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BNP Paribas MarFA™ Summary: Equities Overshooting, Again (08 June 2018)

Core Content Overview

BNP Paribas MarFA™ is a cross-asset correlation framework used to identify driving factors and trading opportunities across equities, credit, FX, commodities, and rates. It monitors 75 assets and provides fair value assessments based on macroeconomic and market factors. The report highlights current market deviations from these fair values, suggesting potential corrections within 1-2 months.

Key Macro and Market Factors

• Macro Factor #1: Inflation expectations (5y5y and survey measures) – important for USD FX pairs and risk-sensitive assets.

• Macro Factor #2: US 10y term premium (estimated using the Fed's ACM model) – crucial for rates and curves.

• Macro Factor #3: Economic activity data, especially from the eurozone and G10 – most significant for equity markets and credit indices.

• Market Factor #1: Trade-weighted USD and commodities – affects rates and equities.

• Market Factor #2: US 10y term premium – highly correlated with yields and curves.

• Market Factor #3: Implied volatility, especially in FX – linked to emerging market equities.

Equities Analysis

• Overvalued: MSCI World, S&P 500, and MSCI China show bearish signals.
• Undervalued: Brazilian equities and FTSE MIB are identified as undervalued.
• Deviation Highlights:
  • MSCI China is overvalued by 6.12%.
  • S&P 500 is overvalued by 2.98%.
  • MSCI World is overvalued by 2.28%.
  • MSCI Brazil is undervalued by 14.13%.
  • MSCI Mexico is undervalued by 5.11%.

Rates Analysis

• US 10y Nominal and Real Yields: Both appear too low by around 10bp.
• European Yields: Broadly in line with fair value.
• Key Deviations:
  • US 10y yield is undervalued by 9.2 bp.
  • US 10y real yield is undervalued by 12.35 bp.
  • Italian 10y yield is overvalued by 90.38 bp, but the confidence indicator has turned off due to political turmoil.
  • Australian 10y yield is overvalued.
  • Canadian and German/French yields are fairly valued.

Credit Analysis

• Eurozone Investment Grade (IG) Credit: Appears oversold.
• Eurozone High Yield (HY) Credit: Oversold, with a deviation of -1.7 z-scores.
• US IG Credit: Converged back to fair value.
• US HY Credit: Slightly overbought.

Commodities Analysis

• Oil (WTI): Undervalued after a recent decline, with a deviation of -4.1%.
• Copper: Overvalued by 8.56% following a sharp price rise.
• Gold: Trading fairly valued.

FX Analysis

• Overbought: AUDUSD (2.5% overvaluation), USDMXN (4.6% overvaluation).
• Undervalued: EURSEK (2.1% undervaluation), EURCHF (1.66% undervaluation).

Trading Strategy Performance

• A strategy of buying undervalued assets and selling overvalued ones has historically provided a Sharpe ratio of 1.3 since MarFA™ was launched in September 2016.
• In 2018, the Sharpe ratio for the portfolio has increased to 2.8 due to market volatility.
• Since the start of 2018, equity markets have shown the best performance (Sharpe ratio of 3.9), followed by commodities (0.8).

Important Notes

• A deviation of more than 2 z-scores is considered significant.
• The framework may differ from MarFA™ Metals or Energy models.
• The report contains non-independent research and is a marketing communication, intended for professional clients and eligible counterparties.
• No investment, financial, legal, or tax advice is provided.
• Past performance is not indicative of future results.
• Indicative prices and performance data are based on internal models and may vary significantly from other sources.
• BNPP may have conflicts of interest and may engage in transactions inconsistent with the views expressed.

Legal Disclaimer

• This document is not investment research for MiFID II purposes.
• It may contain "Research" as defined under MiFID II unbundling rules, which is only available to those who have signed up for BNPP's research packages or are out of scope of the unbundling rules.
• BNPP may have a financial interest in the issuers or entities mentioned.
• The information is provided on a confidential basis and may not be copied or distributed without prior written consent.
• The document is for informational purposes only and does not constitute an offer to sell or a solicitation to buy any financial instruments.