Mystery trader bets market will crash by a third
Renée Schultes
16 Aug 2007
Carry trade unwinds as yen hits one-year high
An
anonymous investor has placed a bet on an index of Europe's top 50
stocks falling by a third by the end of September, as world equity
markets plunged for a third day and volatility hit a three-year high.
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Managers cheer the dollar’s decline23 Apr 2007Market is living for the momentum 05 Mar 2007US hit by investment outflow16 Feb 2007Traders miss out on dollar slide30 Nov 2006 The mystery investor has bought put option contracts on the DJ
Eurostoxx 50index that will result in a profit if it plunges to 2,800 or below by
the end of September. Based on the 2,800 strike price, the position
covers a notional €6.9bn, and potentially even more using a market
price of about 4,100 when the trades were done on Tuesday and Wednesday.
The identity of the investor is unknown but market sources
speculated it was either a large hedge fund hedging itself against
deepening losses, or a long-only fund manager pressing the panic button
to protect its gains.
The investor has bought a total of 245,000 put options on the index.
The September put option with a 2,800 strike was the most popular DJ
Eurostoxx 50 contract yesterday, according to data from
Bloomberg.
Volatility in European equity markets has risen sharply this week as
investors cut back on the amount of risk they are taking. The VSTOXX
index, which measures the volatility of the DJ Eurostoxx 50 index, hit
34 this morning, which is more than double its three-year average.
Similarly the volatility of the US stock market was trading at almost three times its three-year average, hitting 30 yesterday.
However, both indices continue to trade below their 2002 highs.
European stock markets were trading down almost 3% at by 13:00 GMT
today, after large drops in Asia and Australia overnight. The
Australian market fell 300 points at one stage when futures trading was
suspended for over an hour and traders were forced to hedge positions
by selling physical stocks rather than futures.
An analyst at
Goldman Sachs JB Werein Australia wrote: "I think I shall remember this day as the day that
I saw the market go to hell, look into the abyss - didn't like what it
looked like and then came screaming back up as far away from there as
it could get. ... It was a truly spooky day and I’ve seen a lot over
the last 20 years but today will be one that anyone who saw it will
never forget. But this is what market bottoms are made out of."
The rise in volatility and risk aversion has also contributed to a
sharp appreciation in the Japanese yen, which has been used to finance
the so-called carry trade, where investors borrow in a low-yielding
currency to invest in one with a higher-yield.
Analysts' belief that the yen carry trade is set for a major
unwinding has intensified today as the Japanese currency continued to
rally in morning trade.
The yen strengthened today as it broke through several psychological
barriers. The yen hit 113.60 against the dollar by 12:35 GMT, the first
time in more than a year it has dropped below 114. The yen was
substantially up against the dollar from yesterday, when it traded at
above 116.
Simon Derrick, head of currency research at
Bank of New York Mellon,
said: "With any hope of even a brief bounce emerging in the yen crosses
evaporating in the fierce glare of another horrible close in New York,
it is clear that the vicious, self-reinforcing, downward spiral we were
worrying about is already firmly established."