Sales of Notes Tied to European Stocks Plunge on Brexit Concern

Uncertainty over how a potential British exit would affect the European Union is causing U.S. and Japanese investors to eschew structured notes tied to the Euro Stoxx 50 Index.

In Japan, sales of the securities in the first five months plunged 97 percent from the same period of 2015 to $45.4 million, a four-year low, according to data compiled by Bloomberg. U.S. issuance of notes linked to the European benchmark fell 68 percent to $1.1 billion between January and May.

A looming June 23 vote on whether Britain will stay in the European Union has caused risk aversion among investors. Lower volatility on the Euro Stoxx 50 compared with the Nikkei 225 index this year has also kept investors away from the products, according to Tomoyuki Mori, the head of equity and fund derivatives marketing in Japan at JPMorgan Chase & Co. 

“If European stocks fall after a Brexit vote, it isn’t positive for these structures, which work best when stocks are rising,” he said.

Structured notes tied to the European gauge typically are bullish on the region’s stocks. This year’s largest U.S. deal was a 14-month, $84 million note, sold on Jan. 28, that pays three times the increase of the index. Returns are capped at 20.46 percent and all principal is at risk, according to a prospectus filed with the Securities and Exchange Commission.

Two weeks ahead of the Brexit referendum, a YouGov poll showed 45 percent of voters would choose to leave compared with 42 percent favoring the status quo, a reversal from similar surveys in May and April.

The Euro Stoxx 50 volatility index is at a one-month high of 25.8, rising from a low this year of 19.8 in April.

To contact the reporter on this story: Viren Vaghela in Hong Kong at vvaghela1@bloomberg.net. To contact the editors responsible for this story: Richard Bedard at rbedard2@bloomberg.net, Ken McCallum