Volatile Eurostoxx increases demand from the Americas

Continuing uncertainty about the economy of Greece and its inclusion in the euro as well as speculation about when the US Federal Reserve will increase interest rates are the drivers of much of the activity in the Americas markets, and will continue to be throughout the summer.

In the US, the Eurostoxx 50 remains the leading underlying for the third month in a row, making this the base asset with the highest sales volume this year for the first time in the US, according to SRP data. In Canada, while the S&P/TSX 60 was the leading underlying in May, the European benchmark index has also regained popularity up north, sitting securely in third place by measure of both volume ($434m) and issuance (50 products). “The macro story is driving Eurostoxx demand,” said Franck Bertoneche, managing director, head of cross-asset distribution, North America global markets at BNP Paribas. “US stocks can be considered to be highly valued, the European Central Bank has recently begun administering quantitative easing, while the US is winding down its programme, along with the foreign exchange aspect, which makes Europe more interesting for US investors.”

The end of April and the beginning of May saw a spike in Eurostoxx 50 implied volatility, resulting in attractive pricing and the ability to structure more eye-catching products. All that, combined with the fact that it is possible to structure products linked to the Eurostoxx 50 and hedge out the foreign exchange risk, makes the index very tempting. “Most of the Eurostoxx-linked notes that have been done in the US are quanto US dollar, which means you receive the differential in value of the rise in the index without being penalised by a potential depreciation of the euro versus the US dollar,” said Bertoneche.

Use of the Eurostoxx 50 index in the US is up 14% this year, although products linked to the European benchmark saw a 5% fall in sales month on month. Sales of products linked to the index this year have shot up 53%, compared with the same period last year. This compares with a 22% rise on the month in sales of products linked to the S&P 500 index and a rise of 25% from the same period last year.

In Mexico, the expectation that the US Federal Reserve will increase interest rates towards the end of this year continues to overhang the market, keeping both issuers and investors on alert.

While the selection of underlyings in Mexico continues to expand, interest in the TIIE 28 interbank rate remains. “We saw growing interest in structured notes linked to the TIIE 28, which may be explained by latest speculations in the market regarding the rise of interest rates in US and Mexico,” said Jorge Pacheco, associate director at Scotiabank Mexico. “Additionally, the volatility of the TIIE has risen substantially in the past year, which has made it attractive to investors.”

In line with the trend in the rest of the region, the appetite for index-linked products is gaining momentum in Mexico, with May’s standout benchmarks the S&P 500, Dax and Ibex 35. The main attraction is the record high levels all these indices hit in April. However, both the Dax and Ibex 35 have since changed course and started to fall, which may inspire investors to return to the perennially favoured FX-linked products.

In Brazil, there is a similar reorientation towards equity index underlyings, such as the Eurostoxx 50 and S&P 500. Since 2011, some of the biggest Brazilian companies, such as Vale and Petrobras, experienced a substantial fall in price, which led investors to deviate from share-linked products or to invest in foreign companies, such as Apple or Google. The largest economy in Latin America experienced an intense fall since the end of 2011, and it has still not recovered.

For single stock underlyings in the Americas, Apple was the most popular. The Apple stock is very attractive as a structured product underlying, in part because it has decent volatility and historically it tends to go up in value, which provides a directional play in addition to a good coupon, according to Bertoneche. “On top of this, Apple has a great story; it is a great brand that has a lot of new things coming out, such as the Apple Watch,” said Bertoneche. “Investors are buying the story and the fact that it is value-friendly in terms of pricing.”

In the US alone, May sales of structured products linked to Apple stock reached $176m. These are the biggest sales of structured products linked to Apple in a single month since the company went public, according to SRP data. This is in response to record-breaking quarterly earnings report announced by the California-based technology company at the end of April, when the company posted quarterly revenue of $58bn and quarterly net profit of $13.6bn, with growth fuelled by record second quarter sales of the iPhone and Mac, and an all-time record performance of the Apple App Store.

The majority of May’s Apple-linked products were reverse convertibles with a knockout feature. Many investors either feel that Apple is unlikely to go down, or, if it does drop, they are happy to own it at a lower price than it is today.

“We are seeing investors more open to innovation and dialogue,” said Bertoneche. “People are looking and trying to diversify a bit in this tricky market.”

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Volatile Eurostoxx increases demand from the Americas