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).
𝐃𝐮𝐞 𝐭𝐨 𝐭𝐡𝐞 𝐜𝐨𝐧𝐟𝐥𝐢𝐜𝐭 𝐢𝐧 𝐔𝐤𝐫𝐚𝐢𝐧𝐞, 2022 𝐡𝐚𝐝 𝐚 𝐯𝐞𝐫𝐲 𝐬𝐢𝐦𝐢𝐥𝐚𝐫 𝐀𝐜𝐭 1 :
· 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%.
· 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.
𝐁𝐮𝐭 𝐚 𝐝𝐢𝐟𝐟𝐞𝐫𝐞𝐧𝐭 𝐀𝐜𝐭 2 𝐬𝐨 𝐟𝐚𝐫 :
· 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.
· 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 ?