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Tail Risk

10 July 2020 by jbchevrel

HSBC Holdings PLC (HSBCHD) has underperformed notably this week. HSBCHD 5y SUB CDS has widened roughly +30bp since Monday. It closed 115bp Monday, 146bp today. President Trump is expected to sign into law the Hong Kong Autonomy Act next week. HSBC and other US/Euro banks in HK are conducting emergency audits of their clients to identify Chinese and HK individuals and corporates which could face US sanctions in response to the new Security Law. The news that the US is reportedly considering removing the USD/HKD ‘peg’ (7.75-7.85 band) as a sanction against the Chinese government set the ground for a low-probability-high-outcome that some market participants seemingly had to hedge against. For some time already, hedge fund manager Kyle Bass is betting against the HKD, in the expectation that the US will remove the peg against USD. Bass’ Hayman Capital is making 200x leveraged bet against HKD. HKD has been pegged against USD for almost 40 years. HKMA, on its side, has a strong track record in defending the range. On top of that, some resurgence in COVID cases has been taking place in HK. Notably, HK has closed schools and has tightened social-distancing requirements. That is small compared to the rest of the world (in HK: 147 new cases in 7 days). Similarly, Standard Chartered PLC (Holding Co.) 5y SUB CDS widened from 119bp (Monday) to 145bp (at today’s close).