Paid episode

The full episode is only available to paid subscribers of Capital Flows and Asset Markets


Barriers are far lower than I expected but HSCEI autocallables are getting near its barriers

I have been talking about autocallables for a while and having looked at the weakness in markets this year, I had assumed we must be getting near some key barriers for the autocallable market. Experience has taught me 50% drawdown from a peak means you will be hitting an autocallable barrier. The main markets for autocallables are S&P 500, EuroStoxx 50, Kospi 200, Nikkei 225 and HSCEI. Of all of these markets, HSCEI has been the weakest.

In recent years, the HSCEI is the only market that has seen autocallables knock in, and that was in 2016, when the market fell 50% peak to trough. So I have been using peak to trough drawdown at that as a rough guide to where autocallable barriers are likely to be. On that basis, with the current drawdown from 2021 peak of 12,000 we should have passed some barriers. The fact is that market tends to very aware of where the barriers are, it’s just that this is not a data point that is shared widely. A friend passed me the latest estimates of where the large autocallable barriers for HSCEI. 5200 on the HSCEI is the key number for HSCEI barriers. This would put it at 50% down from the average level HSCEI traded over 2020, which is more than what I expected. That is I was using peak level, whereas using an average seems to work better.

Can HSCEI get to that barrier level? Well as long as the Chinese Yuan is weakening, I don’t see why not. With the Yen trading as weak as it is, I suspect it continue to pull Yuan down. Weak yen is actually bad for the markets.

This new information means that I need to assume barriers on the two biggest autocallable markets, EuroStoxx 50 and S&P 500 are also much lower than I assumed.

Watch with a 7-day free trial

Subscribe to Capital Flows and Asset Markets to watch this video and get 7 days of free access to the full post archives.

Autocallables and Volatility
Autocallables and structured products and short volatility products
Russell Clark