Volatility in Asia Long HSCEI-SPX volatility spread via corridor variance Global synchronized monetary tightening is positive for EM vol Emerging markets have been the biggest beneficiaries of the central bank-fueled abundance of liquidity. However, we think the tide may be turning as last week, the Fed, ECB, and BOE all delivered policy announcements with hawkish tones. How far they really go to tighten policy when economic data is weakening still remains unknown. However, we think the uncertainty surrounding tightening will be more positive for EM volatility than for DM volatility. Chinese banks: Rapid increase in leverage is a big concern The HSCEI currently has a 70% weight in the financial sector. Recently, BofAML analyst Winnie Wu turned very bearish on the sector as (1) leverage has rapidly increased—debt to GDP rose by 18% in 2016 and may go above 300% by 2019, (2) shadow banking has become too big, too complicated, and too levered to easily regulate—even at the highest quality bank, China Merchants, off-balance sheet wealth management products (WMP) have grown to 40% the size of on-balance sheet assets from just 18% two years ago, and (3) excessive home price inflation—low and middle-income households are late to the party and a correction in prices could have a systemic effect as property assets have been used as collateral in WMPs. SPX: The Fed is now “collaring” the market Since the global financial crisis the Fed has been well known for providing a put option by its willingness to step in during periods of market stress. However, post the Fed meeting last week, it appears the central bank has decided to cap its monetary support as some FOMC members seem worried that financial conditions are too loose. Effectively, the market is now “collared” (more so for the SPX compared to EM) as the downside is protected by the Fed put (though with a lower strike price) while the upside is capped by log-jammed fiscal policy and positioning, where the risk of quant fu