Prepare for volatility; Chinese Golden Week, IPO normality, and an equities rally

Published on 2 October 2023

Stuart Lawrence, head of UK equity trading at UBS Asset Management, discusses how traders should anticipate a pick up in realised volatility this week. He also unpacks the impact of the Chinese Golden Week on markets; his view on what to expect from the primary markets going forward, his outlook on equities for Q4 and a potential rally before end of year.

North America

  • Equities are low but liquidity is good for the year to date. US IG volumes are high and bid-ask spreads are very tight for the year.
  • Data: The US Unemployment Rate print on October 6.
  • Primary Equities: 3 IPOs expected. Well below the weekly average of 12 deals for the last 5 years.
  • US axe data, which is within normal ranges, indicates a higher proportion of asks versus bids in credit.

Europe and the UK

  • Equities volumes are low for the year but spreads are tight. Euro IG volumes are high and liquidity is good for the year to date.  
  • Data: EU Retail Sales and Producer Prices Inflation numbers on October 4.
  • Primary equities: No expected IPOs this week. Comparatively, there were 6 last year for the same week in 2022.
  • EU axe data, which is within normal ranges, suggests a higher proportion of EU dealer bids versus asks in credit.
  • GBP axe data, within normal ranges, suggests much higher net selling versus buying of credit.

Transcript of interview:

Jo Gallagher: Welcome to Trader TV This Week – your insight into how trading desks can prepare for the week ahead. I’m Jo Gallagher.

Today I’m joined by Stuart Lawrence at UBS Asset Management to unpack the main topics and events leading this week.

Stuart, welcome to the show.

Stuart Lawrence: Hi Jo. Glad to be here.

Jo Gallagher: Before we start, let’s take a quick look at last week’s activity and what’s coming up.

In North America, equities volumes are low for the yearly average, but liquidity looks unaffected by the drop and bid-ask spreads remain tight.

US investment grade volumes are high for the year to date and bid-ask spreads are very tight for 2023.

We should expect a slow start to the week and the beginning of Q4 in terms of economic indicators for the US, but on Friday, markets will be awaiting the latest reading on the US unemployment rate. We anticipate a quiet week in terms of primary equities with only three IPOs was expected in tech, industrials and real estate at an aggregate of $27.2 million. This is well below the weekly average of 12 deals in the past five years, and the largest deal is expected to be Primech Holdings, which is seeking to raise $13.7 million.

US axe data, which is within historical ranges, indicates dealers asks have increased by 4.4% over bids in the past week, suggesting an increase in net selling of credit going into the week ahead.

In Europe and in the UK, equities volumes are down week on week and low for the year, but bid-ask spreads are tight for 2023 averages. Euro investment grade volumes are high for the year to date, but liquidity is still good and spreads are tighter than the yearly average. In Europe, we’ll also have a light week in terms of data, but we can expect numbers on EU retail sales and producer prices on Wednesday.

Our primary equities readings show that no IPOs are expected to be listed on European exchanges this week. Following on from one last week out of Italy, there were an average of six IPOs for the same week in 2022, at a total of $137.5 million.

EU axe data, which is within normal ranges, indicates the proportion of EU dealers bids versus asks has increased by 4%.

GBP dealers asks are up by 4.7% against bids for the past week, suggesting a leaning towards selling versus buying credit going into the week ahead.

Stuart, lots to discuss. What are the top things that traders need to focus on this week?

Stuart Lawrence: As we enter Q4. The focus will remain on macro data points and sentiment as investors and traders look for signs about how the market will move going into year end. With the Fed focused on a higher for longer narrative and with European central banks also dealing with stubborn if falling inflation, which necessitates the same interest rate decisions, traders will be alert to any signs of damage to the global economy caused by monetary tightening.

The fact the US ten year remains a 16 year high shows that the macro picture is both clouded and volatile. Therefore, I would say there are three major data points coming out this week that we need to focus on. On Wednesday, we have US factory orders, Thursday, initial jobless claims and on Friday, nonfarm payrolls.

Historically, by some way, October is the month where we see the highest realized volatility. And with volume returning after a very quiet summer, traders should expect to see a more free flowing market. After trading in a very tight range, in fact, the tightest range since 1995, the STOXX 50 has now broken through the 4200 level. And in the short term, we could expect to see further weakness.

Jo Gallagher: We have the Chinese Golden Week this week. Why do traders need to pay attention to that and what does that mean for emerging market volumes?

Stuart Lawrence: Golden Week runs through this entire week and the main market and China Connect will be shut. In addition, we have holidays in Hong Kong, India, Japan, Korea and Taiwan. So we should expect significant disruption to APAC liquidity. Excluding China, volumes could be expected to fall between 8-10% over the period and in the small cap and emerging market space this will be even greater.

Post Golden Week investors will be particularly interested in looking at the holiday spend as it is a good barometer of consumer sentiment and by proxy, the Chinese economy, particularly when the Chinese economy is facing multiple headwinds. Areas to look at will include luxury items, watches and travel to and from Macau, which we can measure through flights and hotel bookings. Early indications suggest that domestic travel has actually returned to pre-COVID levels, while international travel lags somewhat.

Jo Gallagher: What is your view on the primary and secondary pipelines following a poor three quarters? Do you expect them to pick up?

Stuart Lawrence: Absolutely. The last nine months have been particularly poor, but there are signs that Q4 could see some sort of improvements in the secondary markets. It has been underwhelming post summer. There had been expectations that September was going to be the month when things started really picking up, and that hasn’t transpired. Now we are looking for November in a post blackout environment where we should be able to see some deals before we get into year end. This should be helped by the fact that businesses now know where we are pretty much with regards to the interest rate environment and have clarity of their needs going forward. From the IPO side, last week we saw Shot Pharma come to market very strongly, rising 15% in its first day of trading and holding up very well. This shows that successful deals can be done even in these difficult environments. There are potentially three more in EMEA this year and then 2024 is already starting to look like a return to normality after two very tricky years. The pipeline is looking strong and we already have expectations that firms such as Ampere, Peugeot, Flix and Telkom will be coming to markets.

Jo Gallagher: Now, looking at Q4, what are your projections for equities for the rest of the year?

Stuart Lawrence: Moving into Q4, traders will be focused on balancing traditional seasonality with a difficult market environment which we currently face. Historical precedent suggests that when we have had a year, such as we had, we’ve had a strong January through to August and then a slightly weak September, but we should see a very strong Q4 after perhaps a couple more weeks of weakness.

Unfortunately, precedent and reality don’t always come together. We have myriad headwinds, higher interest rates, oil prices, the dollar’s bid, Chinese macro, European stagflation, corporate Q3s. That said, I do believe a year end rally is probably underpriced and assuming no further negative catalysts, seasonal dynamics should come into play. US and European long short hedge funds are typically buyers going into Q4 and with performance lagging in the market, any positive catalysts or at least no more negative catalysts could translate to an upside chase into year end. After a big summer of short covering with gross leverage in only the 20th percentile, positioning suggests that investors fear missing out on a year end rally. The question is, do you jump in now or do you hold on to see if the markets will pull back further before you invest?

Jo Gallagher: Thank you, Stuart for your insight, and thank you for watching.

This has been Trader TV This Week.