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Equity Strategy: Time to Take Profits in Asia-ex-Japan Equities
Following 10% outperformance since December, and with our SBI overbought, we now downgrade our recommendation on Asia-ex-Japan from Overweight to Neutral. Recent outperformance has been supported by Activity Surprises, the region’s high Beta with respect to Global Equities, the weaker USD and lower bond yields. Our belief that surprises have peaked and global growth will slow as the year progresses therefore present a challenge to further outperformance, whilst tapering may put a floor under global bond yields. However, the increased weight of the Tech in Asian Equities may act to limit the region’s downside in a global slowdown scenario.
PODCAST: Click to hear Zahra’s accompanying podcast
Economics: US - A Bold Path Forward
In his final article for ASR, former Treasury official, Gerald Cohen, argues that a credible proposal is needed to overcome the current political morass. One avenue might be to introduce a ’20-20-20 tax plan’, suggested by Gerald himself. Without such a plan, the Trump administration risks losing the confidence of consumers and businesses, which could undermine the financial markets and economy.
Multi-Asset: Taking profits on long EM / short Materials
We are recommending clients take profits on the long MSCI Emerging Markets / short MSCI World Materials ‘convergence trade’ idea from February as: a) the performance ‘gap’ that opened up in the aftermath of Trump’s election victory has largely closed; and b) Brazil’s political scandal has brought forward Brazilian sovereign credit concerns that would probably have otherwise emerged in H2 as the growth rebound faltered.
Politics: The Four Options for Brexit
We envisage four potential Brexit outcomes, none of which include a trade deal being negotiated within two years as outlined by the UK Government.
1. A negotiated hard Brexit ASR probability 40%
2. An unnegotiated chaotic Brexit ASR probability 40%
3. A transitional Brexit ASR probability 15%
4. No Brexit ASR probability 5%
• Time to Take Profits in Asia-ex-Japan Equities, by Zahra
• Guest article: A Bold Path Forward, by Gerald D. Cohen
• Absolute Surprise: The costs of a hard Brexit, by Raph
• Absolute News: Proposals for eurozone renewal
• Sentiment extremes and markets on the move, by David
• The Four Options for Brexit, by Richard
EQUITIES: Stretched optimism points to pull-back in MSCI EMU vs. US (P3)
BONDS: Brazil set-back curbs stretched EM bond optimism (P11)
VOL: ML MOVE well placed to pick-up versus VIX on 1-3M view (P1)
Risk of reversal in EZ equities vs. US; ML MOVE likely to rise vs. VIX
Early last week a big gap had opened up between ASR Global Sector and Stock-Bond Risk Appetite Indicators (RAIs). We have used the ASR Market Scenario Analyser to look at what happened historically in the following 2M after similar RAI levels. Such episodes were followed by positive average 40D returns from oil, set against negative returns from metals, bonds and eurozone equities. US equities outperformed over the period and EM equities fared relatively badly.
This relatively strong showing by US equities chimes with the EMU/USA ($) SBI, which last week moved over 98, to levels that have in the past 10 years been followed by a fall in the MSCI EMU index versus the US over the next 30 days on 90% of occasions (by an average 2.4%), and on 86% of occasions over the next 65 days (by an average 5.8%). Stretched optimism points to risk of a pull-back in MSCI EMU versus US (dollar terms). See p3 for charts.
Chart of the Week: In the wake of last week’s sharp volatility moves, the bond-equity vol SBI dropped below 6: notable given sub-6 SBI levels in the past 10Y have been followed by a rise in ML MOVE versus the VIX index over the next 30D on 87% of occasions, by an average 34%. Interestingly, it is a relative vol backdrop that has also seen S&P 500 futures beat US 10Y Treasuries futures on 70% of occasions over the next 65 days, by an average 2.8%
Economics: US corporate sector: debt & disruption
Equity Strategy: An ASR Global Liquidity Signal For Global Equities
Multi-Asset: Lack of macro ‘uncertainty’ keeping a lid on vol
VOLATILITY: VVIX-vs-VIX, VIX and ML MOVE sentiment stretched (P1/3)
EM:EM equities edge to stretched optimism levels; Brazil CDS slide (P7/11)
POSITIONS: Specs’ CAD net short sizeable; Silver less stretched (P13/15)
Low US equity and bond volatility at risk from stretched sentiment
Implied volatility remains low across assets (see page 4), with the VIX last week dropping to closing lows last seen in 1993. The path of the US 10Y-2Y yield curve is consistent with upward pressure on equity volatility in the next couple of years. In the near-term, the VIX SBI also hit oversold sentiment levels last week: notable given sub-4 SBI levels in the past 10 years have been followed by a rise in the VIX index over the next 30D on 89% of occasions, by an average 23. Our sentiment measures suggest VIX may pick-up near-term.
In the case of relative vol, recent moves have lifted the VVIX vs. VIX relative to 12 month highs, and the VVIX/VIX SBI to over 92.5, to levels that have in the past 9 years been followed by a fall in VVIX vs. VIX over the next 30D on 80% of occasions (by an average 10%), and on 89% of occasions over the next 65D by an average 15%. We look for a reversal in VVIX versus VIX in the coming 1-3 months. Recent VVIV/VIX SBI levels have also regularly been followed by weaker performance by the S&P 500 over the next 3 months. See p3 for charts.
Chart of the Week: On the bond vol front, the ML MOVE index may also find contrarian support as it nears 5 year lows, given that even sub-6 SBI levels have in the past 10 years been followed by a rise in the ML MOVE index over the next 30 days on 86% of occasions, by an average 19%.
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