July ends on softer note despite Bank of America’s huge push, selling 61.45% of week’s volume

By Emma Trincal

New York, Aug. 5 – Market turbulence along with investor fixation on the stock market have caught on, with last week’s action pushing monthly volume down 21% in July to $2.99 billion from $3.79 billion in June, according to preliminary data compiled on Tuesday by Prospect News.

At the same time, investors favored bullish bets. The largest offering was designed to enhance returns while giving full exposure to a market decline.

July slowdown

July was also disappointing compared to a year ago, falling 23% from $3.88 billion in July 2014, the data showed.

The weekly volume amounted to $1.63 billion, which is weak for an end-of-the month week, according to weekly data for 2015.

The monthly decline had a negative impact on the year-to-date growth. Volume now stands at $27.95 billion. While this is nearly 11% more than the $25.21 billion that priced during the first seven months of last year, the growth has receded compared to year-to-date figures observed in previous weeks, which showed a 15% advance on average.

Bank of America was by far the dominant agent last week. It priced $1 billion in 29 offerings, or 61.45% of the total volume. It also sold the top 20 deals, which totaled about $888 million.

The most popular structures were leveraged return with no buffer or barrier (35% of the total) as well as the so-called market-linked step-ups (23%), both sold by Bank of America’s brokers.

Those two types of notes shared a bullish approach: all the products featured full downside exposure and focused on return enhancement sometimes over a short period of time.

Leveraged giants

The top offering – and also the seventh largest deal of the year in size – was Bank of America Corp.’s $168.52 million of 14-month Accelerated Return Notes linked to the S&P 500 index. The upside leverage factor was three and the cap 10.41%. Investors were fully exposed to the downside.

“You’re getting three times the upside, so you have to pay for that. There is no downside protection because the emphasis is on the return. It’s your risk-reward,” said a sellsider.

He said that structured notes add more risk than other types of securities but offer the potential for higher returns.

“Bonds and stocks move the opposite way. The saying is the bond market likes human sacrifice. If the economy is weak, it’s strong for the bond market. The Fed will lower rates. For stocks, it’s the opposite. A weak economy is just not good for equities.

“If you combine two items, bond and equity, you’ll get more bang for your bucks. You’ll also be taking more risk.”

Bank of America priced another large 14-month leveraged deal – the second for the week – with its $101.13 million of 0% Accelerated Return Notes linked to the Euro Stoxx 50 index. The structure was identical but the cap was 16.2%.

“The stock market is in for a correction. That’s why you can get the leverage on those deals. It’s because the market is telling you prices can go down. The options market is very efficient,” said the sellsider.

Market-linked step-ups

Credit Suisse AG, London Branch priced $84.21 million of three-year autocallable market-linked step-up notes tied to the Euro Stoxx 50 index. Ranked No. 3, this deal was also distributed by Bank of America.

Market-linked step-ups, which combine a digital payout and a delta one exposure without capping the infinite range above the step strike, tend to be popular among investors, for the most part, clients of Merrill Lynch.

The notes were automatically called at par of $10 plus a call premium of 12.13% if the index closed at or above the initial level on either annual call date.

If the index finished above the step-up level, 130% of the initial value, the payout at maturity would be par plus the index return.

If the index gained by up to the step-up level, the payout was par plus the step-up payment of 30%.

Otherwise, investors were fully exposed to any losses.

“There’s a lot of controversy with this digital stuff,” the sellsider said.

“When you have contingency, a lot can go wrong. I like the three-time leveraged deal better. It’s plain vanilla. The further you go away from plain vanilla, the more chances you have of taking more risk.”

Sources tried to explain the bullish bias among investors.

For some, it was simply the signature of Bank of America, a firm that markets itself as bullish.

Still, the aggressive nature of those products remained a surprise for some.

“It’s hard to be completely bullish in this market with all the uncertainty that comes from the Fed, China, the collapse in oil and commodities,” said Paul Weisbruch, vice president of options sales and trading at Street One Financial.

In the United States, the Federal Reserve’s minutes released last week did not bring any clarity about the timing of the interest rate hike, he said, with market bets split between September and December.

“We noticed the absence of people purchasing protection, and we’re kind of perplexed by that,” he said.

“We’re in the midst of a bull market that hasn’t had any significant correction in years. You just get a 1% to 3% selloff and sure enough people jump in to buy on the dips, propelling the indexes to new highs, all of that happening in the course of a few trading sessions.”

He sees risks in investing in this “choppy” market.

“People don’t seem to be concerned by the market selling off as reflected by the VIX around 11 or 12 lately, not the best measure of volatility mind you. But some people look at these levels as indicators of complacency.”

Fed-induced volatility

Weisbruch blamed the Federal Reserve Board for the short-term up-and-down moves of the market.

“The Fed is much more involved in the market on a day-to-day basis. They spoke last week. You had one speech yesterday and one today. The timing is the big question. It drives the market crazy and causes a lot of headwinds.”

Perhaps the fact that all selloffs have been quickly followed by rallies is what makes investors complacent.

“They may feel they don’t need protection since the market always comes back up. But this is not going to last forever,” he said.

“Meanwhile, short-term volatility is very high. You get big moves on the downside and big moves on the upside. The chart of the S&P looks like a camel, quite frankly.

“Just look at Apple. Apple didn’t move a lot in May. Now it has a huge range. It looks like a biotech, and it’s the largest market cap in the world.

“Even large indexes are subject to ample price moves.

“You can’t isolate yourself from the exposure to these big movers like Apple.

“We’re in very choppy markets. We don’t have a trend here.

“This short-term volatility is predicated by the Fed. What could shake up the market would be a surprise in the language they use or the decisions they make. For now, it’s too much information.”

The sellsider agreed that the markets are choppy, but he did not attribute the volatility to the Fed.

“I don’t think it’s even an issue anymore. Whether they raise rates in September or December, what’s the difference?

“If you look at historical spreads between the 30-year and the Fed fund rate ... if the Fed increases the rates by 25 basis points, it doesn’t matter. We will still be within the spread.

“The train is already in the station. Eventually it has to happen.”

The second top agent last week was UBS with $170 million sold in 58 deals, or 10.16% of the total. It was followed by Morgan Stanley, which priced 18 offerings totaling $110 million, or 6.49% of the overall volume.

“The stock market is in for a correction. That’s why you can get the leverage on those deals.” – A sellsider

“We noticed the absence of people purchasing protection, and we’re kind of perplexed by that.” – Paul Weisbruch, vice president of options sales and trading at Street One Financial

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.