EFTA01195929.pdf

From: Nay Gupta <MINIM. To: jeevacationggmail.eom Cc: Vinit Sahni , Paul Morris < IIME>, Tazia Smith Subject: Jeffrey - 4 trades 1 like - Nay [C] Date: Mon, 14 Apr 2014 17:17:44 +0000 Inline-Images: unnamed; unnamed(]); unnamed(2); unnamed(3); unnamed(4); unnamed(5); unnamed(6) Classification: Confidential Hi Jeffrey, There hasn't been much I've really liked recently. Here are four trades - 3 I like right now and 1 for now or soon. 1) BUY 10y BTPS @ 3.16% - This is a 3-6mth 'buy the rumour sell the fact' tactical trade to position for ECB QE (now) The ECB is preparing both itself and markets for QE - Its senior board members have stepped up public comments over the past 48hrs. This is the clearest sign so far QE could happen and why I am writing to you now. Ideally ECB wants to buy ABS from small to medium sized European companies but the outstanding available is relatively small so it will likely buy Eurozone Government Bonds. The spread between Italian BTPs and German Bunds has tightened significantly past 18months but old metrics of value make no sense in Europe because they rely on history when there was no QE. While It's hard to get excited about 10y BTPs yielding 3.16% (164bp over 10Y German Bunds) I'd still have 5-10mm 10y BTPs in my portfolio both for the duration and spread compression potential. I prefer 10y over 5y because the recent nearly parallel spread compression has left 5s10s steep relative to 0-5s.. 3 reasons i like this trade: i) macro investors view ECB QE as a second bite at the cherry. Everyone I talk to wants European risk assets having seen QE in the US. ii) ECB QE is probably still 3-6mths away which will keep credit bid. This will be a buy the rumour sell the fact trade Hi) Credit has been bulletproof during the recent risk selloff because a) ECB QE expectations, b) G3 rate hikes are being pushed into the future while cash has nowhere else to go. This price action is telling - as and when equities recover i think credit continues to tighten Yields of 10Y Italy, 10y Germany and the Yield Spread EFTA01195929  SPREAD SUMMARY Last 164.78 Mean 234.2757 Off Avg -69.4957 Median 214.7206 StDev 122.7606 -26.7 StDev from mean -0.5661 Low: 3.166 Percentile 39.0966 High 11/09/11 552.5662 Low 08/10/09 66.9182 Hi: 55tf>662 400 2009 2010 2011 2012 2013 2014 GB1PGR10 Index (Italy Generic Govt 10Y Yield) Copyrights 2014 Bloomberg Finance LP. 14-Apr-2014 16:21:57 2) Tactically position for higher EURUSD - 2 week view (now) BUY EUR50mm 2week expiry 1.40 strike European Style EURUSD Calls @ 6bp (EUR30,000) This is a low cost contrarian short term tactical call. Most investors myself included are bullish USD in the medium term (see trade 3) but in the very short term I see EURUSD higher because: i) Despite ECB preparing the markets for QE, the price action of EURUSD (broadly unchanged) has been quite bullish compared to what one would expect ii) Speculators don't appear long EURUSD to us. Majority are short or flat. iii) implied volatility is 5.25% (offer for 2week options) which is very very low historically. So this is a penny option, highly convex, pain trade bet against other speculators betting on QE If my view is wrong 6bp is lost. If i'm right I'd plan to exit in a week making 4-6x Scenario Analysis - Premium in bp of EUR notional EURUSD call option prices Spot 1.382 Spot At exp 1w 2w 1.42 141 142 145 1.41 71 76 84 1.4 0 24 37 1.39 0 4 11 1.382 0 1 4 « 4bp is mid mkt, offer is 6bp 3) Position for a Stronger Dollar - lyear view (now or soon) Buy ly expiry European style digital binary option on EURUSD struck 5% below spot @ 21% of payout (which i think is too cheap) Current strike (spot - 5%) would be 1.3120 EFTA01195930 At expiry if EURUSD has fallen by more than 5% from current levels the option payout is EUR1mm. Upfront premium is EUR210k. The option is liquid and can be unwound at any time. i) Yellen has done a poor job of communicating the Fed's thinking but its increasingly clear the Fed will brake later than usual ii) Betting on higher US interest rates in the rates market isn't cost effective because the forward curve is already pricing in higher rates iii) The Dollar hasn't appreciated yet because short rates in the US haven't risen meaningfully iv) THE KEY POINT - FX volatility is very low in currency pairs like EURUSD where central bank policy on each side is increasingly diverging. The low vol makes this bet inexpensive to put on. v) Because FX vol is so low betting now or soon with a one year time horizon costs very little. id rather be early than late here vi) i prefer 1y expiry because this trade could take 6-12mths to play out EURUSD VOL: Low - but then again most most vols are What I like about EURUSD is that central bank policy on each side is diverging 20.0000 • Last Price 7.2650 T High on 12/31/08 19.5225 - 18.0000 -0- Average 10.9287 1 Low on 05/31/07 5.80.00. 16.0000 14.0000 12.0000 10.0000 8.0000 6.0000 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 EURUSDV1Y Curncy (EUR-USD OPT VOL 1Y) Monthly 01JAN1997-14APR2014 Copyright@ 2014 Bloomberg Finance . 14-Apr-2014 16:49:49 This Table shows mid-market premiums (in % of notional) as spot and time change. EURUSD binary option prices Spot: 1.382 Spot ± X% Abs Spot At exp lm 2m 3m 6m 9m 12m 5.0 1.451 0 0 0 1 3 6 8 2.5 1.416 0 0 1 2 6 10 12 0.0 1.382 0 1 3 6 12 16 19.5 -2.5 1.347 0 7 13 18 25 28 30 -5.0 1.313 100 48 48 47 46 45 45 -7.5 1.278 100 95 88 82 71 66 62 -10.0 1.244 100 100 99 96 88 82 77 19.5 is mid (offer is 2 ) 4) Scale into £4mm Nationwide (UK Building Society) 6.875% perpetual which yields 6.4% in GBP and is likely to be called in 5years European Bank AT1 HyBrid Bonds (aka CoCo's) have rallied significantly. We were unable to get the BBVA issue at the right EFTA01195931 levels. A very similar bond which has rallied 30bp less than the BBVA is the Nationwide (UK Building Society) 6.875% perpetual which currently yields 6.4% and is likely to be called in 5years time. It has a tierl capital trigger of 7% and current tierl capital ratio is 13% which is fair margin. The Nationwide one Pm suggesting today is rated Fitch/S&P BB+, its parent is Fitch/S&P rated single-A The BBVA bond we tried to buy earlier is rated Fitch BB-, its parent is S&P rated BBB- I suggest scaling £2mm at 6.5% and £2mm at 6.75%. Transaction cost is 6bp from mid. Yield to call of Nationwide 6.875% perpetual ISIN XS1043181269 7.000 6.900 6.800 6.700 6.600 6.484 6.400 Mar 7 Mar 14 Mar 21 Mar 31 Apr 8 2014 E1(1O0O11 Corp (NATIONWIDE BLDG SOCIETY) Copyrights 2014 Bloomberg Finance 14-Apr-2014 17:08:59 Tazia for any execution, Q&A to me. Best, Nav Nav Gupta Managing Director Deutsche Bank AG. Filiale London Deutsche Asset 8, Wealth Management 105/ ners Hall). EC2N 1EN London. United Kingdom Tel. Email Any proposed ideas are being delivered to you by the DeAWM Key Client Partners ("KCP") London desk for discussion purposes only, and do not create any legally binding obligation on the part of Deutsche Bank AG and / or its affiliates ("DB"). These ideas are for the consideration of the intended recipients of this mail only. The KCP London desk does not provide investment advice. All intended recipients are Professional investors (as defined by MiFID). who understand the strategy. characteristics and risks associated with any ideas proposed herein and will be able to evaluate it independently. All trades on proposed ideas shall be subject to the relevant internal approvals prior to execution. EFTA01195932 Panitn,417Petro-on This e-mail may contain confidential and/or privileged information. If you are not the intended recipient (or have received this e-mail in error) please notify the sender immediately and delete this e-mail. Any unauthorized copying, disclosure or distribution of the material in this e-mail is strictly forbidden. Please refer to http://www.db.com/en/contentleu_disclosures.htm for additional EU corporate and regulatory disclosures and to http://www.db.com/unitedkingdom/content/privacy.htm for information about privacy. EFTA01195933