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HyperVolatility – End of the Year Report 2013

The HyperVolatility End of the Year Report 2013 has been completed.

The report has an interactive Table of Contents, therefore, you can simply click on the asset class you are interested in and jump straight to the analysis.

The first copy is read–only while the second file is a printer–friendly version of the research.

The HyperVolatility End of the Year Report 2013 can be downloaded FOR FREE at the following link (no registration required):

HyperVolatility End of the Year Report 2013

HyperVolatility End of the Year Report 2013 (PRINT)

The 1st part of the report examines the performances of the most important asset classes in the world (equities, currencies, bonds and commodities) in 2013.

The asset classes that have been object of our annual research are the following

Equity futures: DAX, E–Mini S&P500, FTSE/MIB

Treasury Bonds futures: German Bund, American Treasury Bonds

Currency futures: Euro, Japanese Yen

Commodity futures: WTI Crude Oil, Gold

Volatility Indices: VIX  

The 2nd part, instead, presents the macroeconomic scenario in USA, Europe and BRICS economies (Brazil, Russia, India, China and South Africa). The analysis focuses on important indicators such as GDP growth, inflation, Debt–to–GDP ratio, unemployment rate, inflation rate and credit rating.

A Chinese and an Italian version of the aforementioned research will be uploaded in the upcoming hours.

Portfolio Hedging: Risky Assets vs Safe Havens

The credit crunch changed the game and we all know it. Financial markets have been completely reshaped, in fact, the old way to invest is not yielding the results it used to and the composition of market participants have been totally revolutionised (perhaps permanently). The attention towards the management of portfolio risk augmented dramatically soon after the 2008 – 2009 and words like “safe havens” and “risky assets” started to consistently appear on many financial newspapers; but how the “safe havens” relate to “risky assets” nowadays? Which markets can today still be considered to be “safe”? The continuous weekly analysis of inter-market relationships that we perform, here at HyperVolatility, brought us to write this research. Let’s proceed with order.

Risky assets are all those markets that are traded mainly for speculative purposes so in this category we primarily find equity indices (S&P500, DAX, Dow Jones, FTSE100, Nikkei225, etc), stocks (Apple, Microsoft, Amazon, etc), some currencies (essentially Euro vs US Dollar and Yen vs US Dollar) and the most popular commodities such as WTI Crude Oil (this list is far from being exhaustive). Clearly, some of the aforementioned markets are more prone to speculation than others because of the nature of their market players (for instance equity indices are mainly traded by hedge funds, banks and retail traders whilst WTI Crude Oil is traded even by large commercial players that enter futures or options positions purely to hedge their physical exposure) so the way they move and react to market news and changes in the fundamentals vary vastly. On the other hand, the “safe assets” are the ones that fund managers and traders use in order to limit losses during sharp retracements in equity indices. In other words, they are employed in portfolio management as a sort of insurance. The markets that have historically played this role are Gold, Japanese Yen, US Dollar, Swiss Franc, Treasuries such as the American Treasury Bond or the German Bund and the “more recent” VIX Index (the adjective “recent” refers to the fact that the VIX Index could not be traded in the past). The reason they are called “safe havens” is because they tend to rise when risky assets fall, consequently, they are inversely correlated to equity indices and stocks; but is it really so? Do they really provide a valuable parachute against crash landings?

In order to answer the above mentioned questions we take 2 risky assets, E-Mini S&P500 and Crude Oil futures, and we compare their fluctuations against American Treasury Bond futures, German Bund futures, Gold futures, Japanese Yen futures and the VIX Index (the weekly analysis of all the aforementioned markets is covered by the HyperVolatility Forecasts service, send us an email at info@hypervolatility.com to know more). The study of the inter-market relationships has been performed using the correlation analysis and the dataset consists of weekly data for the years 2010, 2011 and 2012 (the last observation for the 2012 has been registered on the 24th of August 2012). Let’s examine E-Mini S&P500 futures:

As we can clearly see from the above reported chart the American index is negatively correlated to all the “safe havens”, which means that while E-Mini S&P00 futures were retracing the safe assets were going up and vice versa. Nevertheless, the correlation index fluctuated a lot throughout last years and the fact that Gold and Japanese Yen futures show an incredibly strong positive correlation in 2010 proves what it has been just stated. Therefore, any hypothetical fund manager or trader willing to hedge any S&P500 long position with these instruments would have obtained fairly poor results in 2010. However, it is worth noting that in 2011 and 2012 the futures on the Asian currency performed fairly well and proved to be moderately good when offsetting the risk coming from long positions on risky assets whilst gold futures worked out well only in 2011. Additionally, the futures on the German Bund had a fairly good negative correlation in 2011 but the performances registered in 2010 and 2012 are not really encouraging which means that there were extended periods of time where both instruments (E-Mini S&P500 and German Bund futures) were moving in the same direction. The same thing can be said for Treasury Bond futures, which display a more solid negative correlation in 2012 than German Bund, but the overall performance is still not that good. The only market which showed a constant and reasonably robust negative correlation with E-Mini S&P500 futures is the VIX Index that can be traded via VIX futures and options offered by the CBOE. Let’s now see if the scenario is different for WTI Crude Oil futures:

The chart displays a significant negative correlation and all the “safe havens” seem to be very good when hedging crude oil positions, although, in 2012 there is a considerable positive relationship with Gold futures (we will explain why later). Specifically, Japanese Yen futures and the VIX Index both show a negative relationship which was evidently much stronger in 2011 than it is now and the analysis manifestly highlights that the best products to use, when hedging any crude oil position, are definitely Treasury Bond and German Bund futures because the negative coefficients that they display are very solid and the inverse rapport seems to be quite stable over time.

So, why are Gold futures a sub-optimal choice? There are no definite answers to that but there are two contributing factors which could help to explain what is happening:

1) The CME increased margin calls for gold futures in August 2011, hence, many traders could not afford to keep their positions open anymore and had to cut them. This resulted in a large drop in gold prices, even if investors were heavily using them to hedge against the massive plunge that risky assets experienced over the summer of 2011, and by looking at the above reported chart it is easy to notice that in 2011 Gold futures were the worst performers (the correlation is still negative but it is definitely weaker than the one registered for the remaining “safe havens”)

2) Gold prices are still used for hedging purposes; the only problem is that they are now employed to counterbalance a different type of risk: over-inflation. In particular, gold futures are being purchased to cope with a higher inflation that can be caused by the “expansive monetary policies” recently adopted by the Fed and the ECB (the Fed will purchase 40 billion dollars worth of mortgage backed securities on a monthly basis and the ECB just launched an apparently unlimited bond buying programme). This explains the uptrend in gold prices and the positive correlation with the so-called risky assets in 2012

According to our findings the best markets to use when hedging positions on E-Mini S&P500 futures are the VIX Index, Treasury Bond and Japanese Yen futures whilst Crude Oil futures are best covered by Treasury Bond and German Bund futures with the Asian currency and the VIX being the 3rd best option (they are equally good so we can both place them at the 3rd place in our ranking).

Conversely, Gold prices proved to be the worst performer and the least reliable market, amongst all the “safe havens” analysed in the present research, when trying to minimise the downside risk on equity indices and risky assets.

 

The HyperVolatility team provides weekly volatility forecasts directly delivered at your email address. Send us an email at info@hypervolatility.com to know more and join our promotional campaign. WE GUARANTEE YOU A ONE MONTH AND A HALF FREE MEMBERSHIP FROM THE MOMENT YOU SIGN UP WITH US.

 

German Bund Futures Volatility Forecast (05/10/2011)

German Bund futures opened at 136.9 on Monday, dropped to 135.9 on Tuesday, touched 135.6 on Wednesday, settled to 135.7 on Thursday and jumped back up to 136.7 on Friday.

The current volatility is 0.42% (6.6% annualised) and the TGARCH plot is now showing a downward sloping curve which is now trading close to its mean reverting point. The actual situation could lead to 2 different scenarios: the conditional variance spikes again after having touched the 0.4% support (6.3% in annual terms) or it keeps fluctuating laterally until the end of the week.

The probable scenario is half a way through the two just mentioned. In particular, the volatility is likely to increase in the very short term (read the first half of the week) whilst the second half should see a softening of market swings.

The HyperVolatility team is moderately bearish German Bund futures because, despite a probable retest of the 138.5 area in the first 3 days of the week, the price action should head south and eventually touch the 133 – 134 area by the end of the week.

Needless to say that unexpected bad news would push the price back up to 139 but, everything else being equal, we should have a diminishing in the buying pressure.

German Bund Futures Volatility Forecast (27/09/2011)

German Bund futures opened at 137.5 on Monday, moved to 137.7 on Tuesday, closed to 137.9 on Wednesday, jumped to 138.7 on Thursday and settled to 137.6 on Friday.

The actual volatility is 0.57% (9% in annual terms) but the TGARCH curve is now slightly upward sloping even though we still remain in a fairly low level and very close to the long term equilibrium point. It is worth noting that this time the increase in the conditional variance has not been caused by an augment in the buying pressure but from a sharp decline in futures prices.

The fact that the symmetric effect between price and volatility is now over means that the volatility will probably tend to augment over the next trading days and accompany an ulterior drop of German Bund futures.

The announcement of the 2-3 trillion euro package and the consequent increase of the EFSF are likely to attract speculative sellers because most of the investors will switch their attention back on risky assets.

The HyperVolatility team is moderately bearish German Bund futures because the conditional variance is likely to head north over the next trading days whilst the price should retest the 134.5 – 135 area by Friday.

On the other hand, this market is one of the last safe havens remained and any bad macroeconomics news would provoke a massive buying pressure which would lift the price to 138.5

German Bund Futures Volatility Forecast (19/09/2011)

German Bund futures opened at 138.1 on Monday, dropped to 137.5 on Tuesday, plummeted to 136.7 on Wednesday, touched 136.1 on Thursday and closed at 136.7 on Friday.

The current volatility is 0.58% (9.2% annualised) and the TGARCH plot is displaying a downward sloping curve which is trying to complete its mean reverting process towards the 0.4% – 0.45% threshold (6.3% – 7.1% in annual terms). The drop in the conditional variance is a strong signal that the buying pressure is now in a downtrend and that the next trading days could see both a softening of the oscillation rate and a slow decrease of futures prices.

German Bund futures have been heavily bought by investors seeking protection against equity markets storms but an ulterior plunge in the volatility curve is a strong signal that the buying pressure is now diminishing (for a more precise explanation of the relationship between German Bund futures and volatility please watch our video-research on our HyperVolatility Channel).

The HyperVolatility team is moderately bearish German Bund even if we reckon that a sharp drop in futures prices is quite unlikely. The market will probably retest the 135 area by Friday but a sideways movement should dominate the upcoming trading hours.

Some short term opportunities could come during the FOMC announcement as many traders will attempt to buy Bund futures in order to avoid violent price shocks in risky markets.

German Bund Futures Volatility Forecast (06/09/2011)

German Bund futures opened at 134.3 on Monday, jumped to 135.1 on Tuesday, retested the 134.4 level on Wednesday, achieved 135.5 on Thursday and closed at 136.8 on Friday.

The current volatility is 0.6% (9.5% in annual terms) and the TGARCH chart is displaying a curve which is now insistently upward sloping implying that the buying pressure is far from being over and likely to continue over the next trading hours. Should the situation worsen it would not be surprising to see the volatility retest the 1% level (15.8% annualised) by Friday.

The fragile situation of the global economy and the decreased rate of growth of the American market are factors which are heavily affecting investors’ feelings. Furthermore, the uncertainty about Obama ‘s speech is going to act as a catalyst meaning that a lot of traders will buy German Bund futures to limit market risk.

The HyperVolatility team is bullish this market because the increase in volatility will accompany a  higher buying pressure which will eventually bring the price action to test new all-time highs around the 138.5 – 139 threshold.

Once again, Obama’s speech on Thursday will have a significant impact on this market should any monetary/fiscal stimulus package be announced.

German Bund Futures Volatility Forecast (30/08/2011)

German Bund futures opened at 135.3 on Monday, settled at 135 on Tuesday, plummeted to 134.2 on Wednesday, jumped back up to 134.8 on Thursday and closed at 135.2 on Friday.

The volatility is now 0.44% (6.9% annualised) and the TGARCH plot is now showing a slightly downward sloping curve which should keep plummeting over the next hours and settle around the long term equilibrium point which is around the 0.35% – 0.4% area ( 5.5% – 6.3% in annual terms). The positive correlation between the German Bund futures price and its volatility during market turmoil is a well known fact, hence, a softening of the volatility should be interpreted as a decrease in the buying pressure which pushed the price to make unprecedented new highs.

The HyperVolatility team is bearish German Bund futures because the conditional variance should settle around the long term equilibrium point whilst futures prices should decrease and eventually retest the 133.5 area by Friday.

It is comes without saying that bad macroeconomics news will keep futures prices well above the 135 level and some worse-than-expected reading, particularly NFP or Manufacturing Index, would push the price action towards the 136 threshold.

German Bund Futures Volatility Forecast (22/08/2011)

The worst scenario profit target we gave you one week ago, that is 136, proved to be the right one. The buying pressure dramatically increased soon after Germany and France prime ministers finished their public speech whilst prices went through the roof after the US manufacturing data were released.

German Bund futures opened at 132.7 on Monday, rose to 133.4 on Tuesday, closed above 134 on Wednesday, jumped to 135.5 on Thursday and closed at 135.5 on Friday.

The actual volatility is 0.8% (12.6% in annual terms) and the TGARCH plot is evidently displaying an upward sloping curve which should increment its value over the next trading days. However, German Bund futures volatility responds inversely to equity market fluctuations (for a more detailed explanation please watch the HyperVolatility Channel on YouTube) meaning that an increase in the volatility of German’s fixed income product is highlighting a very high buying pressure that is likely to continue over the next hours.

The HyperVolatility team remains bullish on this market because the positive correlation between German Bund futures prices and volatility it is a typical process observed during market turmoil and it should not be interpreted as a warning signal. We expect the market to keep moving higher and eventually achieve the 136.5 area by Friday but short term retracements or a sideways movement of the price action, particularly in the first half of the week, are not eventualities to opt out.

Clearly, good news from Germany and US would change the overall picture and drag down the price in the 132 area but further bad figures (Home Sales, Initial Jobless Claims, GDP, etc) would literally drive the price towards the 137 area by Friday.

German Bund Futures Volatility Forecast (14/08/2011)

The HyperVolatility team forecasted a further increase in the German fixed income bond market and our projections proved accurate and profitable once again although the 135 target point was only brushed by but never touched nor violated. German Bund futures opened at 133.49 on Monday, plummeted to 133.22 on Tuesday, jumped to 134.4 on Wednesday, dropped back to 133.25 on Thursday and closed at 133.04 on Friday.

The volatility is now 0.78% (12.3% annualised) and the TGARCH plot is obviously displaying a volatility curve which is “trying” to complete its mean revert process in order to settle around the long term balance point which, for the German Bund, is around the 0.4% threshold (6.3% in annual terms).

Additionally, the intervention of the ECB, which desperately bought up Italian and Spanish bonds on the secondary market in order to calm down investors and decrease the yields which were dangerously close to the 7% break point, managed to throw some water on the fire, at least in the short term.

The HyperVolatility team is bearish German Bund futures because the inverse leverage effect, and therefore the positive correlation between the price action and its volatility, will accompany a down move of the price itself. As a consequence, futures should get back to 130 by Friday and eventually break through this level.

Like the Swiss Franc, the German Bund has an inverted reaction to bad macroeconomics news. Therefore, should the market be hit with further downgrading and/or bearish figures the price could jump back up and touch the 136 – 137 zone.

German Bund Futures Volatility Forecast (08/08/2011)

German Bund futures opened at 131.2 on Monday and remained at that level on Tuesday too but it plummeted to 131.7 on Wednesday, jumped to 133.2 on Thursday and closed to 130.8 on Friday.

The volatility is now 0.81% (12.8% in annual terms) and the TGARCH plot is showing an upward sloping curve which does not display any retracement and that is signalling an ulterior augment of the oscillation rate in the upcoming trading days.

As we proved in one of our quant research (which can be watched on our YouTube channel: HyperVolatility Channel) German Bund futures volatility respond inversely to bad macroeconomics news more than any other “safe assets” and this explains the great burst in the conditional variance last week.

The fact that the ECB is now buying Spanish and Italian debt securities is not going to change the fact that the global economy is slowing down, investors are literally freaking out and therefore the high volatility should be interpreted as a very bullish signal.

The HyperVolatility team is bullish German Bund futures because the explosion in volatility is, in this case, a clear signal that the buying pressure is particularly intense and likely to continue. Hence, we believe that futures prices will head north once again and eventually retest the 135 area by Friday.

However, an ulterior bad macroeconomics announcement could easily send German Bund futures prices through the roof (read 136 – 137) and smash down its already low yields favouring a decrease in Germany’s borrowing costs.

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