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2 days ago
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Analysis-FX options market positioned for further dollar weakness
By Laura Matthews and Saqib Iqbal Ahmed NEW YORK (Reuters) -The U.S. dollar has steadied after a sharp tumble this year but traders in the foreign exchange options market are positioned for the U.S. currency to weaken further amid growing concern about the U.S. economy and persistent trade-related tensions. Investors started the year expecting the Trump administration's policies to boost the dollar, helped by his tax cuts and safe haven demand stemming from protectionist policies. But that view quickly soured when U.S. President Donald Trump unveiled levies in April that were larger and broader than anticipated, spiking volatility and sending the dollar to a three-year low. While a temporary pause in some of the reciprocal tariffs has helped calm nerves, the options market still paints a dour outlook for the dollar. The options market can offer a view on how investors and traders expect currencies to fare months down the line. "FX option prices in general continue to point to a greater risk of further dollar weakening," said Tim Brooks, head of FX options at Optiver. "From our perspective there is no clear single large position, but relative to the past 5-10 years, we see unprecedented demand from investors to own USD puts in comparison with at-the-money options or USD calls." Put options confer the right to sell the underlying security at a fixed price and date and are typically bought to express a bearish view. Their bullish counterpart is the call option, which grants the right to buy at a set price and known time frame. Because the foreign exchange market quotes currencies in pairs like dollars per euro, and yen per dollar, a bullish position on the euro indicates a bearish view on the dollar. FX risk reversals, a type of options strategy that involves the simultaneous purchase of a put option and sale of a call, or vice versa, are useful indicators of which currency is seeing more demand. Pricing on several of these currency pairs remains near multi-year highs despite the pause in the dollar's slide this year, highlighting the market's bearish stance on the buck. According to LSEG data, the three-month, six-month, and one-year 25-delta EURUSD at-the-money risk reversal measures just edged off their highest level of bullishness for the euro against the dollar on records dating to 2007, apart from a brief interlude during the 2020 pandemic's market disruption. "Positioning remains extremely bearish on the dollar," Karl Schamotta, chief market strategist at Corpay, said. "Pricing increases across the curve, with one-year risk reversals trading well above their shorter-term equivalents, suggest that options market participants expect the euro to continue its gradual grind higher," he said. The euro is up nearly 10% against the dollar this year. DOLLAR BEARS AT PLAY Other popular bets being placed are for the dollar to fall against the yen, Sagar Sambrani, senior FX options trader at Nomura, said. Investors are building up positions in dollar puts, trades to sell the U.S. currency particularly against currencies like the euro and sterling, suggesting they remain convinced the greenback has more losses in store. CME Group's options data show USD puts have drawn strong demand, both in aggregate and against most major currencies. In May, USD puts made up just over 59% of traded FX options volume, said Chris Povey, head of FX options at CME Group. Demand for dollar puts over calls was especially apparent in the yen and the Australian dollar, Povey said, making up more than 65% of the options volume in those pairs. Options data hint at expectations that the pace of decline in the dollar from here may be more measured relative to the sharp drop seen since the start of the year. The dollar is down about 9% against the euro, and the yen, respectively, for the year. The euro was last at $1.1443, and the dollar was trading at 142.70 yen. "Traders think spot market momentum will fade in the short term, but are betting on a gradual narrowing in relative growth differentials between the advanced economies by the autumn, along with a slow-motion diversification push over the next year, with major investors reallocating resources toward structurally undervalued markets outside the United States," Corpay's Schamotta said. CONTRARIANS BEWARE Investor confidence in the U.S. economy outperforming the rest of the world has taken a knock in recent months. Worries about rising U.S. debt and a widening budget deficit have also come to the fore, bolstering investors' desire to lighten up on U.S. assets. "I don't think we have the conviction to fight this consensus," Jayati Bharadwaj, a global FX strategist at TD Securities. "The new announcements that we have seen since the start of the year ... after a long time there are fundamental reasons to be bearish on the dollar," she said. With trade policy in flux, the dollar could well experience modest relief rallies. It also has the great advantage of being the No. 1 central bank reserve currency, backed by the world's safest and most liquid government debt market, with higher interest rates than rival developed-economy currencies. But on balance, the path of least resistance for the dollar is lower, strategists and investors said. "We've seen a significant amount of buying of dollar puts coming from a number of different types of clients," said an FX options trader at a large U.S. bank, who did not want to be named because of the private nature of these trades. "We still want to have exposure to dollar weakness, because that's the trade that when you add up all the things that are going on in the world probably makes the most sense," the trader said.
Yahoo
27-05-2025
- Business
- Yahoo
Semiconductor ETF options show caution ahead of Nvidia results
By Saqib Iqbal Ahmed NEW YORK (Reuters) -Traders in the options markets are bracing for industry-wide volatility when AI-chipmaker Nvidia reports results on Wednesday, with defensive options contracts on a major semiconductor ETF drawing heavy trading. For VanEck Semiconductor ETF, the largest semiconductors ETF with some $22 billion in assets, about 2.4 put options changed hands daily over the last 10 days against every call option traded, the most defensive the trading has been in about 10 months, according to Trade Alert data. Call options convey the right to buy shares at a fixed price in the future while put contracts offer the right to sell the shares at a given price. "The put buying in SMH ahead of Nvidia's earnings reflects growing concern about potential volatility for the entire sector following the report," said Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group. On Tuesday, some 105,000 put options changed hands against about 16,000 call options, by 3 p.m. ET (1900 GMT), Trade Alert data showed. In one notable trade, one investor last week bought 50,000 put options in SMH that would guard against the ETF's shares slipping about 10%, to below $220, by the end of May. Nvidia accounts for about a fifth of the semi ETF's assets but due to its dominance in the artificial intelligence market, the chipmaker's influence goes beyond its weight in the fund, analysts said. While investors have been focused on defensive plays in the SMH ETF, options action on Nvidia itself was more mixed, Murphy said. Murphy said investors were selling options to take advantage of heightened volatility expectations around the chipmaker's earnings, meaning they were betting the reaction to the chipmaker's results will not be overly severe. "It's been hedging in SMH while in NVDA they're tactically monetizing elevated premiums ahead of earnings," he said. Susquehanna makes markets in the securities of Nvidia. Interactive Brokers' list of the 25 most active securities by client orders showed Nvidia ranked second, underlining the heightened investor interest in the results. Still, the stock was only one of two names for which investors were net sellers. "That likely reflects some caution ahead of earnings after a solid run," Steve Sosnick, Interactive Brokers' chief strategist, said in a note. Nvidia will be the last of the "Magnificent Seven" megacap tech and growth companies to report results for this period. Their stocks have been mixed in 2025 after leading the market higher as a group in the last two years. For the year, Nvidia shares are up about 0.7%, while SMH shares are up about 1.2%. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
30-04-2025
- Business
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Muddied GDP report leaves investors with little clarity about economic risk
By Lewis Krauskopf and Saqib Iqbal Ahmed NEW YORK (Reuters) -Investors were left with little clarity on Wednesday about the health of the U.S. economy despite a fresh report on gross domestic product, with the fallout from President Donald Trump's sweeping tariffs muddying growth signals. On its face, the first-quarter data showing the first U.S. economic contraction since 2022 was alarming and brought immediate pressure on U.S. stocks. But some economists had braced for an even deeper contraction and were encouraged by the data. The weakness stemmed from a surge in imports as businesses sought to avoid higher costs from the new tariffs, a phenomenon that many analysts said was poised to reverse in coming months. Investors faced a similar position as they had before the highly anticipated report, vulnerable to twists and turns in Trump's very much unresolved trade war that stood to keep markets on edge and the potential for a recession still on the table. "There's just massive distortion and volatility in the economic data right now because of the pull-through of tariffs," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. The GDP report "doesn't help shake off this economic contraction fear that has been gripping markets." U.S. gross domestic product fell at a 0.3% annualized rate last quarter. Imports jumped at a 41.3% rate, resulting in a large trade gap that chopped off a record 4.83 percentage points from GDP. "It's more frustration for the long term investor because you're not getting a really good read on what the actual economy is doing," Mark Hackett, chief market strategist at Nationwide. "We need to know what's happening in the economy ... and reports like this don't give us a lot of useful data on that." Larry Werther, chief U.S. economist of Daiwa Capital Markets America, said he was encouraged that consumer spending, which accounts for more than two-thirds of the economy, grew at a 1.8% rate, indicating "the domestic economy was still on track" in the first quarter. Recession was not Werther's base assumption "but odds of it in the next 12 months have increased substantially" from the start of the year, he said. Meanwhile, the persistent uncertainty itself poses a risk to markets. "This period where tariffs are trying to be negotiated and acknowledged by the market makes things extremely difficult to model, predict, etc," said Peter Andersen, founder of Andersen Capital Management in Boston. STOCKS FALL AFTER GDP REPORT Stock futures fell sharply after the report but major averages pared some of their losses by mid-day. The S&P 500 was last off about 1%, and down 10% from its February record high. Wednesday's data leaves investors at a crossroads: On the one hand, even allowing for the one-off tariffs-related hit, the growth picture looks lackluster; while on the other hand, with markets braced for the worst, any signs of better-than-expected data in coming months could spark a rally in risk sentiment. "People are positioned conservatively ... and when that happens, it doesn't take a ton of good news to move the markets pretty violently positive," Nationwide's Hackett said. In the meantime, investors are trying to position for a variety of outcomes. Lack of clarity on the tariff situation is leading Sonu Varghese, global macro strategist at Carson Group, to favor a "barbell" approach to portfolios, with defensive, low-volatility stocks at one end and high-momentum, growth equities at the other. Investors will quickly get another view of the economy on Friday, with the release of the U.S. employment report. "Everything else is skewed because of tariffs ... but right now consumption is still holding the economy together," Varghese said. "If the labor market starts to falter here, then we have a big problem going forward." Sign in to access your portfolio
Yahoo
14-04-2025
- Business
- Yahoo
S&P 500's looming 'death cross' may not be as ominous as it sounds, analysts say
By Saqib Iqbal Ahmed and Terence Gabriel NEW YORK (Reuters) - A tariff-induced selloff in the U.S. stock market faces another worry, the "death cross" pattern, but history shows the ominous sounding technical signal may not necessarily mean equities face more significant downside. A death cross occurs when the 50-day moving average (DMA), seen by technicians as a proxy for the intermediate-term trend, slips below the 200-DMA, a proxy for the long-term trend. Technical analysts view the occurrence as marking a spot where a shorter-term correction could turn into a longer-term downtrend. The S&P 500's 50-DMA ended on Friday at about 5,761, while the 200-DMA ended just over 5,754. While the benchmark stock index was higher in Monday afternoon trading, the 50-DMA was on track to fall around 15 points at the close of the session, which would put it below the 200-DMA for the first time since February 1, 2023. A death cross occurred for the Nasdaq Composite on Wednesday. "It's a very ominous sounding signal in equity markets, but when you actually back-test the death cross throughout history, you're better off a buyer than a seller on the death cross," said Adam Turnquist, chief technical strategist for LPL Financial. Looking back over roughly 50 years, the S&P 500 has seen 24 death crosses. In 54% of the cases, the death cross occurred after the point of the index's maximum intraday decline, a Reuters analysis of LSEG data showed, meaning the worst of the slide had already happened before the death cross. In 46% of the cases, the selloff worsened, with the benchmark index logging an average decline from the point of the death cross of 19%. There have been instances of severe losses following the signal. After death crosses in 1981, 2000 and 2007, the ultimate declines of the ensuing selloffs were 21%, 45% and 55%, respectively. The S&P 500 has fallen 52% of the time 20 days after a death cross occurred, with an average loss of 0.5%, Bank of America technical strategist Paul Ciana said in a note analyzing nearly 100 years of data. But 30 days after the signal, the index was higher 60% of the time, with an average gain of 0.8%, Ciana said in the note on Monday. The severity of the selloff that the market has already endured - the S&P 500 came within about 1% of confirming a 20% correction this month - and the highs hit by various measures of bearish sentiment, including the Cboe Volatility Index, hint that a selling crescendo might be over, analysts said. "We had major signs of capitulation over the last week in the broader market," Turnquist said. "To me, looking at the charts, this is more 2018, 2020 kind of potential V-shaped recovery than something more drawn out," he said. Sign in to access your portfolio
Yahoo
14-04-2025
- Business
- Yahoo
S&P 500's looming 'death cross' may not be as ominous as it sounds, analysts say
By Saqib Iqbal Ahmed and Terence Gabriel NEW YORK (Reuters) - A tariff-induced selloff in the U.S. stock market faces another worry, the "death cross" pattern, but history shows the ominous sounding technical signal may not necessarily mean equities face more significant downside. A death cross occurs when the 50-day moving average (DMA), seen by technicians as a proxy for the intermediate-term trend, slips below the 200-DMA, a proxy for the long-term trend. Technical analysts view the occurrence as marking a spot where a shorter-term correction could turn into a longer-term downtrend. The S&P 500's 50-DMA ended on Friday at about 5,761, while the 200-DMA ended just over 5,754. While the benchmark stock index was higher in Monday afternoon trading, the 50-DMA was on track to fall around 15 points at the close of the session, which would put it below the 200-DMA for the first time since February 1, 2023. A death cross occurred for the Nasdaq Composite on Wednesday. "It's a very ominous sounding signal in equity markets, but when you actually back-test the death cross throughout history, you're better off a buyer than a seller on the death cross," said Adam Turnquist, chief technical strategist for LPL Financial. Looking back over roughly 50 years, the S&P 500 has seen 24 death crosses. In 54% of the cases, the death cross occurred after the point of the index's maximum intraday decline, a Reuters analysis of LSEG data showed, meaning the worst of the slide had already happened before the death cross. In 46% of the cases, the selloff worsened, with the benchmark index logging an average decline from the point of the death cross of 19%. There have been instances of severe losses following the signal. After death crosses in 1981, 2000 and 2007, the ultimate declines of the ensuing selloffs were 21%, 45% and 55%, respectively. The S&P 500 has fallen 52% of the time 20 days after a death cross occurred, with an average loss of 0.5%, Bank of America technical strategist Paul Ciana said in a note analyzing nearly 100 years of data. But 30 days after the signal, the index was higher 60% of the time, with an average gain of 0.8%, Ciana said in the note on Monday. The severity of the selloff that the market has already endured - the S&P 500 came within about 1% of confirming a 20% correction this month - and the highs hit by various measures of bearish sentiment, including the Cboe Volatility Index, hint that a selling crescendo might be over, analysts said. "We had major signs of capitulation over the last week in the broader market," Turnquist said. "To me, looking at the charts, this is more 2018, 2020 kind of potential V-shaped recovery than something more drawn out," he said. Sign in to access your portfolio
