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BNP Paribas MarFA™ Summary: Opportunities Occurring (24 March 2017)

Overview

BNP Paribas MarFA™ is a cross-asset correlation framework that identifies market factors and trading opportunities across equities, rates, FX, credit, and commodities. It focuses on short-term mispricings and uses correlations over the past three months to signal potential corrections in asset prices over the next 1-2 weeks. The framework identifies key drivers such as implied volatility in FX and rates, investor risk appetite, and the US 10-year term premium.

Main Market Factors

1. Implied Vols in FX and Rates Markets

   • Critical for risky assets like equity and credit indices.
   • FX and rates implied vols have been declining, while equity vols have remained relatively stable.

2. Investor Risk Appetite (BNP Paribas Risk Premia Index)

   • Most relevant for FX pairs such as NZDUSD, USDCAD, and EURNOK.
   • Indicates the sentiment of investors towards risk-taking in the market.

3. US 10y Term Premium

   • Important for interest rate assets, especially developed market 10y yields and 2s10s curves.
   • Reflects the difference between long-term and short-term yields, indicating future rate expectations.

Identified Mispricings and Trading Signals

Equities

• Overvalued:
  • Korean equities
  • Mexican equities
  • Emerging Market equities
• Undervalued:
  • S&P 500 (following recent decline)
  • MSCI Brazil (by ~3.7%)
  • MSCI New Zealand (by ~3.9%)

Rates

• Too Low:
  • US 10y yield (by ~7bp)
  • Canada 10y yield (by ~6bp)
  • Australia 10y yield (by ~10bp)
• Too High:
  • German real rates (by ~7bp)
• Too Flat:
  • German curve (by ~5bp)

FX

• Overvalued:
  • EURNOK (by ~1.5%)
  • EURUSD (by ~1.5%)
• Undervalued:
  • USDZAR (by ~3.1%)
  • USDJPY (by ~1.7%)

Credit

• UK High Yield Spread:
  • Trading too wide by ~25bp, indicating potential overvaluation.

Key Observations

• MarFA™ identifies around 20 assets that are mispriced on a short-term basis.
• The framework uses a Z-score deviation to assess the extent of mispricing.
• The following assets are currently showing the largest deviations:
  • Most Overvalued:
    • German real rates (+7bp)
    • UK high yield spread (+25bp)
    • MSCI Emerging Markets (+1.6%)
    • MSCI Korea (+2.3%)
  • Most Undervalued:
    • USDZAR (-3.1%)
    • MSCI New Zealand (-3.9%)
    • Australia 10y yield (-10bp)
    • US 10y yield (-7bp)

Methodology

• MarFA™ monitors correlations, driving factors, and valuations of 75 assets.
• It uses a combination of implied volatility, risk appetite indicators, and term premium to evaluate asset mispricings.
• The framework is based on a three-month lookback period and provides signals for potential corrections within 1-2 weeks.

Legal and Disclaimer Information

• This document is non-independent research and is a marketing communication.
• It is intended for professional clients and eligible counterparties.
• BNP Paribas may have conflicts of interest due to its involvement in trading and investment banking activities.
• No guarantees are made regarding the accuracy, completeness, or future performance of the information or assets discussed.
• The information is for informational purposes only and should not be relied upon as investment advice.

Conclusion

BNP Paribas MarFA™ provides insights into current mispricings across multiple asset classes, highlighting both overvalued and undervalued instruments. The framework is a valuable tool for identifying short-term trading opportunities based on market factors such as implied volatility, risk appetite, and term premiums. However, it is essential to consider the legal disclaimers and potential conflicts of interest before making any investment decisions.