Chart 40: European AT1s offer a compelling yield for total return investors 8 == Stoxx Banks 12m fwd DY (%) — Coco Index yield (%) 7 6 . 5 4 3 e © Fr er Fe Fr vvre vere & Ss ¥ FF Fw Fw SF YY FY KF Y Source: BofA Merrill Lynch Global Research, Bloomberg, Datastream, IBES Volatility: Sticking with Relative trades While 2016 started off with a bang volatility wise it has ended with a whimper. Neither Brexit nor the US presidential election proved to be anything more than a blip. Realised vol in the S&P 500 over the last 100 days is just 9.5%. That compares to 13.6% for the Eurostoxx 15.1% for the Russell and 21.8% for the NKY. Chart 41: Neither the Trump election... Chart 42: ...nor Brexit led to a sustained period of higher volatility 45 45 ——VIX Index 40 40 35 35 30 30 25 295 20 : 20 15 15 o=——\/2X Index 10 10 & \) & a) © © © © © & \ \ & & © © © © ~ x N YS s » » » s xs x N s x » N » s FF EF KS KF KF KF VK SF yr -F FF ¥ KF KF KF ¥ SF Source: Bloomberg Source: Bloomberg That is why we prefer relative variance trades. They tend to carry flat to positive but have convexity to the downside. We are happy to continue to run these trades into 2017 and then use shorter term instruments to hedge specific events. We did this around Brexit and have recently bought a 3000-2850 Eurostoxx put spread to hedge our European exposure around the Italian referendum. While a No vote is expected we are not sure what the aftermath will look like and there is considerable uncertainty over the bank recapitalization of the banks afterwards. We also have a calendar put spread in eurostoxx which tends to pay off best around the 2500-2600 levels so that remains something that we will look to keep for now given downside risks in Europe over the first half of next year. One trade we are taking off today is our Kospi forward vol position. We had held that as a hedge against a China hard landing. Our derivative strategists no longer like it and we have no opted for a currency hedge for our China risk