​U.S. Systematic Vol Sellers Drive SX5E Short-Term Vol, Term Structure

The recovery in the Eurostoxx 50 (SX5E) over recent days, combined with flow from systematic fund managers that typically sell short-term volatility in the Eurostoxx 50 (SX5E) via capped or uncapped var swaps in order to capture the volatility risk premium, is partly driving a re-steepening of the term structure. In an environment where SX5E term structure has been steepening and short-term vol is under pressure, investors have been plotting risk reversals on the index and, tactically, entering strategies that monetize the high vol in European Banks.