EFTA02454282

From: jeffrey E. <[email protected]> Sent: Friday, August 5, 2016 3:54 PM To: Ens, Amanda; Richard Kahn Subject: Re: MEGA Action: Post NFP Trades: Hedge US Credit, Buy Financials, Buy USD proxies, Buy Biotech amanda lets talk today On Fri, Aug 5, 2016 at 10:01 AM= Ens, Amanda > wrote: The Tai= Hedge: Buy Puts on IG Credit. A Dec LQD 98% Put ($120.00) costs 1.29% ($1=55, ref: $122.80, 7.6 vol, 38 delta) or sell JGBs. <=mg src="cid:1585976186" alt="cid:38917479" height="72" width="691"= MEGA Action: Strong US pa=roll data risks steepening of US yield curve - tail hedge US credit exposu=es. <=> Post Strong US Payroll Data we still see a December=US rate hike. * =/span>Growing hike expectations will steepening=the US and Japan yield curves. The question is how do Risk Parity funds ha=dle "The Great Rotation" as US equities continue to look m=re attractive than Fixed Income? * =C2* Financials and Health=are and Technology to outperform Utilities and Staples. =C2* =C2* USD should also benefit as the US yield curve steepens. =C2* There is a chart pack below. <=>What is the Trade? 1. The Tail Hedge:=Buy Puts on IG Credit. A Dec LQD 98% Put ($120.00) costs 1.29% ($1.55, ref= $122.80, 7.6 vol, 38 delta) or sell JGBs. EFTA_R1_01555923 EFTA02454282 2.=span style="font:7.0pt "Times New Roman""> <=span>Financials =utperformance: Buy Regional Banks Call. A Dec KRE, 103% Call ($42) costs 3=8% ($1.60, ref: $41.65, 23.0 vol, 36 delta) <= style="line-height:150%">3. =Or=buy a 6M ATM worst-of {XLF (financials) call, XLU (utilities) put} f=r `1.38%(65% discount to the average vanilla option) apan style="font-size:10.0pt;line-height:150%;font-family:"Verdana&q=ot,"sans-serif"">4. =span>Post earnings — Buy Healthca=e & Biotech on improved outlook: Buy Calls on Bio-Tech Index. A Dec 10=% ($310) IBB Call costs $12.70 (4.1%, ref $296.00, 26.0 vol, 41 delta)<=u> =b>5. =/u>USD Strength Trade: Short the BA=L "Weak USD Winners Equity Custom Basket", MLDIUSDC Index.ru> =/u> Rationale =span style="font-size:10.0pt;font-family:"Verdana","sans-=erir">US Payroll data was a very strong report showing that the econ=my can resume a higher trajectory of growth into the second half of the ye=r and the Fed can deliver a hike in December. =p class="MsoNormal">1) NFP was up 255K with net positive re=isions of 18K. The 6month moving average of 189K suggests a solid pace of =rowth. 2) Hou=ehold jobs surged 420K, reversing the recent few months of weakness. This =ffset the increase in the labor force participation to 62.8 from 62.7%, wh=ch is an encouraging sign for the longer run trajectory of job growth. =/u> 3) Average hourly=earnings increased 0.3%, leaving the yoy rate unchanged at 2.6%, showing t=at wages are sticking at a higher pace. 4) The Unemployment rate held at 4.9% while the=underemployment rate (U6) increased to 9.7%. 5) Professional & business services saw =he strongest job growth of 70,000, though this sector tends to account for=a good portion of job growth generally. Only mining and logging (-7k) and =nformation services (Ok) were weak. Post Q2 earnings results, Health =are is now in a strong position to outperform <http://rsch.baml.com/r?q=-- f=Kv0H2hhlw6fcYbuRtA&e=jeevacation%40gmail.com&h=7Ws4Wg> . The sector saw more positive than negative revisions to estimat=s on a three-month basis, more positive than negative revisions to sales f=recasts and management has been most positive in guidance.4=pan> The N=sdaq Biotechnology Index (NBI) has surpassed S&P500 (up 13% vs.=5%) since the end of 1Q, thanks to increased M&A activity and solid 2Q=earnings reported by the large-cap biotech companies as a group <http://=sch.baml.com/r?q=DcR3HEJAJ9GrI8M4aKdamg&e=jeevacation%40gmail.com&=mp;h=oE91Sw> =/span>. Recent NBI rally suggests a "real" =urn in market sentiment post major sector sell-off beginning last August. =2% of S&P 500 companies have beaten on EPS, 52% have beaten on sales a=d 40% have beaten on both compared to full-quarter historical averages of =3%, 57% and 35%, respectively. 2 EFTA_R1_01555924 EFTA02454283 "Global Equity=Volatility Insights <http:firs=h.baml.com/r?q=6CfeDcIMVw2r18M4aKdamg&e=jeevacation%.40gmail.com&am=;h=1H7UoA> " from June 28 and su=gests risk parity fund leverage is high and we do not think the relationsh=ps have changed significantly. As correlation between bonds and SPX increa=es, risk parity leverage increases. The Bank of Japan's "=comprehensive assessment" in Sep MPM is creating intense speculation<=span> chttp://rsch.baml.com/r?q=Qnr=±5ChBkWri8M4aKdamg&e=jeevacation%40gmail.com&h=Hiu8QQ> . BoJ may make QQE more flexible whic= would enhance policy sustainability risking steeper yield curve, stronger=yen and weaker equity but bank shares to rise. If the BoJ does move to mak= policy more flexible, we think the focus will be on JGBs, rather than on =egative interest rates. Chart Pack: Nasdaq Bio Tech Index: Buy Calls on Bio-Tech=b> In JGB Futures, 150.60 is an impor=ant level for all global fixed income. <=span> Regional Bank ETF (KRE): Buy Calls on KRE=span style="font-size:10.0pt;font-family:"Verdana","sans-=erif—> Short the BAML "Weak USD Winne=s Equity Custom Basket" <=span> This chart is a danger for risk parity funds as bond/equity correlation swings positive.<=span> =span style="font-size:10.0ptfont-family:"Verdana","sans-=erif- > 3 EFTA_R1_01555925 EFTA02454284 =p class="MsoNormal">Greg Kaldor=span style="font-size:10.0pt;font-family:"Verdana","sans-=erif";color:#948671"> Managing Director Us MEGA (Macro Equity & Global Alpha) Bank of America Merrill L nch T+ B/Berry This message, and any attachments, is for the intended rec=pient(s) only, may contain information that is privileged, confidential an=/or proprietary and subject to important terms and conditions available at=emaildisclaimer <http://www.bankofamerica.com/emaildisclaimen . 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