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Readers of TME know or view on volatility. We outlined our latest logic onOct 28th, the highest close for VIX since the June VIXplosion (VIX closed just above 40 on Oct 28). we wrote;
"As usual people hedge at wrong times and wrong levels and most tend to confuse direction with pace. Sure, there is a lot of uncertainty ahead, but how much are people paying for that premium?....For the ones been waiting to sell elections fear, these levels are much more attractive than what so many investment banks were recommending only a week ago..."
Fast forward and we have VIX in total crash mode, down 18% as of writing.
Absolute levels of VIX are still elevated. Wonder if we are going to start talking about Santa rallies soon and smart quants soon starting to tell us to sell volatility?
Credit impulse driving most things, properties included...but note the 3 red lines having changed that relationship somewhat recently.
Nordea reminds us of:
"i) Liability-to-asset ratio (excluding advance receipts) of less than 70% ii) Net gearing ratio of less than 100% iii) Cash-to-short-term debt ratio of more than 1x If all three red lines are breached, a Real Estate developer is NOT allowed to grow the debt base at all (Evergrande has been stuck in this situation for a while)."
Numera simulates a 20% correction on property prices and reaches the conclusion:
"Our simulations reveal a 20% correction would lower global manufacturing and producer prices by around 2% one-year after the shock."
Guess we have to be China property experts for longer...