Cost of Hedging Weekly Update 4-16

by Jay Pestrichelli on April 16th, 2013

Up until yesterday the cost of hedging story seemed to stay at relative low levels and didn’t really have anything interesting to report. However after the horrible events in Boston, the market 2% sell off gave us a reminder of why we hedge. As of yesterday’s close the short-term daily cost was 1.05 basis points and the mid-term out to December was also 1.05 basis points per day. 
See data for the past 21 months on our Resources Page

Yesterday almost felt like 2 very different days. The first 4 hours of the day was all about the gold sell off. I read that it was the largest 2 day decline in 30 years as gold dropped from 1560’s 4:00 price on Thursday to 1356 at 4:00 on Monday; a 13% drop.The equities market seemed to follow this decline and even some treasury bonds were down at mid-day. It was an all-out risk off beginning to the day. However at 2:30 when news and pictures of the bombs at the finish line started circulating, we saw another 1% decline in equities. 
Today’s bounce back is a relief trade reaction that the damage seems to have been localized to the marathon event and is a good example of the push and pull relationship between fear and greed.  To help keep it in perspective, the one-day rise in the cost of hedging yesterday didn't even match the one-day rise we saw on Feb 25th when the mid-term costs rose to 1.25 bps per day. 

Taking emotion out of the equation (as hard as that is) means we have to look at the market without the Boston event and remember what happened in the morning. The declines of the morning were a result of a report of China’s GDP decline and brought into question whether multiple expansion of this market was sustainable.

That question still exists and the answer will be driven by earnings.  Keep your eye on that and watch for a continuation of high expectations or disappointment leading to a correction. It’s still all about earnings and today’s bounce back is proof that until we see corporations disappoint, the market will continue to rise. 

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