Mabrouk Chetouane, global head of market strategy at Natixis Investment Managers, discusses what events will be driving global market activity this week and why he’s positive on equities and risky assets.
He unpacks the current state of implied volatility across assets and delves into how Natixis IM leverages external and internal stress indicators to inform its trading desk.
The global head also looks at how he and his team approach market movements when driven by hard data (fundamentals) versus sentiment-driven activity. And finally, Chetaoune advises how desks can prepare for upcoming high-stress events such as the US election in November.
Interview Transcript
Jo Gallagher Welcome to Trader TV This Week, your insight into how trading desks and prepare for the week ahead. I’m Jo Gallaher. Today I’m joined by Mabrouk Chetouane at Natixis Investment Managers to discuss the main topics and events leading this week. Mabrouk, welcome to the show.
Mabrouk Chetouane Thank you.
Jo Gallagher As we go into Q4, what advice would you have for trading desks going into this week?
Mabrouk Chetouane When we look at this week, there are three key indicators for investors and for capital markets. The first one is the ISM data, the ISM index for the US, confirming or not the soft-landing or the no-landing scenario.
The second one is the PMI index in China, in the context where we had this massive plan announced last week by the Chinese administration trying to avoid a recession. We do not expect this indicator to behave better, but this will give additional information on the current state of the economy in China. And the third one – maybe the most important – is the jobs report in the US that will be released on Friday. Again, it will give us more information of the direction of travel for the US monetary policy, and confirm if the fed could do another jumbo cut, which will have definitely consequences on portfolios.
So, the advice I can give to investors is to not leave the equity market – to stay exposed to the equity market – because if we have bad news, or good news, definitely it will affect positively the equity market in the US for sure.
Jo Gallagher What’s the current state of market stress and implied volatility?
Mabrouk Chetouane When we look at the implied volatility metrics – on the capital market, on the equity market, on the bond market, or on the FX market – we can see that this implied volatility has continuously declined since August when we had this peak in stress, triggered by the jobs report and the decision made by the BOJ. Clearly, the market is no more worried about any negative downturn in the short term. Definitely the markets get more and more confident on the solidity of the equity market and the capital market from a global perspective. This is linked, in my opinion, to what the fed has announced; I mean, confirming that now they are ready to lower the interest rates.
The direction of travel for the fed is now well anchored, and there is good reasons to see the markets continuing to increase in terms of equity prices, and this implied volatility continuing to decline or to stabilize at the current level. We have to underscore that these current implied volatility measures are very, very low; I mean, we are about 15% when we look at the VIX index, which corresponds to a normal regime from an historical perspective. So, no worries, no concern when we look at all these metrics.
Jo Gallagher And so how do you use these implied volatility metrics internally?
Mabrouk Chetouane So, the first thing we are doing is collecting data coming from the Cboe – and definitely what is the most important thing for us is to, let’s say, combine all this information in order to get a synthetic indicator. These implied volatility data are available for emerging markets, for commodity markets, for equity markets, and by merging all these indicators – so it requires some statistics, of course – we can derive a global stress indicator that shows us what is the current state of the market.
We share this information with the PMs in order to offer the possibility to track the volatility from a global perspective on a daily basis, and maybe adjust the portfolio exposure to any specific market given the information given by this indicator. So, we are using this data in order to adjust our position, we have a kind of risk-based approach, and definitely it is helping us make the right decision at the right moment.
Jo Gallagher Market stress, volatility and dislocation in the market is often really difficult to interpret, and we’ve seen many instances of that this year. How do you approach market movements when they’re driven by hard data fundamentals versus sentiment-driven activity?
Mabrouk Chetouane This is a very difficult task to disentangle the reaction coming from the sentiment data and the hard data. But the question mark, in my opinion is: is there any interaction between the soft data and the hard data? In other words, is there any overlap between the sentiment data and our central scenario? If, for example, the reaction of the markets in August after the release of the jobs report has a consequence on our central scenario, if there is any overlap, clearly we have to consider this data quite seriously.
However, if there is no interaction, no overlap between sentiment and hard data, this is clearly reflecting on overreaction of the market and this is exactly what we have seen in August. But now, I mean, the key question is how we can assess these overlaps? Typically, when the market gets into a stress regime, what we are observing is a recorrelation of all the markets, of all the asset classes, and clearly this recorrelation means that something serious is happening in the market. Or the other way, I mean, if there is only one asset class reacting – if there is no recorrelation between all asset classes – this corresponds to an overreaction. Looking at the correlation between all the asset classes, using quant models to capture this dynamic correlation, is – in my opinion – essential to make the difference between overreaction and something more significant, substantial, that could affect our exposure to the capital markets.
Jo Gallagher Sentiment-driven activity can be really risky to interact with. How would you advise traders to prepare for those moments of stress over the next few months, and in the run up to the US election?
Mabrouk Chetouane There is three strategies, in my opinion, to implement in order to protect portfolios and investments; the first one is using options. The price of the protection is quite cheap given the low volatility that we have talked about before. The second way is to use this negative correlation that we are seeing now between the bond market and the equity market.
If there is negative news coming from the political side, or from the geopolitical area, definitely the bond market is protecting the portfolios. And the last one is using the money market, because if we want to, let’s say, reduce our equity exposure and add more cash in the portfolio, this is also another strategy that could definitely protect the portfolios against any negative developments that could polute them in the capital markets.
Jo Gallagher Thank you, Mabrouk, for your insight, and of course you for watching. This has been Trader TV This Week.
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