|15 March 2017|
|Warrant Activity: Warrant Plays for FOMC Meeting|
Key Events Happening this Week
Investors’ expectations of a March Federal Reserve rate hike near 100% on strong economic data
Investors’ expectations of a March rate hike by the Federal Reserve has risen considerably. According to the Bloomberg World Interest Rate Probability, expectations of a rate hike rose significantly from 52% at the end of February to almost a 100% today (see chart).
Rising expectations of a rate hike might be attributed to a comment made in early March, where Federal Reserve Chair Janet Yellen stated that “it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect”. Yellen also pointed out that core inflation (excl. volatile food and energy prices) is at 1.7%, vs. the Fed’s target of 2%.
U.S. economic data continue to strengthen as the February nonfarm payroll report (released last Friday) showed the creation of 235,000 new jobs, beating expectations of a 190,000 increase (according to Reuters). Unemployment rate also declined to 4.7% in February, vs. 4.8% in January.
The U.S. Federal Reserve will hold their Federal Open Market Committee (FOMC) meeting on 14-15 March where analysts expect the benchmark fed funds rates to be raised by 25bps to a range of 0.75%-1%. Industry analysts expect three rate hikes over the course of this year.
Expectations of a rate hike has spiked up since early March
Source: Bloomberg World Interest Rate Probability (data as of 14 March 2017)
S&P 500 Warrants in Play – Sensitive warrants ideal for short-term investors
The S&P 500 closed at 2,365.45 on Tuesday, down 8 points from the previous close, as the FED interest rate decision nears. Traders looking to position ahead of the decision can consider the more “sensitive” warrants to trade the underlying moves.
According to Macquarie’s article titled Most active warrants in Singapore have high “sensitivity” on 8 Feb 2017 (Click here for the article), a warrant’s “Sensitivity” is an estimate of how much the underlying price needs to move for a corresponding one tick (or minimum spread) movement in the price of the warrant. Macquarie uses the delta and Warrant Per Share to calculate the sensitivity of the warrant to the underlying.
Sensitive warrants are favoured by short-term investors who use warrants, priced at a fraction of the share price, to trade the underlying moves. The table highlights the details of some of the more “sensitive”/liquid S&P 500 warrants. The sensitivity of each warrant issued by Macquarie can be found on the warrant terms page in their website (Link to Macquarie’s website)
Source: SGX, Macquarie (data as of 14 March 2017)
Singapore Banks Warrants – Bank stocks saw strong total returns since November 2016
In a recently publish market update(click here for the full article), it was highlighted that a rising interest rates environment typically point to improving economic conditions and may potentially have impact on different equity sectors in the market. Specifically for the banking sector, net interest margins (NIMs) typically increase from higher interest rates. Cyclical sectors also typically benefit as an improving global economy will likely result in an increase in capital spending.
Beyond rising interest rates, asset quality remains a focus for Singapore banks in 2017. According to Moody’s Investors Service, Singapore banks saw further decline in profitability and mixed asset quality performance in 2016 but expect pressure on credit costs and net interest margins to subside this year, providing support to profitability.
Singapore banks have an average total return of 18.1% since 8 November 2016, outperforming the STI’s 12.1%. The strong returns are backed by a net buy of S$1.43 billion by institutional investors during the same period (according to SGX’s data). The three Singapore banks are trading at a price-to-book (P/B) ratio of 1.1x with an ROE of 10.0%.
Investors who are bullish on the banks may consider call warrants, while those who feel a correction is near may consider the put warrants.
Source: SGX (data as of 14 March 2017)
Specified Investment Products
Structured warrants are an example of Specified Investment Products (SIPs). The MAS has introduced measures for intermediaries to safeguard the interests of individual investors investing in SIPs, which are products with features that might be more complex in nature. Investors now have the opportunity to assess their qualifications to trade SIP or enhance their product knowledge through the SGX online portal available here.
Structured Warrants Education Portal
Structured Warrants have a growing presence in Asia as an alternative for investors to participate in the performance of an underlying asset at a fraction of its price, in both bullish and bearish markets. Click here for educational videos covering the basics of trading structured warrants.
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