Mature Economies. Quantitative Market Alert

Transcription

1 Mature Economies Quantitative Market Alert MarketQuant Research Monthly February 1, 2018

2 Quantitative Market Alert Mature Economies Monthly MarketQuant Research February 1, 2018 Contents Key messages February Summary of Early Warning Signals... 5 Summary on Market Fair Values... 6 S&P CAC DAX FTSE Nikkei US Treasury 10 Year Yield French 10-year bond yield German 10-year bond yield UK Gilt 10 Year Yield Japan JGB 10 Year Yield EUZ Corporate spread 5-7 year A US Corporate spread 5-year A TAC ECONOMICS 2

3 Quantitative Market Alert Mature Economies Monthly MarketQuant Research February 1, 2018 This document provides the outputs of highly complex and extraordinarily powerful datamining and artificial intelligence tools applied to macroeconomic, financial and market variables. These outputs are: - Early Warning Signals (EWS) on large reversal in market prices (upwards as well as downwards) over a short-term horizon (from 1 to 6 months ahead). - Directional Trend Outlook (DTO) for short-term horizons (3-month and 6-month ahead) giving a strong indication on the level of market price expected at the 2 time-horizons compared to current level (higher or lower than today). The tools include an estimation of cyclically-influenced Fair Values (i.e. market prices that would be fully consistent with the traditional set of economic and cyclical determinants of fair values). Results presented here are directly the outputs of the quantitative models and we do not tamper with them. Written on February 01, 2018 with data up to January 30, TAC ECONOMICS 3

4 Quantitative Market Alert Mature Economies Monthly MarketQuant Research February 1, 2018 Key messages February 2018 Key changes from Jan Stronger signs of higher volatility on equity and credit markets Equity: positive DTO remain favorable at 3- and 6-month horizons, but with much higher volatility Bonds: sell-off episodes likely US-T, OAT and Bund yields are expected to see repeated moments of sell-off with potential overshooting Widening credit spreads on US and EZ markets over the next 3-months, concentrated on EUZ afterwards, with higher volatility. - The sudden increase in US, French and German 10-year bond yield in Jan.2018, though related to unexpected events (ECB tone, German coalition, EUZ economic news, Trump s fiscal boost), were well predicted by our Early Warning Signals (EWS) of early Jan.18. The same however proved too alarmist on European and US equity and corporate spread, though the high turbulences observed at the end of January may indicate that we were wrong for just a couple of days. - The most visible change in EWS against the Jan.2018 QMA is the higher occurrence of double signals, suggesting increasing markets uncertainties and a rise in market volatility. This is particularly visible for equity indices and corporate spreads, consistent with our questions regarding mutually-reinforced over-valuations and future growth in corporate profits. The other meaningful change is a favorable Directional Trend Outlook (DTO) at the 3-month horizon for some government bonds, suggesting that episodes of deterioration (past and future, suggested by negative EWS for the US, France and Germany) will lead to recurrent overshooting followed by moments of pause and retrenchment up to Apr On equity markets, our DTOs are positive for all markets on a 3- and 6-month (except the CAC 40), suggesting the market trend will remain positive. However, our EWS (double signals) highlight potential of stock market volatility return from March to July 2018 as bond market fears increase in the background of gradual move away from easing central bank policies. While it raises concerns given our expectations of equity markets adjustments over the course of 2018, DTO suggest that volatility episodes will not translate to a bear market soon. - One major change compared to last month is the positive DTO for US 10-year Treasury yield on a 3-month (Apr.2018 yield expected to be lower than the current 2.74% level) despite our macro scenario suggesting a gradual increase for such yields, towards 3.0% mid-2018 and 3.4% end It suggests that the current sell-off (+36bp observed between Dec, and Jan, ) and other similar episodes expected during the next three months would be followed by less brutal but significant pauses and reversals. Higher consistency across our outputs for the US is seen for the following 3 months (May to July), with negative DTO and EWS for the whole period. Differenciation between US and European bond yields remain significant, though sell-off episodes (Feb. to Apr.) tend to be more immediately contagious that trend directions. Yields on Bunds and Gilts are expected to be lower in 6 months than today; the more negative for French OAT that we noted before is confimed by this update. - Regarding corporate spreads, DTO for Euro and US markets converge on a 3-month horizon to indicate the likelihood of widening spreads in a volatile background. As noted last month, they diverge again on a 6-month horizon, though now also with all months from May to July showing double signals: the negative DTO on both the 3- and 6-month horizon for the 5-7year EZ spread for A-rated issuers seem consistent with the announced and expected adjustment in ECB Asset Purchase Program. TAC ECONOMICS 4

5 Quantitative Market Alert Mature Economies Monthly MarketQuant Research February 1, 2018 Equity Indices Summary of Early Warning Signals Market Level (Jan.30, 2018) S&P CAC DAX month FTSE Nikkei Year Government Benchmarks US Treasury 10 Year Yield 2.73% French OAT 10 Year Yield 0.96% German Bund 10 Year Yield 0.68% UK Gilt 10 Year Yield 1.46% Japan JGB 10 Year Yield 0.10% Corporate Spreads Euro 5-7 Year A US 5-Year A Legend: 12 bp 77 bp 6-month Strong improvement Strong deterioration Double signal No sudden change Medium term compared to the current market level (first column) / - indicates uncertain Source: TAC ECONOMICS TAC ECONOMICS 5

6 Quantitative Market Alert Mature Economies Monthly MarketQuant Research February 1, 2018 Summary on Market Fair Values The following table summarizes the estimated fair value for each market. The comparison with the market level during the same month allows evaluating the expected short-term direction assuming that market level oscillates around fair-value. Market Level (Jan.30, 2018) Fair Value Oct. 17 Gap to Fair Value Expected shortterm direction Change over one month Equity Indices S&P Decrease Increase CAC Decrease Increase DAX Decrease Increase FTSE Decrease Decrease Nikkei Decrease Increase 10-Year Government Benchmarks US Treasury 10 Year Yield 2.73% 2.94% -21 bp Increase Increase French OAT 10 Year Yield 0.96% 0.81% +15 bp Decrease Increase German Bund 10 Year Yield 0.68% 0.45% +23 bp Decrease Decrease UK Gilt 10 Year Yield 1.46% 2.00% -54 bp Increase Decrease Japan JGB 10 Year Yield 0.10% 0.00% +10 bp Decrease Decrease Corporate Spreads Euro 5-7 Year A 12 bp 32 bp -21 bp Increase Decrease US 5-Year A 77 bp 85 bp -8 bp Stable Increase Source: TAC ECONOMICS TAC ECONOMICS 6

7 S&P 500 Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence * * * * ** ** Evolution of S&P 500 Comparison of Actual vs. Fair Value Fair Value (October 17) Market Level Gap to Fair Value 413 Expected short-term direction Market evolution between November and December 2017 Decrease Increase (Dotted lines in red represent EWS thresholds at -3.8bp and 4.2bp) S&P 500 Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 7

8 Main drivers for S&P 500 EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). US Financing conditions Market correlations US Financial stress index US Corporate spread 5-year A EUZ Monetary conditions Market analysis TAC ECONOMICS 8

9 CAC 40 Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence * * ** * * ** Evolution of CAC 40 Comparison of Actual vs. Fair Value Fair Value (October 17) Market Level Gap to Fair Value 212 Expected short-term direction Market evolution between November and December 2017 Decrease Increase (Dotted lines in red represent EWS thresholds at -5.1bp and 5.0bp) CAC 40 Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 9

10 Main drivers for CAC 40 EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). EUZ Economic expectations US Credit Spread Financial stress index EUZ Monetary Market EUZ Monetary conditions Market analysis TAC ECONOMICS 10

11 DAX 30 Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence * * ** ** * ** Evolution of DAX 30 Comparison of Actual vs. Fair Value Fair Value (October 17) Market Level Gap to Fair Value 1435 Expected short-term direction Market evolution between November and December 2017 Decrease Increase (Dotted lines in red represent EWS thresholds at -5.4bp and 6.0bp) DAX 30 Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 11

12 Main drivers for DAX 30 EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). US Financing conditions Market correlations US Financial stress index US Corporate spread 5-year A EUZ Monetary conditions Market analysis TAC ECONOMICS 12

13 FTSE 100 Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence * * * ** * * Evolution of FTSE 100 Comparison of Actual vs. Fair Value Fair Value (October 17) Market Level % % Gap to Fair Value 604 Expected short-term direction Market evolution between November and December 2017 Decrease Increase (Dotted lines in red represent EWS thresholds at -3.9bp and 4.0bp) FTSE 100 Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 13

14 Main drivers for FTSE 100 EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). US Financing conditions Monetary policy Market analysis GBR PER EUZ Market volatility US Financial stress index TAC ECONOMICS 14

15 Nikkei 225 Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence * * * * * * Evolution of Nikkei 225 Comparison of Actual vs. Fair Value Fair Value (October 17) Market Level % % Gap to Fair Value 3321 Expected short-term direction Market evolution between November and December 2017 Decrease Increase (Dotted lines in red represent EWS thresholds at -6.1bp and 6.2bp) Nikkei 225 Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 15

16 Main drivers for Nikkei 225 EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). US Financing conditions US Financial stress index JPN PER EMBI+ Exchange rate US Financial stress index TAC ECONOMICS 16

17 US Treasury 10 Year Yield Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence * * * * * * Evolution of US Treasury 10 Year Yield Comparison of Actual vs. Fair Value Fair Value (October 17) 2.9% Market Level 2.7% Gap to Fair Value Expected short-term direction Market evolution between November and December bp Increase Increase (Dotted lines in red represent EWS thresholds at -18.1bp and 20.3bp) US Treasury 10 Year Yield Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 17

18 Main drivers for US Treasury 10 Year Yield EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). US Economic activity US Financial stress index EUZ Consumer confidence US Financing conditions Market correlations US Financial stress index TAC ECONOMICS 18

19 French 10-year bond yield Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence * * * * ** * Evolution of French 10-year bond yield Comparison of Actual vs. Fair Value Fair Value (October 17) 0.8% Market Level 1.0% Gap to Fair Value Expected short-term direction Market evolution between November and December bp Decrease Decrease (Dotted lines in red represent EWS thresholds at -19.2bp and 15.9bp) French 10-year bond yield Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 19

20 Main drivers for French 10-year bond yield EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). EUZ inflation EUZ economic activity Global Economic activity Market correlations Market correlations French Market conditions TAC ECONOMICS 20

21 German 10-year bond yield Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence * * * * ** * Evolution of German 10-year bond yield Comparison of Actual vs. Fair Value Fair Value (October 17) 0.5% Market Level 0.7% Gap to Fair Value Expected short-term direction Market evolution between November and December bp Decrease Decrease (Dotted lines in red represent EWS thresholds at -16.7bp and 15.0bp) German 10-year bond yield Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 21

22 Main drivers for German 10-year bond yield EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). EUZ Economic activity US financing conditions US Financing conditions EUZ Monetary conditions Fair value Market correlations TAC ECONOMICS 22

23 UK Gilt 10 Year Yield Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence *** * ** ** ** ** Evolution of UK Gilt 10 Year Yield Comparison of Actual vs. Fair Value Fair Value (October 17) 2.0% Market Level 1.5% Gap to Fair Value Expected short-term direction Market evolution between November and December bp Increase Decrease (Dotted lines in red represent EWS thresholds at -21.6bp and 20.8bp) UK Gilt 10 Year Yield Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 23

24 Main drivers for UK Gilt 10 Year Yield EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). US economic activity EUZ Economic confidence Fair value US Financing conditions US Corp. Bond market Oil prices TAC ECONOMICS 24

25 Japan JGB 10 Year Yield Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence * * * * * * Evolution of Japan JGB 10 Year Yield Comparison of Actual vs. Fair Value Fair Value (October 17) 0.0% Market Level 0.1% Gap to Fair Value Expected short-term direction Market evolution between November and December bp Decrease Increase (Dotted lines in red represent EWS thresholds at -7.4bp and 4.7bp) Japan JGB 10 Year Yield Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 25

26 Main drivers for Japan JGB 10 Year Yield EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). US Financing conditions US economic activity EUZ money market Exchange rate EMBI+ Oil prices TAC ECONOMICS 26

27 EUZ Corporate spread 5-7 year A Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence * ** * * * * Evolution of EUZ Corporate spread 5-7 year A Comparison of Actual vs. Fair Value Fair Value (October 17) Market Level Gap to Fair Value Expected short-term direction Market evolution between November and December bp 12 bp -21 bp Increase Increase (Dotted lines in red represent EWS thresholds at -9.2bp and 8.4bp) EUZ Corporate spread 5-7 year A Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 27

28 Main drivers for EUZ Corporate spread 5-7 year A EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). German Economic expectations EUZ Economic confidence Fair value EMBI+ Market correlations Market analysis TAC ECONOMICS 28

29 US Corporate spread 5-year A Early Warning Signals (red=strong deterioration, blue=strong improvement, grey= double signal and white=no major change) Feb.2018 Mar.2018 Apr month May 2018 Jun.2018 Jul month Signals Confidence ** * * * * * Evolution of US Corporate spread 5-year A Comparison of Actual vs. Fair Value Fair Value (October 17) Market Level Gap to Fair Value Expected short-term direction Market evolution between November and December bp 77 bp -8 bp Increase Increase (Dotted lines in red represent EWS thresholds at -13.5bp and 13.9bp) US Corporate spread 5-year A Early Warning Signals (EWS) The red/blue line represents the deterioration/improvement probability of a major shock, bars in red/blue the observed signals and the dotted line the EWS threshold TAC ECONOMICS 29

30 Main drivers for US Corporate spread 5-year A EWS prediction The following graphs describe the main archetypal determinants to predict strong changes for the next six months. We distinguish macroeconomic indicators (in blue), financial market indicators (in red) from technical market analysis (in brown). US Labor market US Economic activity US Financing conditions German Economic expectations Fair value Market analysis TAC ECONOMICS 30

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