Mid-March 2020 was a turning point for structured products dealers exposed to long term SX5E autocalls. Following the Covid outbreak and governmental pressures, 2020 and 2021 dividends showed first signs of weakness (Act 1) and then collapsed below any hedging model prediction, causing $100s of millions of losses across the street (Act 2).
๐๐ฎ๐ ๐ญ๐จ ๐ญ๐ก๐ ๐๐จ๐ง๐๐ฅ๐ข๐๐ญ ๐ข๐ง ๐๐ค๐ซ๐๐ข๐ง๐, 2022 ๐ก๐๐ ๐ ๐ฏ๐๐ซ๐ฒ ๐ฌ๐ข๐ฆ๐ข๐ฅ๐๐ซ ๐๐๐ญ 1 :
ยท On March 9, 2020, SX5E was down 21% YTD , Dec21 divs were down 19% (totally within model prediction), but Dec20 divs (announced but not voted) were showing the first signs of weakness and were down 7%.
ยท On March 4, 2022, SX5E was down 15% YTD, Dec23 divs were down 14% YTD (totally within model prediction), but Dec22 divs ((announced but not voted) were showing the first signs of weakness and were down 5% YTD and down 10% from the top.
๐๐ฎ๐ญ ๐ ๐๐ข๐๐๐๐ซ๐๐ง๐ญ ๐๐๐ญ 2 ๐ฌ๐จ ๐๐๐ซ :
ยท Unlike in mid-March 2020, SX5E spot bounced back and limited its loss, limiting the selling pressure of exotic traders on dividends. In the absence of regulatory pressure on dividends, some funds came in and bought the dip on Dec22 divs to pocket the unjustified discount. As a result, structured products desk should be fine for now. Dec23 moved back up in line with SX5E.
ยท Now, It will be interesting to see if the gap Dec22/Dec23 closes in 2022 in the same way as the gap Dec20/Dec21 closed in 2020 ?
