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BNP Paribas MarFA™: Deviations amid bond sell-off Summary

Core Content

BNP Paribas MarFA™ is a cross-asset correlation framework designed to identify driving factors and trading opportunities across 75 assets, including equities, credit, FX, rates, and commodities. It uses both macro and market factors to assess fair value and detect mispricing.

Key Points

• MarFA™ Macro is based on 12-month correlations and identifies macro factors such as:

  • Inflation expectations (5y5y inflation expectations and survey measures)
  • US 10y term premium (estimated using Fed's ACM model)
  • Economic activity data (especially from the eurozone and China)

• MarFA™ Trading focuses on short-term market factors including:

  • US 10y term premium and LIBOR OIS
  • Oil and energy prices
  • Implied volatility, especially in equities

• The Indicator of Confidence is introduced to assess the statistical reliability of MarFA™ signals. It helps in identifying when the model's signals are robust and when they should be turned off to avoid potential losses. This has improved the Sharpe ratio of the MarFA™ Macro model to 1.5 since its launch in September 2016.

Equity Market Analysis

• Equity markets show significant dispersion in valuation:

  • Undervalued: S&P 500, MSCI Emerging Markets, Turkish equities, and South African equities by 3–5%
  • Overvalued: FTSE100, CAC, and Swedish equities
  • Fairly valued: Japanese, German, Canadian, and Australian equities after recent rallies

• The S&P 500 and MSCI Emerging Markets have shown signs of undervaluation, with deviations reversing within a few weeks.

Rates Analysis

• US 10y nominal and real yields are considered too high by around 5–10 bp
• Australia and Canada 10y yields are also too high by 15 bp
• German and French 10y yields have returned to fair value
• Italian 10y yields appear slightly undervalued

Credit Analysis

• US investment grade (IG) credit and emerging market (EM) credit are oversold
• Eurozone IG credit is trading in line with fair value
• US high yield (HY) credit has moved into line with fair value after being overbought

Commodities Analysis

• Oil is slightly overvalued despite recent price increases
• Gold and copper are fairly valued
• Platinum is slightly undervalued, but not enough to trigger a bullish signal

FX Analysis

• USD appears overbought against JPY, GBP, AUD, and EUR, but not enough to trigger a bearish signal
• EURSEK has the largest misalignment, trading ~2% above fair value
• GBPUSD and AUDUSD are slightly undervalued but not enough to trigger a bullish signal

Trading Strategy

• A strategy of buying undervalued assets and selling overvalued ones has historically delivered a Sharpe ratio of 1.5
• In 2018, the Sharpe ratio has increased to 4.0 due to recent market volatility

Important Information

• The document is a marketing communication and not independent research
• It is intended for Relevant Persons as defined under MiFID II
• It does not constitute an offer to sell or purchase any financial instruments
• It is not investment research and should not be relied upon for investment decisions
• It may contain Research content, which is only available to firms that have signed up to BNPP Global Markets Research packages

Disclaimer

• The information and opinions are based on public sources and may not be independently verified
• BNPP does not accept any responsibility or liability for the accuracy or completeness of the information
• The document is for information purposes only
• No assurance is given that any indicated returns or results will be achieved
• Simulated performance data is not indicative of future performance
• The Indicator of Confidence helps in managing risk by turning off signals when there is insufficient statistical confidence

Legal Notice

• The document is subject to conflicts of interest due to interactions with sales and trading
• It may contain performance data based on back-testing, which is for illustrative purposes only
• The document is not a prospectus, advertisement, or public offering
• It is provided on a strictly confidential basis
• Any reproduction or distribution without prior written consent is prohibited