Don’t expect it to be a quiet week for trading desks says Karim Awenat, head of EMEA and APAC macro trading at Invesco.
As 2024 comes to a close, Awenat advises traders to remain on high alert for any major surprises that could disrupt markets and lightly staffed desks ahead of the holidays.
In this episode, he discusses how Invesco is navigating the year-end liquidity squeeze; he unpacks his team’s approach to high and low-touch trading in current conditions, and looks at trends in fixed-income funding levels.
Additionally, he discusses the biggest risks to pay attention to and offers one piece of advice to traders as they wrap up the year.
Interview Transcript
Jo Gallagher Welcome to Trader TV This Week, your insight into how trading desks can prepare for the week ahead. I’m Jo Gallagher. Today, I’m joined by Karim Awenat at Invesco to discuss the main topics and events leading this week. Karim, welcome to the show.
Karim Awenat Thanks for having me.
Jo Gallagher To begin with. How is your desk navigating the final few weeks of the year?
Karim Awenat It’s going to be a busy period for us. We’ve got year-end, month-end, and quarter-end, so a lot of index rebalancing going on and we’ve seen a lot of liquidity start to dry up in the marketplace. Just at the tail end of last week, for example, we saw Gilt futures volumes down by about 25% on their normal level. Our own volumes as a firm are typically about 15% lower week on week. So we just need to be cognizant of those liquidity squeezes and how we’re going to approach that to make sure we’re not on the wrong side of being forced to trade in conditions which aren’t particularly favorable.
Jo Gallagher Drilling into that a little bit further, around this time of year there are fewer hands on deck and as you said, liquidity tends to dry up. So how do you think about your strategy in terms of low and high touch-trading?
Karim Awenat I think the way to approach it is to not assume that the liquidity that was there last week is going to make your decisions for you this week. So I’d expect a few more high touch trades, although you would expect fewer people, hands on deck. Within Invesco, you also see the same thing on the sell side. A skeleton staff with backup traders working there. So large transfers of risk probably aren’t going to be as easily achieved as before. So being ahead of that and being aware of what’s going to be the pinch points, that’s going to be the key.
The traditional liquidity providers, the sell side banks, we have a very good relationship with them. So although the alternative liquidity providers might still be showing screen prices, being able to transfer large blocks of risk over this holiday period is going to be a real struggle. So being able to leverage off of those relationships with the more traditional sell-side institutions is really important. To being able to have that dialog with a trader allows us to get to the outcomes we’re looking to achieve.
Jo Gallagher And what is data telling you about market sentiment as we come into year end?
Karim Awenat There’s been a marked increase in funding levels, particularly visible in the equity TRS (Total Return Swaps) space where we’ve seen funding levels at Sonia plus 50 – 60, even 100 bps going across the year-end. That’s also showing up in the fixed income space as you are getting a lot of fast-money people looking to increase their leverage. Dealers are apparently hesitant to extend liquidity, extend credit lines as much as usual across the year-end.
So you’re seeing overnight financing, which is pushing people outside of the government bond market into interest rate derivatives. So swap levels are coming down as people get their duration there. What you’ve seen on the back of that is swap spreads go through zero. For example, Bund spreads are in the ten year, about 10 to 15 basis points positive. We’re currently standing at around about -13 basis points. So there’s clearly a squeeze there and a demand for leverage and term leverage.
Jo Gallagher As you mentioned, it’s been a very big year for debt issuance coupled with the high cost of borrowing. How do you think about that from a trade perspective in terms of risks and potential opportunities?
Karim Awenat Well, the leverage on fast money is nothing new or nothing abnormal. But the overnight rolling of that risk is something that we need to keep a very close eye on, because if it became a disorderly unwinding of those positions, that’s when the liquidity squeeze could hit. You’re seeing some very large volumes in BTPs, and OATs, dominated by these fast-money funds, which is fine as long as they’ve got the capacity to take the positions. However, in a forceable unwind, you not only have a big market directional move, but you also have a lot of liquidity players exiting the market. Two things that if happening at the same time, can be a little bit tricky to navigate. So it’s not something we’re overly concerned about, but we’re certainly keeping an eye on it.
Jo Gallagher And what’s one piece of advice you would offer traders on the desk at the end of the year?
Karim Awenat Don’t expect it to be quiet. It probably will be. But all you need to do is look back to 2001 when Argentina defaulted on the 24th of December. And that certainly wasn’t a relaxed Christmas that a lot of people were expecting. So it’s about being prepared, understanding what you can trade, what you can’t trade. Having that dialog and knowing how to get hold of your key counterparties who are going to help you rebalance when you need to rebalance.
There’s a lot of geopolitical risk out there, more so than economic data. We’ve had some economic data in the past couple of weeks and central bank meetings. You’ve got the Bank of Japan and the Bank of England coming up. But actually the geopolitical risks around France, the change of administration, the US, Syria, Gaza, Ukraine, and Korea. There’s a lot going on out there that might not make it quite the sleepy time that people are hoping for.
Jo Gallagher Thank you, Karim, for your insight and of course, you for watching this has been Trader TV This Week.
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