GS Adam Crook Thoughts From The Floor

Themes resonating with global clients at the moment and GS views/thinking on the topics. Reach out if there are comments, opinions and/or ideas you want to discuss with the people below.

1) Connecting you to GS: Nat Gas – What’s the Right-Tail for H2? Can the Fed still hike if CPI is running around 2% but PCE is closer to 2.5-3%? How much risk-premium has unwound from UK Macro assets + views from here? Hungary – What next for Hungary convergence trades in Rates + FX? What's our read on domestic political calculus driving decisions on escalation / de-escalation in the Middle East?

2) Trades we Like: Hedging Tail-Risks into H2…. Macro markets do not feel in a state of stable equilibrium –> The distribution of potential outcomes feels wide with regards to the Equity momentum/AI trade; AI issuance + its impact on credit markets; global inflation; the Iran War + the right-tail in energy prices; geo-politics; DM + EM monetary policy; and global politics. Last week we hosted a Tail Hedging Webinar, aimed at cross-asset clients looking for the best portfolio hedges into H2 -> Replay can be accessed here:

i) Hedging Middle East Escalation -> Oil: Significant increase in supply-risk given escalation in the Iran/US conflict, Houthis striking vessels transiting the Red Sea + a decline in Kazakhstan exports amid Russia-Ukraine escalation -> Buy Brent Dec26 $120 Binary Call for 10% (~10x Max Leverage, expires 27th Oct). Nat Gas: Seasonally low inventory in Europe, projected to finish Summer at the lowest level for 14yrs, restart of Asia buying + slower ramp on Qatari exports; GS Research upside scenario for Q426 TTF is 102 EUR/mwh -> Buy TTF Q426 (Oct26-Dec26) 90/100 Call Spread for EUR 1.20 EUR (~8.75x leverage). FX: A roughly €50 increase in the price of TTF, implies a 3-5% move lower in EURUSD beta- adjusted; NOKSEK had the largest move in G10, during the initial phase of the war, adjusted for current 3m implied vols -> Buy EURUSD 3m 1.11 Binary Put for 14.3% EUR (~6.9x Max Leverage) or Buy NOKSEK 3m 1.04 Binary Call for 17.5% NOK (~5.7x Max Leverage). (h/t Tom Evans & Prateek Mookerjee)

ii) Hedging AI Unwinds -> Credit: Spreads continue to trade near historical tights, implied vol skew + calendar are both elevated, and susceptible to come lower on a larger move wider. November 300-400 Pay-Spreads vs 250 Receivers offer a good opportunity to get levered short exposure to credit spreads with positive PnL over a range we have seen as recently as last April, whilst being exposed to tightening only beyond 250bps, near 4y tights -> iTraxx Xover Nov 300-400 Pay-Spread vs 250 Rec for 37.5 Cts.. FX: USDJPY has historically moved lower in rates down/equity down environments -> Buy a USDJPY 6m 150 Binary Put for 10% USD (~10x Max Leverage). (h/t Prateek Mookerjee & Carolin Ecsy)

iii) Hedging using Cross-Asset Hybrids -> Equity vs rate correlations have realized deeply negative during the Iran oil shock, as inflation-driven price action caused Equities to drop while Rates rose. Correlations for wingy down/down structures historically traded around +20-25, but have now repriced to around 0. This makes hedges against a "growth shock" very attractive -> i) Buy a 6mnth Dual Binary NDX < 95% vs 5ySOFR < Spot-0.30% for 10% USD (~10x Max Leverage); ii) Buy a 6mnth Dual Binary NDX < 90% vs USDJPY < 95% for 7.75% USD (~13x Max Leverage). (h/t Mikhail Slepovskiy)

iv) Hedging using FX Vol -> We've seen client interest to buy volatility, particularly in limited-loss structures; G10 FX volatility stands out as particularly depressed in a cross-asset context. Given the highly bi-modal distribution of returns, lack of (visible) catalysts, and the exceptionally low cost of optionality, we prefer expressing a view for higher FX volatility through limited-loss options on FX Vol swaps -> Buy a 6mnth 7.0 EURUSD Call Option on Vol-Swap for 35bps Offer (these are options on volatility swaps: Investors pay an upfront premium for the right, but not the obligation, to enter into a volatility swap at a predetermined strike). (h/t Jonas Schmitten)

Max loss = Premium paid for all structures apart from iTraxx Xover Calendar Risk-Reversal

• Nat Gas: Nat Gas – What’s the Right-Tail…