Bank of America Merrill Lynch Global Equity Volatility Insights – Market and Trade Recommendations (Aug 2016)

Global Equity Volatility Insights Understanding when risk parity risk increases we estimate 68% of the 09 August 2016 Corrected Unauthorized redistribution of this report is prohibited. This report is intended for [email protected] US Quantifying the (bond-equity correlation) risks to risk parity Last week’s sharp sell-off in JGBs renewed concerns of forced selling by risk parity funds. While the drawdowns in US Treasuries, US equities, and ultimately risk parity portfolios were small and short-lived, the latent risk remains worth monitoring, as (i) leverage is still near max levels across a variety of risk parity parametrizations, (ii) bond allocations are historically elevated, and (iii) markets continue to be sceptical of a 2016 Fed hike. Hence we provide a simple scenario tool to help investors assess what relative moves in bonds and equities could catalyse significant deleveraging by rules-based risk parity funds running vol target overlays. For example, a -2% daily decline in the S&P 500 coupled with a -0.6% fall in 10y Treasury prices (poor diversification) could trigger a 25% deleveraging (of unlevered notional) today, whereas a -4% SPX drop and +1% bond rally (good diversification) would generate no selling pressure, underscoring the critical role played by bond-equity correlation in governing the severity of risk parity unwinds. Europe Buy the seasonal oil dip via bullish X-market risk reversals Selling rich USO (WTI tracker) 3M 25d puts to fund cheaper SXEP (European Oil & Gas equity) calls is historically attractive. Indeed the number (>2) of long SXEP calls per short USO put is in the 90 th %-ile since 2008. The trade leverages both our commodity strategists’ ‘buy the dip’ view and our equity strategists’ bullish outlook on the Oil & Gas sector, which has been the worst performing over the last 1M. Moreover, the average payoff of being long SXEP 3M 25d calls would have been >2x greater than USO 3M 25d calls (owing to more frequent positive returns), when sized for the same upfront cost. Asia Own NKY Sep/Oct calendar call at vol hit YTD low level going into the Sep BOJ Post the Jul-16 BoJ and the announcement of a ¥28.1tn fiscal stimulus package, NKY and USDJPY 1M vols have dropped to near YTD low levels, both USDJPY and NKY 2M-1M term structures are historically steep, pricing in a slow summer. Our strategists believe Sep-16 BoJ’s will likely create uncertainty, however, NKY Sep-Oct ATM fwd vol currently trades at the low end of its trading range going into BoJ’s YTD. Plus, our analysis suggests a further squeeze in yield will likely be positive for the NKY. We recommend buying 1x NKY Oct 17500 call vs. selling 0.65x Sep 17250 call. Trade update: Closing the NKY Aug/Sep put calendar trade at 0.28% premium Korean auto-callable issuance slightly rose while NKY Uridashi issuance fell in July >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 25 to 26. Analyst Certification on page 23. 11657850 Equity Derivatives Global Global Equity Derivatives Rsch MLPF&S Chintan Kotecha Equity-Linked Analyst MLPF&S [email protected] Nitin Saksena Equity-Linked Analyst MLPF&S [email protected] Stefano Pascale Equity-Linked Analyst MLPF&S [email protected] William Chan, CFA >> Equity-Linked Analyst Merrill Lynch (Hong Kong) [email protected] Jason Galazidis >> Equity-Linked Analyst MLI (UK) [email protected] Anshul Gupta >> Equity-Linked Analyst MLI (UK) [email protected] Abhinandan Deb >> Equity-Linked Analyst MLI (UK) [email protected] Benjamin Bowler Equity-Linked Analyst MLPF&S [email protected] See Team Page for Full List of Contributors Table 1: 3M volatility (weekly changes) Implied Realized S&P500 11.9 (-0.7) 13.2 (-0.1) ESTX50 19.2 (-0.6) 27.7 (0.4) FTSE 12.6 (-0.7) 18.9 (0.1) DAX 17.8 (-1.1) 24.6 (-0.1) NKY 21.7 (-1.1) 27.2 (-1.2) HSI 17.5 (-0.6) 17.2 (-0.5) KOSPI 12.6 (-0.4) 12.9 (0.5) EEM US 18.8 (-0.8) 22.1 (-0.9) TOP40 19.4 (0.3) 18.1 (-0.4) RDX 28.2 (-1.6) 25.8 (-0.6) IBOV 21.7 (0.0) 21.7 (-0.7) ISE30 29.9 (-0.1) 27.7 (-0.4) Source: BofA Merrill Lynch Global Research BofAML GFSI TM X-Asset Risk Landscape GFSI makes new YTD lows as BoE & NFP boost risk assets The GFSI declined to a new YTD low of 0.18 as of 5-Aug, a level not seen since Nov-15. With the BoE surprising to the upside in terms of cutting rates, re-starting QE and guiding towards more accommodative policy down the line, as well as better than expected US non-farm payrolls, risk assets globally got a boost. • Credit experienced the biggest decline in stress across assets: Chart 3 shows that credit (followed by equities) experienced the biggest weekly stress decline. Indeed, Chart 5 and Chart 6 show that sovereign risk as measured by IG & sub-IG foreign sovereign bond spreads experienced the most significant weekly declines in stress versus their history in the GFSI. • Europe continues to be most stressed region: Chart 4 shows that Europe is the most stressed region in the GFSI, despite the stress declines last week. USrelated stresses which were already relatively lower vs the other regions, were more resilient. Indeed the only significant move higher in regional stress was in USD Libor-OIS spreads (Chart 5), which our Rates strategists view as driven by the anticipation of US money market mutual fund reform in October. . Chart 1: Latest* stress across GFSI sub-components 4.0 3.0 Red shaded area highlights components in Bearish GFSI Stress 2.0 1.0 0.0 -1.0 -2.0 3.50 Basis Swap USDJPY 1.78 Basis Swap EURUSD 1.61 1.24 Govt-OIS EUR Bond Basis EUR 0.92 CDS Index Skew USD Euro member Bond… USDJPY Imp Vol Libor-OIS USD Comdty Imp Vol Crude ESTX50 Skew SP500 Skew Nikkei Skew USDJPY Skew GBPUSD Imp Vol Govt-OIS USD EURJPY Skew Libor-OIS GBP Volume Flow HY Bond Flow CDS Index Skew EUR Bond Basis USD IG Foreign Sovrn Bond… AUDJPY Skew Equity Fund Flow EM Nikkei Imp Vol HY Corp CDS USD Libor-OIS EUR ESTX50 Imp Vol Risk Skew Flow Sub IG Foreign Sovrn… HSI Imp Vol Libor-OIS JPY Green shaded area highlights components in Bullish territory IG Corp CDS USD HY Corp CDS EUR Comdty Imp Vol Gold IG Corp CDS EUR FTSE Imp Vol Money Mkt Flow Comdty Imp Vol Copper -0.73 3Y/5Y Credit Curve EUR -0.77 SP500 Imp Vol -0.81 Int Rate Imp Vol USD -0.82 EURUSD Imp Vol -1.11 Int Rate Imp Vol EUR Source: BofA Merrill Lynch Global Research. *Latest as of 05-Aug-16 Chart 2: Change** in stress across GFSI sub-components. The biggest moves were declines in stress; led by credit. Notably stress in GBP vol declined post BoE 0.6 Change in GFSI Stress 0.2 -0.2 -0.6 -1.0 0.26 Volume Flow 0.15 EURJPY Skew 0.13 0.11 CDS Index Skew USD Basis Swap USDJPY 0.10 USDJPY Skew Govt-OIS EUR Int Rate Imp Vol USD Govt-OIS USD Comdty Imp Vol Copper Source: BofA Merrill Lynch Global Research. **Latest as of 05-Aug-16. Change vs 1 week prior (29-Jul-16). Libor-OIS USD USDJPY Imp Vol Money Mkt Flow Int Rate Imp Vol EUR HY Bond Flow Comdty Imp Vol Gold HY Corp CDS USD HY Corp CDS EUR 3Y/5Y Credit Curve EUR IG Corp CDS EUR Comdty Imp Vol Crude Euro member Bond… IG Corp CDS USD Bond Basis USD Equity Fund Flow EM EURUSD Imp Vol HSI Imp Vol Libor-OIS JPY Libor-OIS EUR ESTX50 Skew AUDJPY Skew ESTX50 Imp Vol FTSE Imp Vol SP500 Imp Vol Nikkei Skew SP500 Skew Basis Swap EURUSD Nikkei Imp Vol Libor-OIS GBP -0.22 Sub IG Foreign Sovrn… -0.23 GBPUSD Imp Vol -0.25 -0.43 Bond Basis EUR IG Foreign Sovrn Bond… -0.63 CDS Index Skew EUR 2 Global Equity Volatility Insights | 09 August 2016 The GFSI Risk Allocator favours being underweight risk assets given the distribution of stresses within the GFSI. The percentages of Bullish, Bearish and Neutral GFSI components (as used in the Risk Allocator) were 8.7%, 13.0% & 78.3%, respectively as of 5-Aug. The Risk Allocator (using Bull, Bear & Neutral weights of 2, 0, 1) suggests reducing the underweight position to 4.3% UW from last week’s 17.4% UW. Chart 3: Stress across assets (Rates & FX are the most stressed asset classes – credit stress declined the most last week Chart 4: Stress across regions (Europe is the most stressed region in the GFSI while EM is the least stressed) 0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 0.01 -0.01 -0.01 -0.05 -0.12 Commodities Rates FX Equities Credit 0.1 0.1 0.0 -0.1 -0.1 -0.2 0.03 -0.11 -0.11 -0.11 US Japan Europe EM Latest stress (05-Aug-16) Change in stress Latest stress (05-Aug-16) Change in stress Source: BofA Merrill Lynch Global Research. 1wk change (22-Jul-16 to 29-Jul-16). Source: BofA Merrill Lynch Global Research. 1wk change (22-Jul-16 to 29-Jul-16). Chart 5: Top 10 movers in stress (1-week abs chg %-ile vs history*) Stress fall Stress rise 100% 99% 100% 95% 93% 90% 85% 81% 80% 78% 77% 80% 69% 70% %-ile of abs chg in stress vs history* 60% 50% IG Foreign Sovrn Bond Spread Sub IG Foreign Sovrn Bond… Libor-OIS GBP CDS Index Skew EUR GBPUSD Imp Vol Libor-OIS JPY Comdty Imp Vol Copper Basis Swap EURUSD Libor-OIS USD Libor-OIS EUR Chart 6: Global volatility & credit spread stress in the GFSI 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 Latest stress (05-Aug-16) 0.04 0.01 Rates Vol Commodity Vol HY CDS -0.01 -0.03 IG CDS Change in stress FX Vol -0.08 -0.10 Equity Vol -0.23 Sovrn risk Source: BofA Merrill Lynch Global Research. * %-ile of weekly move in stress vs all historical weekly moves (earliest 3-Jan-00). Bar colours represent rise (red) or fall (green) in stress. 1wk change (22-Jul- 16 to 29-Jul-16). Source: BofA Merrill Lynch Global Research. 1wk change (22-Jul-16 to 29-Jul-16). Global Equity Volatility Insights | 09 August 2016 3 Volatility in the US Quantifying the (bond-equity correl) risks to risk parity Last week’s sharp sell-off in JGBs (Chart 7) following the BoJ’s decision not to cut rates renewed investor fears of forced selling by risk parity funds. However, the spill-over into US Treasuries was relatively muted (Chart 7), and coupled with a small and fleeting drawdown in US equities, risk parity portfolio volatility failed to rise materially (Chart 8). Consequently, risk parity funds were likely forced to unwind little to none of their leverage last week and remain near max leverage levels (Chart 9). For this very reason, the latent risk in this corner of the quant fund space remains worth monitoring. Furthermore, as we noted post-Brexit, fixed income allocations within risk parity funds are historically elevated today. And with federal-funds futures markets implying a ~25% chance of a Sep rate hike and less than a 50% probability of a Dec hike, bond markets may be surprised by a 2016 Fed hike. Chart 7: Last week’s sharp sell-off in JGBs did not spill-over into US Treasuries 104 103 102 101 100 99 Jan-16 Apr-16 Jul-16 10y JGB futures total return 108 106 104 102 100 98 10y UST futures total return (right) Source: BofA Merrill Lynch Global Research. Daily data from 4- Jan-16 through 5-Aug-16. Chart 8: Consequently, risk parity portfolio volatility remained quite muted 10% 9% 8% 7% 6% 5% 4% 3% 2% Aug- 12 Aug- 13 Aug- 14 Aug- 15 Aug- 16 Historical volatility of unlevered risk parity portfolio Source: BofA Merrill Lynch Global Research. Equity, fixed income, and commodity components within the hypothetical risk parity investment are represented by the S&P500, 10-Year US Treasury Bonds, and the S&P GSCI Index respectively. Risk parity allocations are determined and rebalanced monthly using prior 12-month realized volatility and correlations. Historical volatility calculated using EWMA with a lambda equal to 0.94. Chart 9: Hence risk parity funds did not delever materially and remain highly levered 3 2.5 2 1.5 1 0.5 Dec-12 Dec-13 Dec-14 Dec-15 LOW Vol Target (6%) & Lvg (1.5x) MEDIUM Vol Target (8%) & Lvg (2x) HIGH Vol Target (10%) & Lvg (3x) Source: BofA Merrill Lynch Global Research. Daily data from 31- Dec-12 through 27-Jun-16. Equity, fixed income, and commodity components within the hypothetical risk parity investment are represented by the S&P500, 10-Year US Treasury Bonds, and the S&P GSCI Index, respectively. Risk parity allocations are determined and rebalanced monthly using prior 12-month realized volatility and correlations. Monitoring relative equity/bond moves for potential risk parity deleveraging It is intuitive to think that rising volatility corresponds to an increase in model-driven selling pressure from risk parity strategies. However, what’s less appreciated in our view is the impact on risk parity allocations as a result of the relative dynamics between component volatilities and correlation. For example, through the close on the Monday post-Brexit (27-Jun-16), S&P 500 volatility rose from 9.6% two days prior to 17.9% (increase of 1.9x) while 10-Year US Treasury Futures return volatility rose 4.3% to 6.6% (increase of 1.5x). Despite these outsized vol moves, in a recent report we showed that owing to the diversification (increasingly negative correlation) between equities and bonds, unlevered risk parity portfolio volatility remained stable and hence, target vol overlays were less likely to be subject to model-driven selling. Given low levels of realized volatility across asset classes, it’s also intuitive to expect continued elevated levels of leverage in risk parity products. To the extent that the leverage is via vol control overlays, there are reasonable concerns on the potential market impact should these model-driven investments be forced to simultaneously deleverage. To that end, we provide a simple scenario tool (Chart 10) to help investors assess what relative moves in the S&P 500 and 10-year US Treasury futures could catalyze significant deleveraging by rules-based, vol-controlled risk parity funds. 4 Global Equity Volatility Insights | 09 August 2016 Importantly, this scenario tool is a function of (1) current unlevered risk parity volatility, (2) current risk parity component weights, and (3) the maximum leverage of the target volatility overlay. For simplicity, we used only a two asset risk parity portfolio of equity and fixed income applied to the S&P 500 and 10-Year US Treasury Futures. Chart 10: Current theoretical deleveraging amounts (of unlevered notional) for an equity/fixed income risk parity portfolio with an 8% target volatility overlay and 2x max leverage cap Assumes a trailing unlevered volatility of 3.1%, unlevered equity and fixed income weights of 22% and 78% respectively, and leverage at a maximum of 2.0 times 5% Daily 10-year USD Treasury Futures Total Return 4% 3% 2% 1% 0% -1% -2% -3% -4% Brexit Aug-15 Risk Flare Taper Tantrum -5% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% Daily S&P 500 Total Return > 50% Delever 50% to 25% Delever 25% to 0% Delever No Delever Source: BofA Merrill Lynch Global Research. Data as of 5-Aug-16. Equity and fixed income components within the theoretical risk parity investment are represented by S&P 500 total return and 10-Year US Treasury Futures total return. Risk parity allocations are determined monthly and rebalanced using prior 12-month realized volatility. Unlevered portfolio volatility for determining target volatility leverage measured using EWMA with lambda equal to 0.94. For example, last Friday 10-Year US Treasury futures declined about 60bps. Had the S&P 500 declined 2.0%, we would have expected about 25% of the unlevered notional of a model 8% vol-targeted, 2.0x max leverage risk parity portfolio to deleverage. The S&P 500 was in fact up 86bps on a total return basis which according to the tool falls in the region of no deleveraging. Also, to put recent events in perspective, we plotted on the scenario tool the respective moves in the S&P 500 and 10-Year US Treasury futures during the Taper Tantrum (19- Jun-2013), the Aug-15 risk flare (24-Aug-15), and post-Brexit (24-Jun-2016). Note, for an accurate assessment through those events, we would also need to reconfigure the scenario tool for the respective unlevered risk parity volatility and risk parity component weights on those dates. However, with current measures for both, the tool does estimate current deleveraging flows should we see similar equity and bond moves today. Interestingly, equity/bond moves through the Aug-15 risk flare would not cause a deleveraging today. The reason is bonds have increased in allocation since last August (78% vs. 66%), and hence the portfolio is more resilient towards equity market declines (but consequently also more sensitive to fixed income declines). The scenario tool also underscores impact on risk parity leverage as a result of the relative dynamics between component volatility and correlation. For example, the first and third quadrants (upper right and lower left sections) are dominated by scenarios of greater than 50% deleveraging. On the other hand, the second and fourth quadrants Global Equity Volatility Insights | 09 August 2016 5 have episodes of more benign model-driven deleveraging. In each quadrant exists examples of simultaneously increasing equity and bond volatility (that is, high absolute equity and bond daily returns). However, in the first and third quadrant, equity and bond moves are in the same direction, which would likely be an example of increasing correlation. On the other hand, in the second and fourth quadrant equity and bond moves are in opposite directions and hence correlation is subject to a decrease. The main takeaway here is the most risk of model driven deleveraging from vol controlled risk parity funds comes when both volatility and correlation of the underlying components rise together. 6 Global Equity Volatility Insights | 09 August 2016 Week in review & notable trends (US) US equities at new all-time highs on upbeat employment report Both the S&P500 and NASDAQ finished the week higher marking fresh all-time highs as the July nonfarm payrolls and average hourly earnings came in better-than-expected. As a result, VIX fell to its lowest levels since Jul-14 and the SPX 1y vs. 1m ATMf implied vol spread rose to its highest level in almost four years on lower short dated vol. Across other asset classes, the USD finished with gains against other major currencies, while Treasury yields rose across the curve, which partly explained the outperformance (underperformance) in Financials (Utilities) (i.e., +1.7% and -2.7%, respectively). Most companies (86% as of 5-Aug) in the SPX have reported Q2 results and the blended (actual + estimated) yoy earnings decline for Q2-2016 now stands at -3.5%, less than the expected decline of -5.5% as of 30-Jun. Analysts expect CY16 earnings decline of - 0.3% which would mark the first time SPX has reported two consecutive years of earnings decline since 2008. Earnings growth is now expected to resume in Q4-16. Chart 11: The SPX vol term-structure steepened materially on lower shorter dated implied vol with the 1yr-1m ATMf implied vol spread reaching its highest level in almost 4 years 30% 25% 20% 15% 10% 5% 0% -5% Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Spread A - B SPX 1yr ATMf implied vol (A) SPX 1m ATMf implied vol (B) Source: BofA Merrill Lynch Global Research. Daily data from 8-Aug-12 to 8-Aug-16. Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 With SPX rallying on a stronger-than-expected July jobs report, SPX implied vol took a further leg down, especially in the shorter end of the vol curve. Indeed, SPX 1m ATMf implied vol ended the week at 9.1 vol pts, within striking distance of its 2- year lows. On the other hand, longer dated ATMf implied vols did not fall nearly as much causing a material steepening in the vol term structure. For instance, the 1yr-1m implied vol spread reached its highest level since 27-Sep-12 (6.4 vol pts). Chart 12: Near multi-year flat call skew on Biotech (IBB) makes long call spreads an attractive option strategy to initiate or replace long positions to lock-in profits from the recent strong rally 55% 20.0% 50% 45% 40% 17.5% 15.0% 35% 45th %-ile 12.5% 30% 25% 10.0% 20% 7.5% 15% 10% 5% 5.0% 2.5% 0% 0.0% 2011 2012 2013 2014 2015 2016 5-day MA of spread A - B (RHS) IBB 1M ATMf implied vol (A) IBB 1M 110 implied vol (B) Source: BofA Merrill Lynch Global Research. Daily data from 5-Aug-11 to 5-Aug-16. Since its peak in Jul-15, the Biotech sector (NBI Index) has been on one of its worst runs in decades, underperforming the broad market benchmark (SPX) by a whopping ~30% on a total return basis. However, more recently the sector has regained some lost ground on solid large-cap earnings reports (i.e., +13.2% since 1-Jul, 9.3% above the SPX). While short-dated implied vol has dropped considerably as a consequence of the recent rally, it still remains supported on a 5-yr basis. Also, upside vol has been richening vs. ATM vol, with the 1m IBB ATM-110 implied vol spread reaching its lowest level in five years on 4-Aug and finishing the week at 1.2 vol pts (3 rd 5-yr %-ile). Investors with a constructive view on the sector who are concerned about a reversal of the recent gains should consider replacing or initiating long position via short dated ATM calls partially financed by expensive OTM calls. Global Equity Volatility Insights | 09 August 2016 7 Chart 13: The 2016 election move implied by the VIX term structure is, in our estimate*, approx. 1.4%... Interpolated Oct future (level where Sep/Oct/Nov Fly = 0) Expected Oct future based on median level of ~1M/2M/3M fly VIX futures (adjusted for holidays) 18.1 17.9 17.6 17.4 17.1 16.9 16.6 16.4 16.1 15.9 15.6 15.4 15.1 14.9 14.6 Excess vol vs median levels Implied daily move on election day = 1.4% vs. a typical realized ''election day" move of 1.5% (see Chart 14) Sep16 Oct16 Nov16 Source: BofA Merrill Lynch Global Research. Daily data from 2-Jun-09 to 5-Aug-16. *Day count adjustment = we adjust the VIX futures curve to reflect the Trade-Day/252 day-count convention and use SQRT ((30/365*252/T)) as the adjustment factor to convert to the common day-count convention used in variance swaps. Term-structure adjustment = we add the median level of the daycount adjusted generic 1m/2m/3m fly (i.e. -0.5x Sep fut. +1xOct fut. -0.5x Nov fut.) to take into account the usual VIX term structure. Using the VIX term structure in the Sep/Oct/Nov buckets and adjusting for term structure/day convention (see footnote to Chart 13), we estimate the option markets’ implied move over a single day in the Oct-Nov period (which encompasses the US election on 8-Nov). Our estimated implied move is 1.4% which is notably very close to the typical 1-day post-election day SPX realized move over past election cycles (1.5% since 1928) (see Chart 14). Importantly, there is a larger-than-typical variation in the distribution of all daily post-election SPX returns (34.0 vol pts vs. 18.4 vol pts for daily SPX returns since Jan-1928), with the largest and the fourth largest daily post-election SPX returns since 1928 occurring in the last two election cycles alone (see Chart 14). Chart 14: …which is notably very close to the typical SPX daily realized move post-elections since 1928 6.0% 5.0% 4.0% 3.0% 2.0% Implied move around 2016 election day (see Chart 13) Hence, investors who believe this is not your typical election (to quote President Obama at the latest Democratic National Convention) may still find that option markets are currently pricing too little of a move. However, as we have recently argued the debate about whether a Trump win would be good or bad for markets coupled with the inability to exactly pinpoint real risks are likely headwinds to a sizeable market shock. 1.0% 0.0% 6-Nov-28 8-Nov-32 3-Nov-36 5-Nov-40 7-Nov-44 2-Nov-48 4-Nov-52 6-Nov-56 8-Nov-60 3-Nov-64 5-Nov-68 7-Nov-72 2-Nov-76 4-Nov-80 6-Nov-84 8-Nov-88 3-Nov-92 5-Nov-96 7-Nov-00 2-Nov-04 4-Nov-08 6-Nov-12 8-Nov-16 Abs. post election day SPX realized move Average from 1928 to 2012 Source: BofA Merrill Lynch Global Research. Data from Nov-28 to Aug-16. 8 Global Equity Volatility Insights | 09 August 2016 Table 2: Current S&P500 volatility and correlation measures relative to the prior two year of historical daily data 1-week change Over 2-year historical period 5-Aug-16 29-Jul-16 Change Current ranking Minimum 25% Median 75% Maximum 1-month ATM implied volatility 9.1% 9.9% -0.8% 0.1% 9.0% 11.2% 12.7% 15.4% 31.8% 1-year ATM implied volatility 15.4% 16.0% -0.6% 13.1% 14.4% 15.8% 16.5% 17.6% 22.5% 1-week intraday realized volatility 8.6% 9.9% -1.3% 11.5% 6.1% 10.1% 12.1% 16.4% 53.7% 1-year minus 1-month term structure 6.4% 6.1% 0.3% 100.0% -12.0% 2.1% 3.7% 4.6% 6.4% 3-month 90 minus 110 skew 9.5% 9.6% -0.1% 3.1% 9.1% 11.1% 11.5% 11.9% 13.8% 1-year top 50 implied correlation 50.31 55.08 -4.77 3.3% 48.38 53.81 55.57 57.90 67.89 3-month top 50 realized correlation 47.71 51.08 -3.38 74.9% 25.85 33.29 39.89 47.71 60.41 VIX 1-month ATMf implied vol 82.6% 88.8% -6.2% 40.3% 62.1% 77.4% 86.1% 98.1% 162.2% VIX 1-month 110 minus 90 skew 20.0% 22.2% -2.2% 39.7% 9.3% 17.9% 20.9% 23.9% 30.3% Source: BofA Merrill Lynch Global Research Global Equity Volatility Insights | 09 August 2016 9 Volatility in Europe Buy the seasonal oil dip via bullish X-market risk reversals Levered X-market risk reversal: Sell 1x USO 3M 25d (~88% strike) puts to fully fund 2.1x SXEP (Oil & Gas equity) 25d (~106% strike) calls (indic.) Alternative (unlevered) implementation: Sell USO 25d puts to fund fully fund closer to the money SXEP calls The seasonal sell-off in oil presents a ‘buy the dip’ opportunity according to our commodity strategists, who expect prices to rebound to $55/bbl by year end. In fact current levels of ~$40 are close to the summer floor ($39) they had previously suggested. BofAML strategists have turned bullish Oil & Gas equities given more CB (BoE) easing, attractive div yields and exposure to the EM recovery narrative. Moreover, Oil & Gas has been the worst performing Stoxx 600 sector over the last 1M, suggesting it has ample scope to rally if it is to catch up to the broader equity market (Chart 15). USO (Oil ETF) puts are rich vs. SXEP (European Oil & Gas equity) calls: The number of long SXEP 25d calls that can be fully funded by selling 1 short USO 25d put is near historical highs (90 th percentile since ’08, Chart 16). In contrast, both SXEP and USO risk reversals are only modestly more attractive than their historical medians. SXEP calls would have offered better value than USO calls at current levels in terms of average historical payoffs as well as the frequency of positive returns (when sized for the same upfront cost, Chart 17). Note that an unlevered implementation of the trade allows for early participation in any potential SXEP rally (as the SXEP call strike is near the money) while providing a ~12% buffer before incurring losses (at expiry) on the short USO leg (Chart 18). CSPP has purchased an outsized proportion of Energy corporate bonds and this has yet to feed through to equities according to our credit strategists (Chart 19): The number of Energy corporate bonds bought by the ECB is approx. 45% of the total eligible amount – the 3 rd highest proportion across all European sectors. Potential USO losses may be dampened if the recent $/Oil correlation persists: Since mid-2015 oil drawdowns have largely coincided with USD weakening (Chart 20). Chart 15: SXEP (Oil & Gas equity) has been the worst performing Stoxx 600 sector over the last 1M 20% 1M Sector Performance 15% 10% 5% 0% -5% Source: BofA Merrill Lynch Global Research. Data from 7-Jul-16 to 5-Aug-16. SXXP return SXAP SX8P SX7P SX86P SXPP SXFP SXIP SXOP SXNP SXTP SX4P SXRP SXMP SXKP SXQP SX6P SX3P SXDP SXEP Chart 16: The leverage provided by the X-market risk reversal (long SXEP call / short USO put) is attractive from a historical standpoint 2.5 2.0 1.5 1.0 SXEP call vs. USO put SXEP call vs. put USO call vs. put 90% 80% 70% 60% 50% # of long 3M 25d calls per short 3M 25d put percentile of ratio (rhs)* Source: BofA Merrill Lynch Global Research. Data as of 5-Aug-16, using indicative mid prices. *Percentiles since Jan-08. 10 Global Equity Volatility Insights | 09 August 2016 Chart 17: SXEP calls would have generated a higher average payoff and more frequent positive returns vs. USO calls (when sized for an upfront cost equal to the current price of the USO 3M 25d put) 60% 50% 40% 30% 20% 10% Avg Payoff Freq of >0 2.1x SXEP 3M 25d calls: 2.9% 27% 1.3x USO 3M 25d calls: 1.4% 10% 0% '08 '09 '10 '11 '12 '13 '14 '15 '16 SXEP Call Payoff USO Call Payoff Source: BofA Merrill Lynch Global Research. Data from 1-Jan-16 to 5-Aug-16. Backtesting is hypothetical in nature and reflects application of the screen prior to its introduction. It is not intended to be indicative of future performance. Chart 18: Selling the USO 25d put (~8.7 strike as of 5-Aug) to buy the SXEP 42d call (~280 strike as of 5-Aug) for ~0 provides early upside participation and a ~12% downside buffer on the short USO put leg 300 290 280 270 260 250 240 230 220 Long SXEP call strike (unlevered implementation) Jan16 Jan16 Jan16 Feb16 Feb16 Mar16 Mar16 Apr16 Apr16 May16 May16 Jun16 Jun16 Jul16 Jul16 Jul16 SXEP Short USO put strike USO (rhs) Source: BofA Merrill Lynch Global Research. Data from 1-Jan-16 to 5-Aug-16. Backtesting is hypothetical in nature and reflects application of the screen prior to its introduction. It is not intended to be indicative of future performance. 13 12 11 10 9 8 7 Chart 19: Number of bonds purchased by the ECB in their CSPP programme by sector 140 # Bonds Purchased 120 % of Eligible 100 80 60 40 20 0 Source: BofA Merrill Lynch Global Research. 55% 45% 35% 25% 15% Chart 20: Oil drawdowns have recently coincided with $ weakening 70% 50% 30% 10% -10% -30% Negative correlation would have helped dampen potential USD losses on the short USO put leg '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 USO vs. EURUSD correlation* Conditional on USO down Source: BofA Merrill Lynch Global Research. Data from 18-Apr-07 to 5-Aug-16. Global Equity Volatility Insights | 09 August 2016 11 Week in review (Europe) The FTSE100 reached 13 months highs last week as the BOE exceeded market expectations by announcing a 25 bp rate cut (its first rate cut in 7yrs), a further £60bn of QE purchases (vs forecasted £50 bn) while also hinting at more potential stimulus in the autumn. Unsurprisingly, GBPUSD fell further on the back of this. The better-thanexpected US nonfarm payrolls that beat all surveyed forecasts helped drive US markets to new all-time closing highs also helped European equities rebound from a mid-week trough. As a result, the V2X has retraced close to its 11 month lows as foreseeable catalysts are behind us for a potentially quieter end to the summer. • Long dated ESTX50 var term structure is historically elevated; vol term structure is not: The dislocation of 3y var convexity (var strike/ATMf volatility) vs that of 1y, which in itself is near extremes, is particularly striking • European issuance of ESTX50-linked structured products picked up in July: We estimate issuance of ~€120Mn/day in July, which compares to €5Mn daily issuance in June and €55Mn daily issuance in 1H16 (excluding June). • The current vega outstanding in SX5E-linked products is €143Mn, which is in its 97 th percentile since Jan-14 (when our records begin). Moreover, this could rise to as much as €169Mn if the SX5E rallied to 3280. Long-dated ESTX50 var term structure is steep; vol term structure is not Despite a significantly steep longer dated ESTX50 variance term structure (vs its average since 2008), the volatility term structure is nearly flat. As a result, the level of ESTX50 long dated variance is historically elevated vs the level of long dated vol. The dislocation of 3y var convexity (varswap strike/ATMf vol ratio) vs 1y var convexity (which in itself is near its historic highs) is particularly striking. Chart 21: Longer dated ESTX50 variance term structure is significantly elevated vs long term average – the extreme steepness is not mirrored in the ATMf volatility term structure 30% 28% 26% 24% 22% 20% 18% 16% 1m 2m 3m 6m 1y 2y 3y vol surface - Current SX5E var surface - Current vol surface - Avg since 2008 var surface - Avg since 2008 Source: BofA Merrill Lynch Global Research. Data: 02-Jan-08 to 5-Aug-16. Current represents snapshot as of 5-Aug-16 Chart 22: ESTX50 variance convexity (varswap strike/ATMf vol ratio) is near extremes – the dislocation of 3y var convexity vs that of 1y, which in itself is near extremes, is particularly striking 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 Jan-08 99.7 percentile 96.1 percentile Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 SX5E 1y var convexity Feb-12 Sep-12 Apr-13 Nov-13 Source: BofA Merrill Lynch Global Research. Data: 02-Jan-08 to 5-Aug-16. Jun-14 Jan-15 Aug-15 Mar-16 SX5E 3y var convexity Structured product Jul update: EU issuance picked up; Korean issuance lagged We estimate issuance of ESTX50-linked structured products in Europe was ~€120Mn/day in July, much higher than the €5Mn daily issuance in June and €55Mn daily issuance in 1H16 (excluding June). This compares to ~€20Mn daily issuance in July out of Korea. 12 Global Equity Volatility Insights | 09 August 2016 Chart 23: European issuance of ESTX50-linked products rose to €9.9bn so far in 2016 (vs €7.2bn as of 4-Jul) EUR bn 35 30 25 20 15 10 5 0 Korea Europe 2016 annualised 16.6 14.3 16.7 9.9 9.5 1.2 3.1 2013 2014 2015 2016 Source: BofA Merrill Lynch Global Research. Data as of 4-Aug-16 12.3 Total annualised expected: 20.5 Chart 24: Issuance of ESTX50-linked structured products in Korea was in line with the 2016 issuance trend EUR bn 2.5 2.0 1.5 1.0 0.5 0.0 Jan-14 Mar-14 May-14 Issuance of SX5E structured products in South Korea Rapid growth of SX5E products in Korean structured market Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Source: BofA Merrill Lynch Global Research. Data as of 31-Jul-16 Issuance slowed down due to China sell-off and new local regulations Nov-15 Jan-16 Mar-16 May-16 Jul-16 Current vega outstanding near at least 2.5y high as European issuance picks up We estimate the current vega outstanding in SX5E-linked products (issued in Europe and Korea) sums up to €143Mn, which is in its 97 th percentile since Jan-14 (when our records begin). Moreover, this could rise to as much as €169Mn if the SX5E rallies to 3280 (assuming no net SX5E-linked issuance 1 , Chart 25, 26 and Chart 27). Chart 25: We estimate the current vega outstanding in SX5E-linked structured products is EUR 83Mn (European issuance) and EUR60Mn (Korean issuance) Vega (EUR Mn) 120 100 80 60 40 20 0 -20 Max vega: EUR111mn at ~3400 spot level Ref. spot = 2932 Max vega: EUR61mn at ~3000 spot level 2000 2200 2400 2600 2800 3000 3200 3400 3600 3800 4000 4200 4400 4600 4800 5000 SX5E spot level Source: BofA Merrill Lynch Global Research. Data as of 4-Aug-16 Vega (Korean issuance) Vega (European issuance) Chart 26: The ESTX50 vega outstanding due to structured products issuance could rise to EUR168Mn, assuming no new net issuance Vega (EUR Mn) 180 160 140 120 100 80 60 40 20 0 -20 Max vega: EUR168mn at ~3220 spot level Ref. spot = 2932 2000 2200 2400 2600 2800 3000 3200 3400 3600 3800 4000 4200 4400 4600 4800 5000 SX5E spot level Source: BofA Merrill Lynch Global Research. Data as of 4-Aug-16 Vega (Aggregated issuance) 1 i.e. notional of newly issued structured products = notional of expiring structured products Global Equity Volatility Insights | 09 August 2016 13 Chart 27: The current vega outstanding in the ESTX50-linked structured products is EUR 143mn, which is in the 97 th percentile since 3-Jan-14 EUR Mn 160 SX5E structured products vega notional Current SX5E structured products vega notional outstanding 140 120 97th percentile 100 80 60 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Source: BofA Merrill Lynch Global Research. Data as of 4-Aug-16 Table 3: Volatility measures of major equity indices in the EMEA region (data as of 05-Aug-16) 3Mth ATM implied volatility 10D realised volatility 12Mth–3Mth ATM i-vol spread 3Mth 90-110 skew Equity index Weekly Weekly Weekly Weekly Weekly Current change 2Yr percentile Current change 2Yr percentile Current change 2Yr percentile Current change 2Yr percentile return ESTX50 19.2% -0.6% 31% 16.6% 5.6% 29% 1.0% 0.2% 87% 8.4% -0.1% 79% -0.6% FTSE 12.6% -0.7% 21% 10.9% 5.2% 29% 3.4% 0.5% 100% 7.5% 0.0% 10% 1.0% DAX 17.8% -1.1% 19% 13.6% 2.9% 11% 1.8% 0.4% 96% 8.6% -0.4% 78% 0.3% CAC 18.5% -0.7% 30% 15.4% 5.3% 27% 0.9% 0.3% 88% 8.6% 0.3% 86% -0.7% SMI 13.8% -1.2% 25% 14.5% 3.6% 51% 1.7% 0.6% 100% 7.6% -0.8% 57% 0.8% RDXUSD 28.2% -1.6% 6% 19.5% 9.2% 8% 1.1% 0.3% 89% 6.0% -0.1% 15% 1.7% TOP40 19.4% 0.3% 59% 11.1% 2.1% 19% 2.3% 0.1% 91% 8.7% -0.2% 63% -1.2% ISE30 29.9% -0.1% 96% 25.2% -21.6% 76% -0.9% 0.0% 7% 6.3% 0.1% 77% 1.0% Source: BofA Merrill Lynch Global Research European volatility: Sector snapshot Table 4: Volatility measures and indicative option prices for major European sector indices (data as of 05-Aug-16) Bearish <<<< --------------------------------------------------- >>>> Bullish 3Mth ATMf implied volatility Real vol* 3Mth 95%-85% put spread** 3Mth 100%-110% call spread** 3Mth 90%-110% risk reversal** Current Current Current price Weekly Max price Weekly Max price*** Weekly Weekly 2Yr (% of change 2Yr payout (% of change 2Yr payout (% of change 2Yr Current change %-ile Current spot) (bps) %-ile ratio spot) (bps) %-ile ratio spot) (bps) %-ile SX3P (Fd&Bv) 13.0% -2.7% 6% 12.9% 0.9% -27 15% 11.7 2.5% -18 19% 3.9 -0.5% -33 20% -0.5% SX6P (Utils) 16.4% -1.0% 32% 20.6% 1.2% -10 31% 8.3 3.0% -11 45% 3.3 -0.6% 0 22% -1.7% SX7E (Banks) 33.5% -2.3% 76% 48.0% 2.6% -13 82% 3.9 4.0% -7 75% 2.5 -0.5% 0 37% -1.8% SX7P (Banks) 28.2% -2.8% 75% 39.8% 2.2% -7 77% 4.6 3.8% -17 71% 2.7 -0.5% 17 35% 0.0% SXAP (Auto) 25.5% -1.1% 56% 33.4% 2.0% -7 52% 4.9 3.7% -8 64% 2.7 -0.6% 3 21% 0.6% SXDP (Health) 15.3% -0.5% 24% 12.7% 1.1% -5 27% 9.1 2.8% -7 35% 3.5 -0.4% 3 16% -0.9% SXEP (Oil&Gas) 23.5% -0.4% 44% 23.6% 1.9% -2 44% 5.4 3.6% -4 44% 2.8 -0.6% 3 28% -0.4% SXIP (Insur) 23.6% -0.4% 86% 31.7% 1.8% -2 84% 5.6 3.6% -3 88% 2.8 -0.6% 2 15% 0.8% SXKP (Telecom) 22.4% -0.2% 81% 23.4% 1.7% -1 75% 5.9 3.6% -2 87% 2.8 -0.7% 1 7% 0.5% SXNP (Indust) 21.5% 0.0% 67% 21.9% 1.7% 0 71% 5.8 3.4% 0 66% 2.9 -0.4% 1 74% 0.2% SXPP (Basic) 32.4% -1.6% 53% 29.7% 2.5% -7 53% 3.9 3.9% -5 59% 2.5 -0.4% 2 8% 1.3% SXQP (Prsnl&HH Gds) 15.4% 0.0% 33% 16.9% 1.0% 0 25% 9.7 2.8% -1 34% 3.5 -0.5% 1 17% 0.0% SXRP (Retail) 22.1% -0.1% 90% 23.4% 1.7% 0 89% 5.9 3.5% -1 94% 2.8 -0.6% 1 7% 0.5% SXTP (Trvl&Lsre) 19.9% -0.1% 55% 26.9% 1.7% -1 65% 6.0 3.2% -1 53% 3.1 -0.2% -1 69% 0.4% Source: BofA Merrill Lynch Global Research *Real vol = EWMA (Exponentially Weighted Moving Average) volatility, which measures historical price volatility but assigns greater importance to recent returns. Sigma(t)^2 = 0.94*Sigma(t-1)^2+(1-0.94)*r(t)^2, where r(t) is the return on day t. **Indicative mid prices; strikes as % of forward ***Negative values indicate that the bullish risk reversal takes in a credit. Equity index Weekly return 14 Global Equity Volatility Insights | 09 August 2016 Volatility in Asia Own NKY calendar call going into the uncertainty Sep BOJ Trade update: Closing the NKY Aug/Sep put calendar trade opened on 25-Jul The short NKY Aug16 15500 put vs. long NKY Sep16 15500-14500 put spread trade was opened on 25-Jul at 0.24% premium and was closed at 0.28% premium on 8-Aug as we are approaching the Aug16 expiry. In addition, the Sep-16 NKY put spread has already carried well by selling the inflated BOJ risk premium even with the spot being largely unchanged. NKY & USDJPY 1Mth vols are down to YTD low: Pricing in a slow summer With the Japanese government announcing a ¥28.1tn fiscal stimulus package last week, the Abe administration has laid out both its new monetary and fiscal policies. In the short-term, there are few catalysts and both NKY and USDJPY 1Mth implied volatilities have retraced materially. VNKY is at 21.5 and USDJPY 1M ATM vol is at 9.8%, near their YTD low levels. USDJPY 2M-1M term structure at its steepest & NKY’s in its 98 th %-ile since ‘11 FX has been the main driver in the current Macro world. Chart 29 shows that the USDJPY 2-month minus 1-month term structure is at its highs since 2011. The Sep BOJ meeting is expected to be held on 21-Sep so USDJPY 1-month options do not cover the event. Notably, the NKY term structure is also very steep at 1.5%, which is in its 98 th percentile since 2011. The NKY term structure was at its steep at 2.5% in Dec-13. Chart 28: Japanese equity volatility has dropped to YTD lows; USDJPY short-dated vol also retraced to near YTD low levels Chart 29: USDJPY 2M-1M ATM term structure (1.7%) is at its 5-year high while the NKY 2M-1M term structure (1.5%) is at its 98 th percentile 55% 50% 45% 40% 35% 30% 25% 20% Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 21.5% 17% 16% 15% 14% 13% 12% 11% 10% 9% 8% 2% 1% 0% -1% -2% -3% Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 VNKY USDJPY 1M ATM vol (RHS) USDJPY 2Mth Minus 1Mth ATM Vol Current Level (1.7%) Source: BofA Merrill Lynch Global Research. Daily data from 5-Jan-16 to 5-Aug-16 Source: BofA Merrill Lynch Global Research. BofAML: BoJ plans for Sep16 'comprehensive assessment' create uncertainty The BOJ’s decision in keeping “QE” or interest rate unchanged in July highlighted the BOJ’s limits in expanding JGB purchases and digging deeper into negative interest rate territory. More importantly, the central bank announced it will conduct a comprehensive assessment of its policy at its Sep meeting. By giving guidance for the next meeting, the BoJ has inevitably focused market attention on possible changes to the monetary policy framework. Significant monetary easing, including helicopter money, cannot be ruled out, but the more likely scenario is that the BoJ makes current monetary policy, which is fixed on achieving 2% inflation target in a short period of time, more 'flexible'. Market expectation for the Sep BOJ in terms of fwd vol is the near its lows YTD With NKY Sep ATM vol at 17.8% and Oct ATM at 20%, the NKY Sep-Oct ATM forward vol is at 21.8%, which is at the low end of the trading range going into BOJ events this year (Chart 30). We think there is value in owning forward vol via calendar options. Global Equity Volatility Insights | 09 August 2016 15 A further squeeze in US and Japanese yields is most positive Japan in Asia The strong US NFP print and the large Japan fiscal plan catalysed a global selloff in bonds. Chart 31 shows that NKY is the most sensitive Asian market to rising USD & JPY yield since 2010 with a correlation of 31%. Buy 1x NKY Oct 17500 call, short 0.65x Sep 17250 call: Gamma neutral, long vol Given the low market expectation in the BOJ and a potential rally in Japanese equities on the back of further yield squeeze and rising BOJ expectation next month, we like owning 1x NKY Oct 17500 call vs. selling 0.65x of Sep 17250 call for 0.7% (¥116). The trade will have a positive 9% delta, 8bps of vega and flat gamma & theta initially. Indicative pricing (As of 8-Aug-16, Ref: 16650) Buy 1x NKY Oct 17500 call: 1.13% (¥187) (iv: 19.2, delta: 24%, gamma: 3.8%) Sell 0.65x NKY Sep 17250 call: 0.66% (¥110) (iv: 16.9, delta: 23%, gamma: 5.9%) Net: 0.70% (¥116) (delta: +9, vega: 0.08%) Chart 30: Current NKY Sep-Oct ATM volatility is cheap relatively to implied volatility going into previous BOJ meetings in 2016 Front Month ATM Vol before BOJ 45% 40% 35% 30% 25% Jan16 BOJ Apr16 BOJ Jul16BOJ Mar16 BOJ Jun16 BOJ Current SepOct Vol 20% -16 -15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 - Number of Trading Days before BOJ Source: BofA Merrill Lynch Global Research Chart 31: The Nikkei is the most sensitive to rising USD and JPY rates among Asian indices 40% Correlation of Index vs. 10Yr USD & JPY Rates 31.1% 30% 20.5% 20% 16.5% 17.0% 17.2% 10% 0% -1.7% -10% -6.5% NIFTY KOSPI2 HSCEI TWSE HSI AS51 NKY Correlation of Index vs. 10Yr USD & JPY Rates Source: BofA Merrill Lynch Global Research. Weekly correlation since 2010 Chart 32: Mark-to-Market of the long 1x NKY Oct 17500 call, short NKY Sep 17250 call structure Mark-to-Market in Yen 400 300 200 100 - 15000 15100 15200 15300 15400 15500 15600 15700 15800 15900 16000 16100 16200 16300 16400 16500 16600 16700 16800 16900 17000 17100 17200 17300 17400 17500 17600 17700 17800 17900 18000 18100 18200 18300 18400 18500 18600 18700 18800 18900 19000 Buy NKY Oct 17500C, Short 0.65x Sep 17250C (At Inception) Source: BofA Merrill Lynch Global Research Assume volatility stays constant Buy NKY Oct 17500C, Short 0.65x Sep 17250C (1day Before Sep expiry) 16 Global Equity Volatility Insights | 09 August 2016 Week in review & notable trends (Asia) The MSCI Asia-Pac USD Index inched down 48bps in an eventful week in terms of macro news, with equities gains offset by USD strength. Following the monetary policy changes announced during the BoJ, the Abe Cabinet approved a fiscal stimulus package totalling ¥28.1tn last week. However, the Nikkei fell 190bps and the yen advanced another 32bps over the week. The Korean government submitted a KRW28tn fiscal package proposal to the Congress, which our economists believe should sustain growth near term; the KOSPI2 was little changed (adding 35bps). The RBA cut rates by 25bps as our economists expected, but Australian stocks declined with the ASX 200 dropping 117bps. Elsewhere in Asia, the HSI, HSCEI, TWSE and Nifty rallied 1.2%, 1.9% 1.2% and 0.5%, respectively. Japanese equity implied volatility dropped to YTD lows • Last week, most major Asian implied vols edged down as underlying indices rallied; ASX 200 vol increased slightly despite the rate cut • NKY vol saw a larger decline, with 3M ATM vol dropping 1.1 vol pts to 21.7% mainly due to diminished uncertainty as the fiscal package rolled out • Most Asian skews flattened and term structures steepened, especially the Nikkei term structure (spread between 1yr and 1M ATM vols), which increased 3.0 vol pts and turned positive NKY Uridashi issuance continues to fall as existing ones haven’t knocked-out Despite the falling NKY and relatively high implied volatility, Japanese Uridashi issuance has further retraced as most existing products have not knocked-out. In Jul-16, there was $450mn Uridashi products issued which are NKY linked. We estimate that the peak of vega profile is around the current spot. Chart 33: In Jul-16, there was $450mn Uridashi products issued which are NKY linked 1.6 1.4 New NKY Linked Uridashi issuance 22,000 21,000 1.2 NKY Index 20,000 1.0 19,000 0.8 18,000 0.6 17,000 0.4 16,000 0.2 15,000 - 14,000 Issuance (US$bn) Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 NKY lndex Chart 34: At current NKY levels, the estimated total vega of the NKYlinked Uridashi products is ~US62mn, near the peak of the vega profile Estimate outstanding vega (US$mn) 70 60 50 40 30 20 10 0 13,000 14,000 Uridashi NKY outstanding vega 15,000 16,000 Outstanding vega for Uridashi products is ~US$62mn 17,000 18,000 19,000 20,000 21,000 22,000 Source: BofA Merrill Lynch Global Research. Source: BofA Merrill Lynch Global Research. NKY Global Equity Volatility Insights | 09 August 2016 17 Chart 35: issuance of Korean structured products ticked up in Jul-16, but stays relatively low as majority of the products still haven’t knocked out 3,500 KOSPI2 HSCEI 9000 3,000 SX5E SPX 8000 2,500 HSI Total issuance (RHS) 7000 6000 2,000 5000 1,500 4000 1,000 3000 2000 500 1000 - 0 USD Mn Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Source: BofA Merrill Lynch Global Research. USD Mn Korean structured product issuance increased to US$1.9bn in July; KOSPI2-linked products dominated Korean auto-callable product issuance ticked up last month, with a total of US$ 1.9bn notional issued, vs. US$ 1.6bn total issuance in June. Looking at individual underlyings, KOSPI2-linked products (currently US$578mn) saw the largest increase. KOSPI2-linked issuance hence took over SX5E-linked issuance (currently US$436mn), which was relatively unchanged compared to June. HSCEI-linked issuance (currently US$ 69mn) further declined whereas HSI-linked issuance (currently US$ 262mn) increased again. SPX-linked issuance grew to US$ 281mn. KOSPI2 outstanding vega: US$23mn HSCEI outstanding vega: US$74mn Chart 36: We estimate that structured product Issuers are currently long US$23mn of KOSPI2 vega 80 KOSPI2 Autocall Vega Outstanding Profile Estimate KOSPI2 outstanding vega (US$mn) 70 60 50 40 30 20 10 - 170 180 190 200 210 220 230 240 250 260 270 280 290 300 310 Source: BofA Merrill Lynch Global Research. KOSPI2 Spot Level Chart 37: We estimate that structured product Issuers are currently long US$74mn of HSCEI vega 100 HSCEI Autocall Vega Outstanding Profile 90 80 70 60 50 40 30 20 10 - Estimate HSCEI outstanding vega (US$mn) 6500 7000 7500 8000 8500 9000 9500 10000 10500 11000 11500 12000 12500 13000 Source: BofA Merrill Lynch Global Research. HSCEI Spot Level Table 5: Volatility measures of major Asian indices (data as of 5-Aug-16) 3Mth ATM Implied Volatility 10D Realized Volatility 12Mth-1Mth ATM Vol Spread 3Mth 90-110 Skew Spread Equity Market Weekly 4Yr Weekly 4Yr Weekly 4Yr Weekly 4Yr Weekly Current change percentile Current change percentile Current change percentile Current change percentile return HSI 17.5% -0.6% 57.2% 15.7% 4.9% 56.4% 2.2% 0.3% 52.0% 5.4% -0.2% 82.8% 1.2% HSCEI 20.8% -0.5% 30.4% 17.4% 6.6% 38.1% 3.3% 0.2% 88.9% 4.2% -0.7% 77.5% 1.9% NKY 21.7% -1.1% 47.3% 19.2% 2.0% 46.2% 1.2% 3.0% 67.5% 5.1% -0.3% 75.9% -1.9% KOSPI2 12.6% -0.4% 15.4% 12.4% 7.1% 57.5% 3.9% 0.5% 75.6% 5.2% -0.7% 80.5% 0.3% ASX 200 14.3% 0.5% 60.1% 9.9% 4.7% 34.0% 2.7% 0.1% 64.2% 7.1% 0.0% 55.6% -1.2% NIFTY 14.2% -0.2% 6.3% 11.8% 2.9% 32.6% 2.6% 0.7% 38.4% 5.8% 0.6% 74.0% 0.5% TWSE 14.6% -0.3% 63.1% 10.2% 2.0% 37.2% 0.7% 1.0% 16.8% 4.1% -0.5% 63.5% 1.2% Source: BofA Merrill Lynch Global Research 18 Global Equity Volatility Insights | 09 August 2016 TWSE 3M 25d-Call IV over SPX is near its 4-year highs Table 6 lists Asian index pairs with the highest IV ratio vs. their 4-year histories. For instance, the ratio of TWSE 3M 25d-Call vol over SPX is near its 4-year highs. Chart 38: The ratio of TWSE 3M 25d-Call IV over SPX is near its 4-yr highs (Daily data from 1-Jan-11 through 5-Aug-16) Implied Vol TWSE 3M 25d-Call vol SPX 3M 25d-Call vol Vol ratio 40% 1.6 35% 1.5 30% 1.4 25% 1.3 1.2 20% 1.1 15% 1.0 10% 0.9 5% 0.8 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Ratio Table 6: Index pairs^ with the highest implied vol ratio vs. their histories (data as of 5-Aug-16) Index A (Implied vol) Index B (Implied Vol) A/B Implied Vol ratio Ratio 4-yr percentile 3M ATM TWSE (14.6%) SPX (11.8%) 1.23 97% 6M ATM SX5E (20.0%) SPX (13.7%) 1.46 96% 12M ATM SX5E (20.2%) SPX (15.4%) 1.31 98% 3M 25d-Put TWSE (17.1%) SPX (15.5%) 1.10 97% 6M 25d-Put TWSE (17.8%) SPX (17.9%) 0.99 93% 12M 25d-Put SX5E (24.2%) SPX (19.9%) 1.22 96% 3M 25d-Call TWSE (13.9%) SPX (9.9%) 1.41 97% 6M 25d-Call SX5E (17.5%) SPX (11.3%) 1.54 97% 12M 25d-Call SX5E (18.2%) SPX (12.8%) 1.42 98% Source: BofA Merrill Lynch Global Research ^ Index universe includes the ASX200, HSCEI, HSI, KOSPI2, NIFTY, NKY, TWSE, SPX and SX5E * mid level implied vol Source: BofA Merrill Lynch Global Research. Daily data from 1-Jan-11 through 5-Aug-16 Global Equity Volatility Insights | 09 August 2016 19 Summary of Open Trades (08-Aug-16) Table 7: Summary of open trades as of 08-Aug-16 Trade Description Open Date Open Level Trade Value Expected Trade Term Rationale Long SX5E vs short SPX Dec18 var swap 5-Jul-16 6.1 vols 5.2 vols Investors should re-assess attractiveness of popular and (typically) technically Long NKY vs short SPX Dec18 var swap 5-Jul-16 5.7 vols 4.9 vols Dec-18 expiry motivated longer-dated RV vol trades, given environment of structurally higher Long SX5E vs short SPX Dec18 put vs put 5-Jul-16 0.00% -0.62% political & economic risks and increasingly limited policy options Long 3M 25d EFA put vs short 3M 25d UKX put 5-Jul-16 0.00% 0.16% 3 months FTSE 3M 25d put vol near 7hr highs vs. vol on EFA Buy CMB Sep16 105-115% call spread Buy ICBC Sep16 105-115% call spread Buy BOC Sep16 105-115% call spread 5-Jul-16 5-Jul-16 5-Jul-16 2.32% 2.12% 2.10% 3.01% 4.17% 3.79% Sep-16 SQ expiry Continuous Southbound inflow benefit financials sector and narrow AH premium Long 0.5x V2X Oct16 future, long 0.5x V2X Nov16 future, short V2X Jan-17 future 11-Jul-16 0.25 vols -0.28 vols Oct-16 expiry Hedge further Brexit fallout, Italian bank & referendum risk Buy a 6M ATM worst-of call on XLP & GLD 11-Jul-16 1.05% 0.48% 6 months Cheaply construct risk-limited “uber-barbell” portfolio Buy a 6M ATM worst-of {SPX put, GLD call} 11-Jul-16 1.60% 1.01% 6 months Low-cost macro hedge for US equity portfolios Buy Oct16 110%f calls on VIE FP, AI FP, IBE SQ, STAN LN and MUV2 GY Buy an Oct16 110%F call on an equally weighted basket (quanto EUR) 18-Jul-16 18-Jul-16 2.37% 0.81% 2.37% 0.69% Buy TLS 25-Aug16 95% puts 18-Jul-16 1.05% 1.67% Buy CSL 25-Aug-16 95% puts 18-Jul-16 1.09% 0.72% Buy Newcrest 25-Aug-16 105/115% call spreads 18-Jul-16 2.64% 1.90% Buy BHP 25-Aug-16 105/115% call spreads 18-Jul-16 2.22% 1.26% Replace T long position via 3M ATM calls 19-Jul-16 2.72% 2.50% Replace LOW long position via 3M ATM calls 19-Jul-16 3.90% 3.66% Replace RTN long position via 3M ATM calls 19-Jul-16 3.16% 3.45% Replace CRM long position via 3M ATM calls 19-Jul-16 4.16% 3.50% Replace CRM long position via 3M ATM calls 19-Jul-16 2.32% 1.26% Oct-16 expiry Oct-16 expiry 25-Aug-16 3 months Add exposure via inexpensive upside on single names where positioning appears particularly bearish and stocks have underperformed vs. their sectors To hedge potential earning downside surprise To hedge potential earnings upside surprises Our analysts expect positive and impactful catalysts in Q3-2016; recent strong performance and depressed short dated implied vol favor stock replacement via calls to reduce downside risk, maintain upside and lock in profits Overlay long WBA long position with 3M ATM calls 19-Jul-16 4.04% 2.49% 3 months Position for accelerated upside returns ahead of closing the Rite Aid acquisition Buy a 6M ATM best-of put on SPX & TLT 18-Jul-16 0.8% 0.49% 6 months Cheap hedge against a bond tantrum Buy a 1Y ATM worst-of call on SPX & TLT 18-Jul-16 0.9% 0.83% 1 year Cheap equity upside in a bond / equity melt-up Buy XLF Sep 24 strike call 25-Jul-16 1.4% 1.9% Sep-16 expiry Buy XLU Sep 51 strike put 25-Jul-16 1.3% 2.5% Buy a 6M ATM worst-of {XLF call, XLU put} 25-Jul-16 1.35% 2.31% 6 months Sell 1x SX7E 1M 25d call to fully finance 1.85x SX5E 1M 25d calls Short VIX Oct 15 put vs. long VIX Nov 19/26 call spread 1-Aug-16 $0.45 $0.125 Oct VIX expiry Record outperformance of Utilities vs. Financials + FMS positioning + central bank catalysts = potential for cyclicals / defensives mean reversion 25-Jul-16 0.0% 0.28% 1 month SX7E 1M 25d call / SX5E 1M 25d call price ratio is in the 100 th 2-yr percentile Sell VIX Oct puts to leverage likely floor in vol ahead of US elections and cheapen shallow hedges Buy HSCEI Aug16 9400 call, Short Oct16 10000 call 1-Aug-16 0.00% 0.04% Aug-16 expiry Short-term bullish China trade with term structure at its steepest in 4yrs Source: BofA Merrill Lynch Global Research. Prices reflective of most recently available data which may be delayed in some cases. “Trade Value” represents current valuation of trades initiated on the “Open Date”. Summary of Closed Trades (08-Aug-16) Table 8: Summary of closed trades as of 08-Aug-16 Open Date Open Level Close Level Close Date Rationale Trade Description Buy NKY Aug-16 105%-110% call spreads & sell 90% puts 11-Jul-16 0.26% 1.73% 25-Jul-16 Take profit as the hurdle to surprise on the upside is high following a 5.8% NKY rally Replace FB long positions via Oct-16 ATM calls 25-Jul-16 5.9% 6.1% 1-Aug-16 Take profit as Facebook rallied on better-than expected Q2 results Replace AMZN long positions via Oct-16 ATM calls 25-Jul-16 5.5% 6.3% 1-Aug-16 Take profit as Amazon rallied on better-than expected Q2 results Buy AAPL Oct-16 ATM protective puts 25-Jul-16 4.6% 1.2% 1-Aug-16 Remove protection as worries around disappointing Q4 guidance faded post earnings Buy 1.5x 5-Aug-16 2950-3000 strangles by selling 1x 19-Aug-16 2950-3000 strangles Sell NKY Aug16 15500 puts, Buy Sep16 15500- 14500 put spreads 25-Jul-16 0.00% -1.12% 5-Aug-16 The BoJ, Fed & EU bank stress tests could move mkts sharply in the near term 25-Jul-16 0.24% 0.28% Aug-16 expiry & Sep-16 expiry Unwinding before the Aug16 expiry; The NKY Sep put spread has carried well Source: BofA Merrill Lynch Global Research. Prices reflective of most recently available data which may be delayed in some cases. “Trade Value” represents current valuation of trades initiated on the “Open Date”. 20 Global Equity Volatility Insights | 09 August 2016 Volatility in Numbers (05-Aug-16) Table 9: Statistics on implied, realised, skew and term structure for 3-month and 12-month vols (developed markets) 3-month 12-month S&P500 ESTX50 FTSE DAX NKY HSI KOSPI S&P500 ESTX50 FTSE DAX NKY HSI KOSPI Implied 11.9% 19.2% 12.6% 17.8% 21.7% 17.5% 12.6% 15.4% 20.2% 15.9% 19.6% 21.1% 18.6% 15.0% %tile (2yr) 4.4% 30.2% 20.2% 19.0% 51.5% 30.4% 18.1% 13.1% 46.0% 46.2% 33.7% 53.2% 34.3% 24.4% 1Week Change -0.7% -0.6% -0.7% -1.1% -1.1% -0.6% -0.4% -0.6% -0.4% -0.2% -0.7% -0.7% -0.2% -0.2% 1Mth Change -2.5% -5.2% -5.1% -5.8% -1.9% -1.8% -0.5% -1.6% -2.6% -1.9% -2.8% -1.0% -0.5% -0.2% Realised 13.1% 27.5% 18.9% 24.4% 27.0% 17.3% 12.8% 17.0% 26.1% 20.5% 25.6% 29.4% 21.9% 14.3% %tile (2yr) 45.0% 79.9% 69.6% 68.9% 69.1% 42.2% 65.9% 95.6% 94.3% 96.4% 95.8% 98.4% 73.8% 96.7% 1Week Change -0.1% 0.4% 0.2% -0.1% -1.2% -0.3% 0.6% 0.0% -0.2% 0.1% 0.0% 0.1% -0.1% 0.1% 1Mth Change -0.4% -0.5% -0.4% -0.5% -2.7% -1.1% 0.8% -0.2% -0.1% -0.1% -0.2% 0.2% -1.6% -0.1% Imp-real spread -1.2% -8.3% -6.4% -6.6% -5.3% 0.2% -0.3% -1.6% -5.9% -4.6% -6.0% -8.3% -3.3% 0.8% Spread %tile (2yr) 19.8% 3.1% 8.3% 4.8% 22.5% 37.9% 18.1% 0.2% 0.0% 0.0% 0.0% 0.0% 9.5% 0.8% 1Week Change -0.6% -0.9% -0.9% -1.0% 0.2% -0.3% -1.0% -0.6% -0.2% -0.3% -0.7% -0.8% -0.1% -0.3% 1Mth Change -2.1% -4.6% -4.7% -5.3% 0.8% -0.7% -1.3% -1.4% -2.5% -1.8% -2.6% -1.2% 1.1% -0.1% 90-110 skew 9.5% 8.4% 7.5% 8.6% 5.1% 5.4% 5.2% %tile (2yr) 3.3% 78.5% 9.4% 77.6% 53.4% 69.2% 64.2% 1Week Change -0.2% -0.1% 0.0% -0.4% -0.2% -0.2% -0.7% 1Mth Change -2.6% -0.4% -3.2% -0.5% -1.2% -1.3% -0.6% 10-day realised 12M - 3M term vol spread S&P500 ESTX50 FTSE DAX NKY HSI KOSPI S&P500 ESTX50 FTSE DAX NKY HSI KOSPI Current Level 6.0% 15.7% 10.5% 13.3% 18.6% 14.9% 11.9% 3.5% 1.0% 3.4% 1.8% -0.5% 1.1% 2.4% %tile (2yr) 7.1% 22.0% 24.1% 9.3% 45.6% 36.7% 52.8% 98.3% 86.6% 100.0% 96.0% 50.8% 69.2% 72.2% 1Week Change 1.6% 5.2% 4.9% 2.4% 2.1% 4.5% 6.8% 0.1% 0.2% 0.5% 0.4% 0.4% 0.5% 0.3% 1Mth Change -20.0% -37.1% -23.2% -30.1% -26.1% -6.7% -5.3% 0.9% 2.5% 3.2% 2.9% 0.9% 1.3% 0.3% Cash index Current Level 2,182.87 2,973.71 6,793.47 10,367.21 16,254.45 22,146.09 252.36 1Wk Change 0.43% -0.57% 1.03% 0.29% -1.90% 1.16% 0.35% 1Mth Change 4.52% 5.72% 3.79% 8.76% 3.73% 6.72% 2.21% Source: BofA Merrill Lynch Global Research Table 10: Statistics on implied, realised, skew and term structure for 3-month and 12-month vols (emerging markets) 3-month 12-month EEM US IBOV RDXUSD TOP40 EEM US IBOV RDXUSD TOP40 Implied 18.8% 21.7% 28.2% 19.4% 21.2% 23.5% 29.3% 21.8% %tile (2yr) 34.5% 2.4% 5.5% 59.1% 40.7% 22.0% 16.4% 80.2% 1Wk Change -0.8% 0.0% -1.6% 0.3% -0.9% -0.1% -1.3% 0.4% 1Mth Change -3.6% -3.0% -3.8% -2.3% -2.2% -1.9% -3.3% -1.0% Realised 22.1% 21.8% 25.7% 17.9% 24.3% 27.7% 36.2% 20.4% %tile (2yr) 65.9% 27.2% 20.8% 47.5% 94.8% 94.0% 45.7% 94.0% 1Wk Change -0.8% -0.5% -0.6% -0.4% -0.1% 0.0% -0.2% -0.1% 1Mth Change -1.5% -4.4% -4.2% -0.3% -0.6% -0.2% -0.4% -0.6% Imp-real spread -3.2% -0.1% 2.6% 1.5% -3.1% -4.3% -6.9% 1.4% Spread %tile (2yr) 12.9% 44.2% 52.4% 51.1% 0.2% 0.0% 0.0% 16.6% 1Wk Change -0.1% 0.5% -1.0% 0.7% -0.9% 0.0% -1.1% 0.6% 1Mth Change -2.1% 1.4% 0.4% -2.0% -1.6% -1.7% -2.9% -0.4% 90-110 skew 7.8% 5.3% 6.0% 8.7% %tile (2yr) 63.8% 48.5% 14.8% 62.6% 1Wk Change 0.3% 0.0% -0.1% -0.2% 1Mth Change 0.0% -0.5% -0.8% -0.6% Global Equity Volatility Insights | 09 August 2016 21 Table 10: Statistics on implied, realised, skew and term structure for 3-month and 12-month vols (emerging markets) 10-day realised 12M - 3M term vol spread EEM US IBOV RDXUSD TOP40 EEM US IBOV RDXUSD TOP40 Current Level 10.4% 13.2% 18.5% 11.0% 2.4% 1.8% 1.1% 2.3% %tile (2yr) 4.2% 3.4% 5.3% 16.6% 74.1% 98.3% 88.1% 90.0% 1Wk Change -0.5% 2.4% 6.2% 2.3% -0.1% -0.1% 0.3% 0.1% 1Mth Change -31.3% -15.2% -8.8% -19.6% 1.5% 1.1% 0.5% 1.3% Cash index Current Level 36.62 57,661.14 1,090.44 45,385.74 1Wk Change 1.15% 0.62% 1.72% -1.16% 1Mth Change 7.86% 11.22% 1.44% 0.12% Source: BofA Merrill Lynch Global Research 22 Global Equity Volatility Insights | 09 August 2016 Analyst Certification I, Benjamin Bowler, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. Global Equity Volatility Insights | 09 August 2016 23 Options Risk Statement Potential Risk at Expiry & Options Limited Duration Risk Unlike owning or shorting a stock, employing any listed options strategy is by definition governed by a finite duration. The most severe risks associated with general options trading are total loss of capital invested and delivery/assignment risk, all of which can occur in a short period. Investor suitability The use of standardized options and other related derivatives instruments are considered unsuitable for many investors. Investors considering such strategies are encouraged to become familiar with the "Characteristics and Risks of Standardized Options" (an OCC authored white paper on options risks). U.S. investors should consult with a FINRA Registered Options Principal. For detailed information regarding the risks involved with investing in listed options: http://www.theocc.com/about/publications/character-risks.jsp 24 Global Equity Volatility Insights | 09 August 2016 Disclosures Important Disclosures FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii) attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). 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Neither BofA Merrill Lynch nor any officer or employee of BofA Merrill Lynch accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. 26 Global Equity Volatility Insights | 09 August 2016 Research Analysts Benjamin Bowler Equity-Linked Analyst MLPF&S +1 415 676 3595 [email protected] William Chan, CFA >> Equity-Linked Analyst Merrill Lynch (Hong Kong) +852 3508 3921 [email protected] Clovis Couasnon >> Equity-Linked Analyst MLI (UK) +44 20 7995 0303 [email protected] Abhinandan Deb >> Equity-Linked Analyst MLI (UK) +44 20 7995 7148 [email protected] Jason Galazidis >> Equity-Linked Analyst MLI (UK) +44 20 7996 5713 [email protected] Anshul Gupta >> Equity-Linked Analyst MLI (UK) +44 20 7996 7062 [email protected] Chintan Kotecha Equity-Linked Analyst MLPF&S +1 646 855 5478 [email protected] Stefano Pascale Equity-Linked Analyst MLPF&S +1 646 855 2631 [email protected] Nitin Saksena Equity-Linked Analyst MLPF&S +1 646 855 5480 [email protected] >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. Global Equity Volatility Insights | 09 August 2016 27