Quadruple Witching Equals Volatility

Today we have what they call in the equities world “quadruple witching” whereby options expire on the S&P 500 index (^GSPC), S&P future, single stocks and futures on single stocks. On such days sometimes see great volatility in the price of equities i.e. a spike in the VIX (^VIX). But threat such moves with caution as they may be telling you very little about any underlying story and are usually quickly reversed.

NAMA Fallout

Irish banks rallied like stink in the equity market yesterday which was frankly to be expected given that nationalisation is off the table (+28% for AIB and +18% for Bank of Ireland). CDS rallied hard too but not to the same extent (c30bp).

Meanwhile Bank of Ireland came out with some pretty woeful H1 guidance yesterday, but is still targeting a profit. Margins hammered, new business hammered and loan losses 7x higher than last year, and 72% of wholesale funding is less than 1 year. Its NAMA response was light on detail. It expects haircut on loans to be significantly less than 30%, much like AIB believes. The loan impairment charge on the €16bn going into NAMA est. at €1.2-1.4bn, but no current estimate of if and how much capital it will need to raise - reckon minimum €2bn (AIB said it will raise €2bn) - but does appear confident it can do so through internal revenue generation or via capital markets.

Index Changes

Last week saw two of the major index providers, Dow Jones Stoxx and FTSE, announce component changes following scheduled reviews. In all cases, the changes are effective as of the opening of European markets on Monday, September 21st. Consequently, today will be a busy day for indexers as portfolios are re-balanced. The big change from an Irish perspective is the addition of CRH to the blue-chip Dow Jones Euro Stoxx 50 index which is likely to attract significant additional flows. CRH is one of only two additions to this index; the other is Anheuser-Busch InBev with Renault and Fortis losing out. Irish Life & Permanent will re-join the DJ Stoxx 600 index after losing its place following the Q2 review in May. Taylor Wimpey will also be added to this index. The changes announced by FTSE will see Wolseley re-join the FTSE Eurofirst 300 (E300) index. It was removed following the Q1 review in March. Origin Enterprises and Irish Continental will be removed from both the FTSE Global Developed Europe index and the FTSE AllCap indices. Irish Life & Permanent and Wienerberger are to be removed from the FTSE All World index and will join the FTSE Global Small-Cap index.

Stocks In The News

Élan yesterday announced its deal with J&J had been completed. The deal as had previously been indicated sees J&J now pay a reduced amount of $885m in exchange for an 18.4% stake and ownership of Élans Alzheimer’s Immunotherapy Programme. It will also continue to invest $500m in research funding. J&J’s shares will be listed on a newly established ADR. Janssen Alzheimer Immunotherapy will now assume Élans partnership with Wyeth under the AIP for the continued development bapineuzumab. The announcement brings to an end the growing unease at the delay in the deal as a result of the Biogen ruling. It also seems to indicate that the court room battle over the perceived option the deal granted J&J in relation to Tysabri is now settled with Biogen. The original deal was seen as a very positive move by Élan and although the up front payment is now reduced, it will reduce the burden of Élans €2bn in debt.

British Land have confirmed overnight press reports that they are to sell a 50% stake in Broadgate to Blackstone, in a deal that has been mooted for some while. The consideration is £77m, although that reflects the £1.97bn of securitised debt that comes with the asset. The £77m of proceeds is below the £150m British Land was reportedly hoping for, albeit the differential is not material in the context of the wider group. The transaction will reduce British Land’s exposure to single asset developments (following on from a similar transaction for Meadowhall), and will also reduce its exposure to city offices from 31% to 21%. However, according to the FT, British Land is set to announce an acquisition of a retail park next week, its first purchase since the start of the slump in mid 2007.

On the Dax BASF climbed 3.4% as the chemical company said it’s raising prices for some polyalcohols worldwide with immediate effect. The return of pricing power? Volkswagen, Europe’s largest carmaker, slid 3%, is poised for the lowest close since July 2007. The common shares’ free float was reduced from 20.08%, Deutsche Boerse said. Green energy stocks had a good day with Q-Cells SE surging 9.7%, the steepest advance among stocks in the HDAX Index, after the producer of cells used in solar panels said it plans to start selling a new generation of more efficient cells next year. Solarworld advanced 5.7%, poised for the highest close in more than a month.

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