“risk on – risk off” – how a paradigm is born

abcGlobal Research

Market focus pg 2

Financial markets have become obsessed with the “risk on - risk off” trade. The market

either believes the future is bright – “risk on” – or that it is bad – “risk off”. In this simple

and binary world, the market swings between optimism and pessimism almost daily.

“Risky” assets all appear to move up (or down) together and instruments like the VIX

volatility index tend to swing the opposite way.

In this piece, we show that risk on – risk off is indeed a genuine phenomenon by analysing

the way that correlations across all major markets have grown in recent years. Using a

specially developed heat map, we see how various events during the financial crisis

triggered the birth of the risk on – risk off paradigm. The pattern is as strong today as it

has ever been.

We track the evolution of this phenomenon in written form, but it is best illustrated by a

short animated movie which shows in a clear and powerful way how markets have

polarised. We recommend reading the piece first and then watching the movie.

Click the following URL to view the movie: (http://cache.cantos.com/flash/hsba-r001/hsba-r001.avi)

In particular we show:

Risk on – risk off must be the foremost consideration in any trading activity today.

Financial markets, and in particular portfolios, are not as diversified as they once

were. Risk takers may be holding more risk in their portfolios than they realise.

In current market conditions, there is little point trying to understand the nuances

between different asset classes, or the relative value within asset classes.

Commodities behave like bonds, which behave like equities. They are no longer

easily identifiable, uncorrelated trades, which should be borne in mind when

developing new trading strategies.

By tracking this phenomenon directly, we will be able to see when the “normal”

world resumes. At that point, we expect relative value will make a strong comeback.

FX Volumes to hit 4 trillion USD a day pg 14

IMM analysis pg 15

We are now publishing the IMM report on a Friday night, shortly after the data is

released. We will be duplicating the Friday publication in the weekly for the next month.

David Bloom Strategist HSBC Bank plc +44 20 7991 5969 [email protected]

Paul Mackel Strategist HSBC Bank plc +44 20 7991 5968 [email protected]

Stacy Williams Strategist HSBC Bank plc +44 20 7991 5967 [email protected]

Mark McDonald Strategist HSBC Bank plc +44 20 7991 5966 [email protected]

Robert Lynch Strategist HSBC Securities (USA) Inc +1 212 525 3159 [email protected]

Daniel Fenn Strategist HSBC Bank plc +44 20 7991 5003 [email protected]

Mark Austin Consultant

View HSBC Global Research at: http://www.research.hsbc.com

Issuer of report: HSBC Bank plc

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

02 August 2010

Currency Weekly

“Risk on – risk off” – how a paradigm is born

Macro Currency Strategy

http://www.research.hsbc.com/

http://cache.cantos.com/flash/hsba-r001/hsba-r001.avi

2

Macro Currency Strategy 02 August 2010

abc

The market loses colour – it’s just on or off Recent high correlations between asset classes have led the market to become obsessed with the idea of

“risk on - risk off”. The concept of risk on - risk off is based on the market’s view of the future state of

the world: the market either believes that future prospects are good, in which case risk is on; or the market

believes that future prospects are bad, in which case risk is off. In this piece, we look at how we have

moved from sophisticated and diverse markets to the simple and binary risk on - risk off mantra that

dominates today. This polarisation implies a high degree of synchronization between the movements of

different assets and consequently a high degree of correlation. Within this risk on - risk off framework,

the nuances between different assets have disappeared, which makes diversification extremely difficult.

Hot heat maps

Although there is widespread acceptance of the idea of risk on - risk off, the extent to which this

paradigm currently dominates markets is perhaps underestimated. The strength of correlations between a

wide variety of assets from different markets is best illustrated through correlation heat maps - a pictorial

representation that draws out the main correlation structures.

In this article we use heat maps to demonstrate that risk on – risk off is a very accurate representation of

prevailing market conditions. However, we warn that only a few years ago market correlations were

significantly different. This highlights the evolving nature of markets and how particular events can result

in major changes in how they operate. It also suggests that although risk on - risk off might be a good

description of markets today, this theme is not going to persist indefinitely.

A changing world...

In recent years, we have seen some of the most dramatic changes in financial markets that have ever been

witnessed. In Chart 0 we demonstrate the magnitude of these changes using the VIX volatility index since

2005. In this chart we highlight a number of the major events and, in the video clip that accompanies this

publication, we show the full evolution of market correlations over this period. We just focus on some

specific time periods to give a flavour of how the correlations have changed and how we have arrived at

today’s risk on - risk off way of trading.

...driven by events

We selected a range of crucial events since 2005 that highlight different correlation regimes for this written

piece. In the accompanying video clip, we roll this window continuously from 2005 to today. The heat maps

demonstrate that correlations and the way that risk is dealt with have changed dramatically since 2005. This

means that even if a pair of assets is highly correlated over one time period, they will not necessarily also be

correlated over a later period. It also shows how we have moved from sophisticated markets, where asset

allocation and relative value were key, to today’s simplified world of risk on - risk off.

Market focus

3


abc

The different periods indicated by horizontal bars in Chart 0 correspond to the following market events and

conditions:

I. “Normal” (2005 to mid 2006)

II. “Normal” but awareness of the potential sub-prime crisis (2006 to mid 2007)

III. Crisis warnings and early crisis events (Northern Rock) – an increase in correlation

IV. Attempt to normalize following early crisis – pre Lehman

V. Crisis and correlations intensify – collapse of Lehman Brothers

VI. Crisis high point – strengthening correlations

VII. Risk on - risk off – high correlations between all markets

VIII. Conclusion – risk on – risk off persists today

0. The VIX Index since September 2005

0

10

20

30

40

50

60

70

80

90

Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10

0

10

20

30

40

50

60

70

80

90

VIXBernanke sub-prime warning

Run on Northern RockLehman files for bankruptcy

Fed cuts rate to historical low

Greek fiscal crisis intensifies

I

II

IIIIV

V

VI

VIIVIII

Source: HSBC, Bloomberg

4


abc

The correlation heat map

We are interested in analyzing the correlations between all asset classes, so we consider a broad range of

assets covering the full spectrum of markets - see the appendix for a detailed description of the 50

different assets. These include both developed and emerging market equities, government and corporate

bonds, commodities, interest rates, credit, and currencies.

Our objective is to analyze the correlations between every pair of assets; however, for large numbers of

assets the number of correlations quickly becomes very large so it can be difficult to discern patterns by

just looking at a block of indigestible numbers. To get around this problem, in our HSBC heat maps (see

Charts 1–8 or movie) we represent the matrix of correlations between pairs of assets.

Heat map explained

In a heat map each row and each column corresponds to an asset, and the elements of the map are

coloured according to the correlation between asset pairs.

Dark Blue – strong negative correlation

Green – weak negative correlation or uncorrelated

Yellow – weak positive correlation or uncorrelated

Dark Red – strong positive correlation.

For example, the diagonal of each heat map shows the correlations between each asset and itself; since

each asset is necessarily perfectly correlated with itself, the diagonal is always dark red.

In Charts 2-9, we show correlation heat maps for each of the time windows highlighted in Chart 1. We

will describe each heat map in turn and discuss what the map implies about market correlations. We

would advise reading this and then running the movie which moves smoothly through time.

5


abc

I.

“Normal” (2005 to mid 2006)

In Chart 1, we show correlations over our “normal” period covering part of 2005 and 2006. We see lots of

green and yellow, indicating that most assets are uncorrelated. Here relative value and diverse asset

allocation strategies work well.

Some parts of the chart show high positive correlations (deep red), which we highlight with circles. These

are markets that are always highly correlated; for example, the assets that we highlight with the larger

circle are all bond yields, which tend to be highly correlated with each other. The lower circle highlights a

group of equities and, of course, it is unsurprising that different equity markets are also reasonably highly

correlated. However, despite these high correlations, most of the heat map is green and yellow, which

implies that most assets either have very weak correlations of are uncorrelated. For example, in this chart

bond yields and equity markets are not highly correlated with each other.

The range of greens and yellows implies there are many separate forces in markets that are driving

different assets in a non-trivial way. This range of forces leads to many different behaviours and

consequently to a large number of uncorrelated assets - a very different world, as we shall show, to the

one that we find ourselves in today.

1. I. “Normal” (2005 to mid 2006)


6


abc

II.

“Normal” but awareness of potential sub-prime crisis (2006 to mid 2007)

The heat map in Chart 2 shows the correlations over a period immediately preceding the Fed Chairman

Bernanke’s warning of the extent of the potential losses from sub-prime lending. At this point the crisis

has not hit, but there are some minor differences between Charts 1 and 2. For example, the correlations

between bonds and equities have increased slightly, which is highlighted by a slight yellowing of the

circled region in Chart 2. However, overall the two heat maps are extremely similar, demonstrating the

stability of correlations from the end of 2005 until the start of the crisis period in July 2007.

2. II: “Normal” but awareness of potential sub-prime crisis (2006 to mid 2007)


7


abc

III.

Crisis warnings and early crisis events (N. Rock) – an increase in correlation

Chart 3 follows the major early events in the sub-prime crisis, such as the Bernanke warning and the run

on Northern Rock in September 2007.

The circle towards the top of Chart 3 on the left hand side highlights that over this period the correlations

between bond yields and equities increased, which implies a stronger relationship between these asset

classes. The rightmost oval highlights that assets that were previously uncorrelated with bonds and

equities are now starting to become correlated with them. For example, correlations between equities and

commodities increase. This provides an early indication that the market might be heading towards a state

in which it is driven by a much smaller number of forces.

The most striking change in Chart 3 is the increase in the extent of the dark blue region at the bottom and

on the top right-hand side of the heat map indicating strong negative correlations. Some of the assets in

this region include the VIX volatility index, credit, and the so called “safe haven” currencies CHF, USD

and JPY. These negative correlations are a manifestation of the same effect as that leading to high

positive correlations: the same force is driving some assets up and other assets down. The significance of

Chart 4 lies in the increased polarization in correlations, with significantly fewer uncorrelated assets,

which implies that a single dominant force is driving markets.

3. III: Crisis warnings and early crisis events (Northern Rock) – an increase in correlation

Source: HSBC, Bllomberg

8


abc

IV.

Attempt to normalize following early crisis – pre Lehmans

Greens and yellows fight back against reds and blues

The heat map in Chart 4 shows the time window from October 2007 to September 2008 covering the

period after the early crisis events, but before some of the events that would shake markets later in the

crisis. The correlations over this period suggest that markets are attempting to normalize after the early

shocks and return to their pre-crisis state. For example, there are decreases in bond-equity correlations;

and the strong negative correlations between the VIX and most other assets soften. Some of the subtle

differences between assets of the same type also seem to reappear; for example, some of the differences

between U.S. and Asian equities re-emerged.

During this period, there appears to have been a shift back towards a market driven by multiple forces,

which results in more uncorrelated green and yellow areas. This return to some sort of “normality”,

however, proved to be short lived; following the collapse of Lehman Brothers there was another major

shift in correlations…

4. IV: Attempt to normalize following early crisis – pre Lehmans


9


abc

V.

Crisis and correlations intensify – collapse of Lehman

Chart 5 shows that following the collapse of Lehman there was a sharp increase in correlations between

many assets. This rise was particularly strong for equities (the circled group of assets). The deep red in

the heat map for correlations between equities implies that there is little relative value within equity

markets during this period; i.e., although it might previously have been possible to find returns in, say,

Asian equities that were not available in U.S. equities, these differences have disappeared. Whilst there

might previously have been subtle differences between the same types of asset, during the crisis these

differences vanished. You were either in equities or out of them, but playing one equity market against

another would not be a source of increased returns.

5. V: Crisis and correlations intensify – collapse of Lehman


10


abc

VI.

Crisis high point – strengthening correlations

As the crisis intensified, the correlations between equities increased (Chart 6); in addition, the correlations

spread to other markets. In Chart 6, we highlight the increase in correlations between commodities and

equities, but there were similar increases in correlations between equities and bonds and between

commodities and bonds. At the same time, the negative correlations between all of these assets and the

group including the VIX and USD, JPY and CHF increased.

The polarization of correlations has reached its highest levels so far during this period, with very few

uncorrelated assets. This implies that the market is being driven by one major force and this really marks

the birth of the risk on - risk off mantra that envelops markets today.

6. VI. Crisis high point – strengthening correlations


11


abc

VII.

“Risk on – risk off” – high correlations between all markets

Intermediate shades have been replaced by the extreme colours

From 2009 to the start of 2010, the degree of correlation between markets progressively increased until at

the beginning of 2010 most markets were highly correlated. This is illustrated in Chart 7 by the extent of

the deep red region and deep blue regions indicating strong positive and negative correlations,

respectively, and the reduction in the green and yellow regions. The heat map has lost some of its colour

shading as the intermediate shades have been replaced by the extreme colours, which is consistent with a

shift in markets to the “risk on – risk off” paradigm and a binary world. Within this paradigm, one either

believes that risk is on or risk is off, and that this single factor drives all markets. Relative value is out the

window for now and finding non correlated assets is extremely difficult.

7. VII: “Risk on – risk off” – high correlations between all markets


12


abc

VIII.

Conclusion – risk on – risk off persists today

Chart 9 shows that six months on from Chart 8 there has been very little change, even while economic

recovery has emerged. In fact, correlations have strengthened even further. This picture is in stark

contrast to Chart 1 which shows correlations for 2005-2006. During this early period, correlations were

only strong between the same types of assets, and a large number of assets were uncorrelated, which

implies that there were many complex forces driving markets. Today, this structure no longer exists; most

assets represent essentially the same trade, and the idea of risk on - risk off dominates the market.

However, the changes between Chart 1 and Chart 8 demonstrate that, far from being static, correlations

are constantly evolving, with major changes triggered by specific market events. Therefore, although risk

on - risk off is the most appropriate paradigm for describing the market today, this picture is unlikely to

persist forever. We have seen that, following the early events in the credit crisis, there was an attempt by

markets to normalize, but that further crises prevented this from happening. At some point the market will

attempt to normalize again and this normalization should be visible in its correlation structure. If

correlations do decline to earlier levels and they remain at these levels for a sustained period of time, this

will provide a good indication that the market has recovered from the various crises of recent years.

Relative value will then make a comeback and asset allocation and diversification will return.

Click the following URL to view the movie: (http://cache.cantos.com/flash/hsba-r001/hsba-r001.avi)

8. VIII: Picture today: risk on risk off persists


http://cache.cantos.com/flash/hsba-r001/hsba-r001.avi

13


abc

Appendix In our analysis, we calculate correlations over a time window that includes 50 weekly returns for each asset.

The key to how insightful the heat maps can be is the order of the assets in the rows and columns. The

obvious approach would be to order the assets based on their type; for example, to place all government

bonds next to each other, all equities next to each other, and so on. However, in some circumstances

particular assets can be more correlated with assets from different markets than they are with assets from

the same market. With this in mind, we use a different approach to the ordering. We determine the order

using an optimization procedure that places assets in adjacent rows (or columns) if they have similar

correlations with a range of other assets. As we show, this technique results in blocks of highly correlated

assets in the correlation heat maps that do not necessarily correspond to assets from the same class.

In the following table, we list all of the assets that we consider in this article.

Details of the assets used in the heat maps

Asset Asset Asset

1 US 10yr bonds 18 DAX 35 AAA corp bonds 2 UK 10yr bonds 19 Hang Seng 36 AA corp bonds 3 Japan 10yr bonds 20 Sao paolo SX 37 USD 4 EU 10yr bonds 21 Singapore SX 38 GBP 5 Norway 10yr bonds 22 Johannesburg SX 39 JPY 6 Sweden 10 yr bonds 23 EM Asia equities 40 EUR 7 Autralia 10yr bonds 24 EM LatAm equities 41 NOK 8 Canada 10yr bonds 25 VIX 42 SEK 9 Brazil 2yr bonds 26 Corp credit - main 43 AUD 10 Singapore 10yr bonds 27 Corp credit - high vol 44 CAD 11 SA 10yr bonds 28 Corp credit - snr fin 45 BRL 12 Hong Kong 10yr bonds 29 Copper 46 ZAR 13 S&P 30 Gold 47 CHF 14 Russell 2000 31 Oil 48 3m eurodollar 15 FTSE 100 32 Natural gas 49 3m euribor 16 Nikkei 33 Soybean 50 3m euroyen 17 Eurostoxx 50 34 Wheat


14


abc

FX Volumes to hit 4 trillion USD a day The results of the April 2010 UK and US semi-annual FX Volume Surveys have now been released.

These surveys both use the same data as the forthcoming BIS Triennial FX Survey (to be released at end

August). Since the US and the UK are the two major centres for FX trading (accounting for over 50% of

the FX market volume in the 2007 BIS Survey), we can use this data to estimate the headline figure for

the BIS survey.

The headline figure of the BIS Survey is their estimate of what they call traditional FX volume. This is

the total volume executed in FX Spot, Forward Outright and Swap trades. In 2007 the BIS measured this

to be over 3.2 trillion USD every day. From April 2007 to April 2010 both the Bank of England and the

NY Fed regional surveys have reported an increase in traditional volume of approximately 30%. This

leads us to estimate the size of the FX market in April 2010 to be over 4.1 trillion USD every day.

As we mention in “BIS Primer: FX volumes back on the rise”, Currency Weekly 28 June 2010, the

headline figure is not the relevant measurement for almost all participants in the FX market. Once the

initial excitement over this headline result has passed we expect that there will be many other results in

the BIS Survey which are much more relevant in determining the state of the FX market.

BIS Traditional FX Volume (including HSBC estimate for 2010)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1992 1995 1998 2001 2004 2007 2010 (HSBC

estimate)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

USD billion USD billion

Source: BIS, HSBC

15


abc

Please note We are now publishing the IMM report on a Friday night shortly after the data is released. We will be

duplicating the Friday publication in the weekly for the next month.

Positions The latest CFTC data shows that large speculators increased their short USD positions in the week ended

July 27, although both the increase, a notional increase, less $1 bn, and the overall level of USD shorts,

$8.5 bn, are not at extreme levels. Nonetheless, it is the third consecutive week that speculators have held

net short USD positions (using the cumulative, notional total of all the currency futures which trade on

the IMM) and the seventh consecutive week that they have reduced USD holdings. That, of course, is

consistent with the pullback in the USD since early-June

Key positioning changes:

Speculators increased long positions in the AUD, CAD and NZD, with the aggregate increase in

those positions totalling $1.8 bn.

Speculators remain short EUR and GBP, but reduced those short positions again in the latest week

and currently hold relatively small imbalances in those currencies.

Analysis We analyse the net speculative positions from the IMM futures market in the current USD value of those

outstanding positions. The graphs also show the current spot rates with the convention that long positions are represented as positive bars for the respective currency. The trade-weighted index used shows the moves of the IMM major currencies to represent relative broad moves in the USD with net speculative

futures market positions.

IMM analysis

1. Cumulative USD position data

- 40

-30

-20

-10

0

10

20

30

Aug -06 D ec -0 6 Ap r-07 Au g-0 7 Dec - 07 Apr -08 Au g-0 8 D ec -08 Apr -0 9 A ug- 09 D ec -0 9 A pr- 10 Aug -10

Bill

ion

s o

f US

D

70

72

74

76

78

80

82

84

86

88

90

DX

Y In

dex

US D N et D XY Inde x

Source: HSBC, CFTC

16


abc

EUR Speculative Positions (Source HSBC, Bloomberg) JPY Speculative Positions (Source HSBC, Bloomberg)

-20

-15

-10

-5

0

5

10

15

Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10

Bill

ion

s o

f U

SD

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

EU

R-U

SD

EUR Net (in USD) EUR-USD

-10

-8

-6

-4

-2

0

2

4

6

8

10

Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10B

illio

ns

of

US

D

85

90

95

100

105

110

115

US

D-J

PY

(in

vert

ed)

JPY Net (in USD) USD-JPY

GBP Speculative Positions (Source HSBC, Bloomberg) CHF Speculative Positions (Source HSBC, Bloomberg)

-8

-7

-6

-5

-4

-3

-2

-1

0

1


Bill

ion

s o

f U

SD

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2

2.1

GB

P-U

SD

GBP Net (in USD) GBP-USD

-3

-2

-1

0

1

2

3

4


Bill

ion

s o

f U

SD

0.95

1

1.05

1.1

1.15

1.2

1.25

US

D-C

HF

(in

vert

ed)

CHF Net (in USD) USD-CHF

AUD Speculative Positions (Source HSBC, Bloomberg) CAD Speculative Positions (Source HSBC, Bloomberg)

-4

-2

0

2

4

6

8


Bill

ion

s o

f U

SD

0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

1

AU

D-U

SD

AUD Net (in USD) AUD-USD

-4

-2

0

2

4

6

8


Bill

ion

s o

f U

SD

0.8

0.9

1

1.1

1.2

1.3

1.4

US

D-C

AD

(in

vert

ed)

CAD Net (in USD) USD-CAD

NZD Speculative Positions (Source HSBC, Bloomberg) MXN Speculative Positions (Source HSBC, Bloomberg)

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6


Bill

ion

s o

f U

SD

0.4

0.45

0.5

0.55

0.6

0.65

0.7

0.75

0.8

US

D-C

HF

(in

vert

ed)

NZD Net (in USD) NZD-USD

-2

-1

0

1

2

3

4

5


Bill

ion

s o

f U

SD

9

10

11

12

13

14

15

16

US

D-M

XN

(in

vert

ed)

MXN Net (in USD) USD-MXN

17


abc

Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: David Bloom, Paul Mackel, Stacy Williams, Daniel Fenn, Robert Lynch and Mark McDonald

Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures 1 This report is dated as at 02 August 2010. 2 All market data included in this report are dated as at close 30 July 2010, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

18


abc

Disclaimer * Legal entities as at 31 January 2010 'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia Limited.

Issuer of report HSBC Bank plc

8 Canada Square, London

E14 5HQ, United Kingdom

Telephone: +44 20 7991 8888

Telex: 888866

Fax: +44 20 7992 4880

Website: www.research.hsbc.com

This document is issued and approved in the United Kingdom by HSBC Bank plc for the information of its Clients (as defined in the Rules of FSA) and those of its affiliates only. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. The document is distributed in Hong Kong and Japan by The Hongkong and Shanghai Banking Corporation Limited and has been prepared for the New York office of HSBC Bank USA, National Association. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. Each of the companies listed above (the “Participating Companies”) is a member of the HSBC Group of Companies, any member of which may trade for its own account as Principal, may have underwritten an issue within the last 36 months or, together with its Directors, officers and employees, may have a long or short position in securities or instruments or in any related instrument mentioned in the document. Brokerage or fees may be earned by the Participating Companies or persons associated with them in respect of any business transacted by them in all or any of the securities or instruments referred to in this document. The information in this document is derived from sources the Participating Companies believe to be reliable but which have not been independently verified. The Participating Companies make no guarantee of its accuracy and completeness and are not responsible for errors of transmission of factual or analytical data, nor shall the Participating Companies be liable for damages arising out of any person’s reliance upon this information. All charts and graphs are from publicly available sources or proprietary data. The opinions in this document constitute the present judgement of the Participating Companies, which is subject to change without notice. This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All US persons receiving and/or accessing this report and intending to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC is authorized and regulated by Secretaría de Hacienda y Crédito Público and Comisión Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisión Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreño, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banistmo Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF). The document is intended to be distributed in its entirety. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. HSBC Bank plc is registered in England No 14259, is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. (070905) © Copyright. HSBC Bank plc 2010, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA (P) 177/08/2009

abc

Global

David Bloom Global Head of Currency +44 20 7991 5969 [email protected]

Asia

Richard Yetsenga +852 2996 6565 [email protected]

Perry Kojodjojo +852 2996 6568 [email protected]

Daniel Hui +852 2822 4340 [email protected]

United Kingdom

Paul Mackel +44 20 7991 5968 [email protected]

Stacy Williams +44 20 7991 5967 [email protected]

Mark McDonald +44 20 7991 5966 [email protected]

Daniel Fenn +44 20 7991 5003 [email protected]

Mark Austin Consultant

United States

Robert Lynch +1 212 525 3159 [email protected]

Clyde Wardle +1 212 525 3345 [email protected]

Marjorie Hernandez +1 212 525 4109 [email protected]

Precious Metals

James Steel +1 212 525 6515 [email protected]

Global Currency Strategy Research Team

“risk on – risk off” – how a paradigm is born

Documents

grupo financiero hsbc

investment products mentioned

hsbc bank plc

vix volatility index

correlation heat maps

correlations intensify collapse

early crisis events

heat maps