Posted on 08/26/2007 4:56:29 PM PDT by djf
Carry trade unwinds as yen hits one-year high
An anonymous investor has placed a bet on an index of Europe's top 50 stocks falling by a third by the end of September, as world equity markets plunged for a third day and volatility hit a three-year high.
The mystery investor has bought put option contracts on the DJ Eurostoxx 50 index that will result in a profit if it plunges to 2,800 or below by the end of September. Based on the 2,800 strike price, the position covers a notional €6.9bn, and potentially even more using a market price of about 4,100 when the trades were done on Tuesday and Wednesday.
The identity of the investor is unknown but market sources speculated it was either a large hedge fund hedging itself against deepening losses, or a long-only fund manager pressing the panic button to protect its gains.
The investor has bought a total of 245,000 put options on the index. The September put option with a 2,800 strike was the most popular DJ Eurostoxx 50 contract yesterday, according to data from Bloomberg.
Volatility in European equity markets has risen sharply this week as investors cut back on the amount of risk they are taking. The VSTOXX index, which measures the volatility of the DJ Eurostoxx 50 index, hit 34 this morning, which is more than double its three-year average.
Similarly the volatility of the US stock market was trading at almost three times its three-year average, hitting 30 yesterday.
However, both indices continue to trade below their 2002 highs.
European stock markets were trading down almost 3% at by 13:00 GMT today, after large drops in Asia and Australia overnight. The Australian market fell 300 points at one stage when futures trading was suspended for over an hour and traders were forced to hedge positions by selling physical stocks rather than futures.
An analyst at Goldman Sachs JB Were in Australia wrote: "I think I shall remember this day as the day that I saw the market go to hell, look into the abyss - didn't like what it looked like and then came screaming back up as far away from there as it could get. ... It was a truly spooky day and I’ve seen a lot over the last 20 years but today will be one that anyone who saw it will never forget. But this is what market bottoms are made out of."
The rise in volatility and risk aversion has also contributed to a sharp appreciation in the Japanese yen, which has been used to finance the so-called carry trade, where investors borrow in a low-yielding currency to invest in one with a higher-yield.
Analysts' belief that the yen carry trade is set for a major unwinding has intensified today as the Japanese currency continued to rally in morning trade.
The yen strengthened today as it broke through several psychological barriers. The yen hit 113.60 against the dollar by 12:35 GMT, the first time in more than a year it has dropped below 114. The yen was substantially up against the dollar from yesterday, when it traded at above 116.
Simon Derrick, head of currency research at Bank of New York Mellon, said: "With any hope of even a brief bounce emerging in the yen crosses evaporating in the fierce glare of another horrible close in New York, it is clear that the vicious, self-reinforcing, downward spiral we were worrying about is already firmly established."
One guess. George Soros
Soros was the first person that came to mind for me also...Hope he loses it all since he’s such a loser himself!
From the article ... scary:
~~~~~~~
European stock markets were trading down almost 3% at by 13:00 GMT today, after large drops in Asia and Australia overnight. The Australian market fell 300 points at one stage when futures trading was suspended for over an hour and traders were forced to hedge positions by selling physical stocks rather than futures.
An analyst at Goldman Sachs JB Were in Australia wrote: “I think I shall remember this day as the day that I saw the market go to hell, look into the abyss - didn’t like what it looked like and then came screaming back up as far away from there as it could get. ... It was a truly spooky day and I’ve seen a lot over the last 20 years but today will be one that anyone who saw it will never forget. But this is what market bottoms are made out of.”
The rise in volatility and risk aversion has also contributed to a sharp appreciation in the Japanese yen, which has been used to finance the so-called carry trade, where investors borrow in a low-yielding currency to invest in one with a higher-yield.
Analysts’ belief that the yen carry trade is set for a major unwinding has intensified today as the Japanese currency continued to rally in morning trade.
The yen strengthened today as it broke through several psychological barriers. The yen hit 113.60 against the dollar by 12:35 GMT, the first time in more than a year it has dropped below 114. The yen was substantially up against the dollar from yesterday, when it traded at above 116.
Simon Derrick, head of currency research at Bank of New York Mellon, said: “With any hope of even a brief bounce emerging in the yen crosses evaporating in the fierce glare of another horrible close in New York, it is clear that the vicious, self-reinforcing, downward spiral we were worrying about is already firmly established.”
I thought of him also. He has the funds and the sneakiness to do it.
I got a bad feeling.
If you believe things can keep going up forever, I got a nice condo I’ll let ya have dirt cheap...
(not really. Just making a point)
I'm thinking a *major* European terrorist attack--bioweapons or a radiological weapon. Remember the rumors of shorts of airline stocks before 9-11?
Anti-Liberal Sarcasm Torpedo ARMED. FIRE!!
...or there's always Harry Reid.
Buy your "U.S. *OUT* of North America T-shirts NOW and beat the rush!
Cheers!
Terrorist attack?
It could signal a possible terror attack soon.
Not sure what to think...
Or somebody with insider knowledge about some of the big economic players...
Or a Gulf States emir or prince .. and there are some heavy duty players.
http://www.nypost.com/seven/08262007/business/dubai_dubai_do.htm
http://www.gulf-news.com/business/Investment/10149506.html
http://www.denverpost.com/ci_6692992?source=rss
“One guess. George Soros”
My guess as well.
Hopefully not a bunch of mideastern types...
George Soros would like the to see the US market crash. I would look to either Far East Asia or Near East Asia for the culprit.
This kind of cr^p reminds me of B52, a Japanese trader who would put up a bid for 52 million of the long bond. He eventually tried something illegal and went to jail.
The article is from the 16th, the point of maximum panic in the various markets.
“I’ll bet my money on de bobtail nag,
Somebody bet on de bay.....
And they’re off! Deutsche Bank comes strong out of the gate, but rounding the turn Credit Lyonais picks up the pace, while Allstom and Daimler fall back. It’s anyone’s race.....
Yeah, what you said, I been reading about this all weekend long
Lots of panic over a simple 10 % correction.
We used to get these every year.
Lots of panic over a simple 10 % correction.
We used to get these every year.
Its a good time to buy.
This article references market action way back on August 16. We’re now in the midst of a {dead cat?} bounce back rally.
10 days after 9/11/2007. Hmmm.
I’ve changed my mind. Anyone want to but my options? ;O)
2 observations:
The article is already a week old.
Options can be re-sold. The buyer would not need to hold them to expiration.
If markets simply dive steeply at any point, the value of a put option can climb (quite dramatically under the right conditions) and the buyer could unload some or all of them for a quick profit.
The person who bought them, would then be facing the expiration.
Could be, technical analysis has led some deep-pockets type to conclude a correction is imminent. They load up on puts. As the market drops, they sell them off a bit at a time.
Could be anyone.
Heck, if I had a supercomputer and a billion dollars, that’s what I’d be trying to do.
Beats working.
“It could signal a possible terror attack soon.”
Most people forget about the short positions that were taken before 911.
I haven’t heard in quite awhile, but my memory is that they were traced back to terrorists.
Airline stocks, etc...
How much does this guy stand to lose or gain if the markets remain steady?
I’ve seen it on a bunch of blogs... lotta chatter. It’s a pretty serious bet, makes ya wonder.
A billion and change...
The date of this report is August 16th — that’s the day after the huge plunge of August 15th and the huge rally on August 17th after the Fed stepped in and lowered the discount rate. Right now, I’d say this trade is in big trouble, after last week’s huge recovery, but that’s just a guess. Maybe the correction will reassert this week... only time will tell.
Well, it’s a bet on the European markets, not ours. And I may not understand it totally, but from what I gather, there is no way to mitigate the possible loss. The index either goes to 2800 in which case he’s even filthier rich, or it doesn’t, in which case he loses the whole shebang.
Or..., worse yet..., someone with an inside scoop on a widespread terrorist event!
Ping to #38
Sounds much more like a form of portfolio insurance then a bet on doom and gloom.
Spooky stuff
Now he needs fire insurance, ‘cause there’s a lot of his money about to go up in flames!
Got it ...thanks.
I read ...who ever it was could lose $760 MILLION give or take a few million.
...proving, once again, that you don’t have to be smart to be rich.
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