal Reserve policy or economic data releases may be overwhelmed by these larger forces combining to fuel more appreciation, according to Jen, the London-based co-founder of SLJ Macro Partners LLP and the former head of currency research at Morgan Stanley.
Dollar ‘Power’
“Short-covering will continue to power the dollar higher,” said Jen, who predicts a 10 percent advance in the next three months to 96 cents per euro. “The dollar’s strength is not just about cyclical factors such as growth. The recent consolidation will likely prove to be temporary.”
The U.S. currency was at $1.0593 per euro at 12:09 p.m. in Tokyo. The last time it traded at 96 cents was June 2002.
Most strategists and investors agree on the reasons for the dollar’s advance versus each of its major counterparts during the past year: the prospect of higher U.S. interest rates while other nations are loosening policy.
Bloomberg’s Dollar Spot Index, which tracks the U.S. currency against 10 major peers including the euro and yen, has surged 20 percent since the middle of 2014. The gains stalled recently, sending the index down more than 3 percent in the three weeks through April 3, as Fed officials tempered investors’ expectations about the pace of rate increases.
Top Forecaster
Jen isn’t the only one who thinks short-dollar positions will cause the rally to extend.
Chris Turner, head of foreign-exchange strategy at ING Groep NV, sees the dollar surging through parity with the European currency by mid-year. He said gains will be spurred by bonds from Germany to Ireland yielding below zero.
“Central banks are re-accumulating their dollar reserves and low, or negative, bond yields in the euro zone will probably speed up that trend,” said London-based Turner, whose bank topped Bloomberg’s rankings for the most accurate currency forecasts in the past two quarters.
Not everyone thinks the dollar will keep on climbing. Billionaire Bill Gross of Janus Capital Group Inc. called his contrarian bet against the greenback “the trade of the year.” His short is premised on the spread between U.S. and European interest rates narrowing.
Adrian Lee, whose eponymous investment company oversees more than $5 billion, disagrees. He points to monetary policy as the biggest driver of dollar strength as the tightening bias of the Fed contrasts with a European Central Bank that’s expanding the money supply.
Rate Outlook
“The dichotomy between Europe and the U.S. is most interesting,” said Lee, chief investment officer at Adrian Lee & Partners, which has offices in London and Dublin. “If you ask where our strategy would be in a year’s time, we can easily have a forecast of the euro well below $1.”
He also sees another structural factor that’s underpinning the dollar: the U.S.’s shrinking current-account deficit.
The decline in oil prices -- even with the shale-gas revolution, the nation is still an importer -- has helped the U.S. reduce its trade shortfall to 2.3 percent of gross domestic product, according to data compiled by Bloomberg. That’s down from a record 5.9 percent in 2006.
For Jen, the rise in dollar-denominated debt across the globe is key. The $9 trillion owed by borrowers outside the U.S. has surged from $6 trillion at the end of 2008 -- when the Fed cut its benchmark interest rate to near zero, making it cheaper to issue in the currency.
Repaying Debt
Russian gas producer OAO Gazprom, Spanish phone company Telefonica SA and ArcelorMittal, the world’s largest steelmaker, have each raised about $12 billion in the U.S. currency since then, data compiled by Bloomberg show. France and Sweden are among the biggest sovereign issuers, borrowing more than $100 billion between the two.
Some of that will need to be repaid even if the remainder will be rolled over. And debt that will eventually be refinanced needs servicing in the meantime.
“After years of accumulating a huge amount of debt in dollars, borrowers will need to figure out how to repay” given the currency’s recent gains, Jen said. “People will either repay early or start hedging actively. There’ll be huge demand for the dollar that is much more than what’s consistent with growth or interest-rate differentials.”
©2015 Bloomberg L.P.
http://www.bloomberg.com/news/articles/2015-04-12/the-9-trillion-short-that-s-seen-sending-the-dollar-even-higher
--
It’s Getting Expensive to Be a Bear as U.S. Rules Pinch Options
by Callie Bost
11:00 PM CDT April 12, 2015
More than just a casino for day traders, the options market is where institutions pay millions of dollars a day to hedge investments. Lately, amid a crackdown on risk-taking, they’ve been paying a little more.
Prices for Standard & Poor’s 500 Index put contracts, the options that act like insurance policies on stocks because they gain value when shares sink, have jumped this year to the highest levels on record relative to bullish calls, six-month data compiled by Bloomberg show. In one example, an option that appreciates if the market slides 10 percent by July has seen its cost shoot more than 120 percent above the corresponding bet on a rally. That’s twice the average spread since 2005.
In a bull market that hasn’t seen a 10 percent correction since 2011, it makes sense that prices are higher to protect equity holdings. But more may be at work. Rocky Fishman, an equity derivatives strategist at Deutsche Bank AG, says hedging costs are going up as dealers are crimped by regulations and self-imposed risk controls stemming from the financial crisis.
“The pricing of downside options is the most visible sign for this trend in periods when markets have not been very volatile,” Fishman said in a phone interview April 1. “It might be good business, but you can’t do it as much. The constraints are getting more aggressive.”
Liquidity Squeezes
Fishman is describing a concern similar to one that is raised in bond markets, where dealers have warned of liquidity squeezes due to restrictions prescribed by the Dodd-Frank Act. While banks have largely ceded their market-making role on equity exchanges to automated traders, they’re still among the biggest suppliers of stock hedges.
Divergences in price between bearish and bullish options can be seen all around the market. Puts expiring in July on the SPDR S&P 500 ETF Trust, the most popular U.S. exchange-traded fund, cost on average 105 percent more than calls this year, compared with 81 percent in 2014, Bloomberg data show.
Three-month protection against a 10 percent drop in the Powershares QQQ Trust, the largest fund tracking technology stocks, were priced 93 percent above bullish options as of April 10, Bloomberg data show. That spread has averaged 51 percent since 2009.
“Said simply, insurance costs more today than in the past since there are less folks carrying the insurance book,” Scott Maidel, an equity-derivatives portfolio manager in Seattle at Russell Investments, said in an interview April 7.
Too Expensive
Something’s making it more costly for managers who want to protect gains from a rally that has added $17 trillion to U.S. share values, according to Sean Heron, who helps oversee $30 billion for Glenmede Trust Co.
Because banks “are willing to sell less or put less on their books, risk protection has gotten a little expensive,” Heron, who manages options strategies for the firm, said by phone April 8. “People selling options right now may benefit from this and people buying options may reconsider because of prices.”
Not everyone is convinced shrinking dealer supply is the main reason bearish options have gotten more expensive. While measures of overall market turbulence such as the Chicago Board Options Exchange Volatility Index are hovering below their historical averages, equities have had a rougher ride in 2015.
The S&P 500, which never went more than three days without a gain in 2014, has twice fallen [ http://www.bloomberg.com/news/articles/2015-03-16/back-to-normal-in-stocks-feels-like-trauma-as-u-s-bull-run-ages ] five straight times since the beginning of this year. Average daily S&P 500 moves have widened 50 percent from last year and shares tumbled 3 percent or more over four different stretches in the first quarter.
Nervousness Increases
Nervousness in the market is growing [ http://www.bloomberg.com/news/articles/2015-04-01/u-s-bull-run-losing-fans-as-traders-load-up-on-s-p-500-hedges ] as investors try to figure out when the Federal Reserve will raise interest rates, according to Barclays Plc’s Maneesh Deshpande. That’s the primary reason for higher hedging costs, he said.
“Increased bank regulations have probably resulted in tighter risk limits,” Deshpande, head of equity derivatives strategies at Barclays, said by phone April 7. “So it appears logical that it is one of the reasons skew is high. However, based on data, that does not appear to be the only explanation.”
Shifts in market-making are part of the process of risk reassessment that was forced on banks by laws aimed at curbing excesses that led to the 2008 financial crisis, according to Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.
“Certainly everyone benefits from a safer financial system, but no one likes higher prices,” she said by phone April 9. “All of the biggest banks are spending enormous amounts of time optimizing capital and each choose to do so in different ways.”
Shoulder Tap
Getting a handle on how large a business options are for investment banks is an imprecise science because they don’t break out the results separately. Revenue from the derivatives businesses at the 10 largest banks globally made up 12 percent of their equities revenue last year, according to a February report from Coalition Ltd., a London-based research firm.
The Fed examined how the biggest U.S. banks’ trading units, including equity derivatives, would handle a market shock in annual stress tests [ http://www.bloomberg.com/news/articles/2015-03-05/fed-stress-tests-show-31-largest-banks-meet-capital-targets ] that were completed last month. The annual inspections are the cornerstone of the U.S. central bank’s efforts to prevent a repeat of the 2008 financial crisis and to gauge the ability of banks to withstand economic turmoil.
The tests, including the Comprehensive Capital Analysis Review, have constrained dealer supply at equity derivatives businesses, according to Krag “Buzz” Gregory, an equity derivatives strategist at Goldman Sachs Group Inc. Larger banks have become reluctant to hold short positions generated from selling hedges to clients, he said.
“The Federal Reserve checks all of your trading books on a given day and they say ‘what’s the risk ?’” Gregory said at a CBOE Holdings Inc. conference in Carlsbad, California, on March 6. “The last thing you want to do is sell $5 billion in downside puts the day they tap you on the shoulder. This is having an impact in pushing skew up.”
©2015 Bloomberg L.P.
http://www.bloomberg.com/news/articles/2015-04-13/it-s-getting-expensive-to-be-a-bear-as-u-s-rules-pinch-options
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Greensburg, KS - 5/4/07
"Eternal vigilance is the price of Liberty."
from John Philpot Curran, Speech
upon the Right of Election, 1790
F6
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