BNP Paribas: More volatility ahea - be tactical

Summary

• October’s price action felt very much like a repeat of the February correction. Equity prices dropped sharply, equity volatility spiked higher and other asset classes, including EM currencies and credit, remained contained.

• One of the main reasons for the equity correction was higher US Treasury yields. In our view, this move is structural. Firstly, UST yields appear to be breaking out of a multi-year downtrend. Secondly, the move-up was driven by real yields reflecting the forces of both quantitative tightening and strong growth.

• While the higher yields can be explained by fundamentals, the timing of the equity selloff was more difficult to predict. In such a context, we rely on our market dynamic indicators. These were signalling equity market vulnerability to a correction in September.

Asset allocation

• We have adopted a more tactical approach relying more on our dynamic market analysis and not just on fundamentals.

• We took advantage of the correction to add equity exposure tactically by going long developed market equities.

• We have also taken a long position in French equities relative to German equities as the CAC/DAX ratio looks historically low and as we see the French CAC index as more insulated from trade protectionism than the DAX.

• We remain underweight EMU duration since we see yields as too low historically and given the shape of the eurozone economy. We remain short EUR/USD as a hedge against an escalation of Italian political risk as well as the risk of higher inflation in the US.

• We went long USD against a basket of Asian currencies as a hedge against the risk of de-globalisation and greater trade protectionism.

For the full report please click the link below:
MAQS Asset Allocation Monthly - More volatility ahead: be tactical