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03 Aug 2020

Eurex

Equity Index market briefing August 2020

U.S. equities continued in an upwards trading channel for July. By contrast, European index benchmarks were slightly lower by the end of the month. Despite the support seen across equity markets, a red flag appears against this benign market backdrop, as gold pushes to new highs above the psychological $2,000 level. Gold, often perceived as a safe haven during turbulent times, also comes under the spotlight as an inflation hedge through its allure as a preserver of wealth. Gold is a non-yielding asset, no dividends, nor coupons, and if held via an ETF wrapper, there is a total expense ratio to consider. This explains the activity we see in our ETF option segment, which saw good volumes due to the rolling of iShares Physical Gold options from August to September expiry. Clients look to harvest the volatility risk premia through the sale of options to recoup some of these holding costs.

Volatility levels are somewhat in "no man's land," perhaps being too cheap to sell but not yet cheap enough to buy. Hence VSTOXX® volumes remain subdued in both futures and options. The term structure in the futures remains relatively flat. There is still no direction in market expectations, though end clients rolled more of their long call positions and let the short positions expire. This suggests that clients expect further volatility in the markets. Our Total Return Futures segment saw positive developments in the recently launched offering for Equity and Basket TRF (ETRF/BTRF) with further trades pushing the total notional value executed above EUR 700m. Another milestone was achieved in early July with special types of reshuffles of existing baskets executed.  There was notably an "amendment"  trade and a "substitution"  trade, evidence that the Eurex listed BTRF solution successfully provides basket rebalance flexibility that is found under OTC conventions.

Looking across our benchmark products, the EURO STOXX® Banks sector suite had stable and even increasing volumes compared to July last year, especially for the Banks index dividend futures. One prime driver of this was the ECB decision to extend its recommendation to financial institutions on dividend distributions and share buy-backs until 1 January 2021. The ECB also clarified that it would give enough time for banks to replenish their capital and liquidity buffers in order not to act pro-cyclically. This caused a repricing of the Banks index dividend futures for 2020 and beyond. Expectations of further bank dividends being paid this year went from low to almost zero with the possibility that future payouts may arrive in a stock dividend format.

While most traders now take some well-deserved (safe destination) vacation over the next few weeks, all keep a keen eye on market movements. Some participants sense fragility in the recent rally back towards the year highs with the controversial U.S. elections only a few months ahead of us.

Zubin Ramdarshan, Head of Equity & Index Product Design, Eurex

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