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Week in review & notable trends (Asia) The MSCI Asia-Pac USD Index inched down 48bps in an eventful week in terms of macro news, with equities gains offset by USD strength. Following the monetary policy changes announced during the Bo), the Abe Cabinet approved a fiscal stimulus package totalling ¥28.1tn last week. However, the Nikkei fell 190bps and the yen advanced another 32bps over the week. The Korean government submitted a KRW28tn fiscal package proposal to the Congress, which our economists believe should sustain growth near term; the KOSPI2 was little changed (adding 35bps). The RBA cut rates by 25bps as our economists expected, but Australian stocks declined with the ASX 200 dropping 117bps. Elsewhere in Asia, the HSI, HSCEI, TWSE and Nifty rallied 1.2%, 1.9% 1.2% and 0.5%, respectively. Japanese equity implied volatility dropped to YTD lows « Last week, most major Asian implied vols edged down as underlying indices rallied; ASX 200 vol increased slightly despite the rate cut « —NKY vol saw a larger decline, with 3M ATM vol dropping 1.1 vol pts to 21.7% mainly due to diminished uncertainty as the fiscal package rolled out « Most Asian skews flattened and term structures steepened, especially the Nikkei term structure (spread between lyr and 1M ATM vols), which increased 3.0 vol pts and turned positive NKY Uridashi issuance continues to fall as existing ones haven’t knocked-out Despite the falling NKY and relatively high implied volatility, Japanese Uridashi issuance has further retraced as most existing products have not knocked-out. In Jul-16, there was $450mn Uridashi products issued which are NKY linked. We estimate that the peak of vega profile is around the current spot. Chart 33: In Jul-16, there was $450mn Uridashi products issued which Chart 34: At current NKY levels, the estimated total vega of the NKY- are NKY linked linked Uridashi products is ~US62mn, near the peak of the vega profile 1.6 - - — 22,000 14 ma New NKY Linked Uridashi issuance 24.000 3 Uridashi NKY outstanding vega , , 70 — = NkY Index a s 1.2 20,000 g go 7-7-7 2 1.0 19,000 S 50 g 0.8 te 18,000 s > 40 S 06 r 17,000 = 3 30 wn y a E . 2094 4 M 16,000 & 3 20 a vega for Uridashi o2 4ul All 15,000 S 10 is ~USS62mn iin 44,000 e 0 s+ + Ke) Ww WwW io) Ko} S OQ OQ OQ OQ OQ OQ OQ Q Q Q ~~ . © 4 % LZ hi Ss ss 8 8 8 8 8& 8 8 =) D = S ® = S (se) + ie) oO Ny ie) a Qa x N ft Oo <—f Oo ft N ~N N NKY Source: BofA Merrill Lynch Global Research. Source: BofA Merrill Lynch Global Research. Merlin Global Equity Volatility Insights | 09 August 2016 17 HOUSE_OVERSIGHT_025994