BNP Paribas: More volatility ahea - be tactical

Foto: picture alliance

While the higher yields can be explained by fundamentals, the timing of the equity selloff was more difficult to predict. The market dynamic indicators signalling equity market vulnerability to a correction.

09.11.2018 | 09:56 Uhr

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

Diesen Beitrag teilen: