February 12, 2018 / 4:14 PM / a year ago

LIVE MARKETS-Turning up the volatility dial: a heat map

    Feb 12 (Reuters) - Welcome to the home for real time coverage of European equity markets
brought to you by Reuters stocks reporters and anchored today by Helen Reid. Reach her on
Messenger to share your thoughts on market moves: helen.reid.thomsonreuters.com@reuters.net
    We've spotted this heat map from Axioma (below) which shows global volatility 'hotspots' as
an alternative way of looking at what went on last week (charts are from Axioma's Equity Risk
Monitors, as of Feb 8).
    Axioma's Worldwide short-term horizon fundamental model showed that most countries saw
volatility tick up more than one percentage point, and correlations increase by more than two
percentage points.
    Interesting though that Latin America had the smallest number of countries which saw
volatility increasing, with both volatility and correlations decreasing in Chile.
    (Kit Rees)
    Well you wouldn't think so by looking at the Milan stock market, which is stubbornly
outperforming the STOXX 600:  
    According to a note Amundi published today, markets are "in denial" about political risks in
Italy and the spread between Italian and German sovereign bonds is showing no sign of stress.
    Interestingly however, Sentix's policy barometer has worsened in February and, according to
its analysts, this is due, among other factors, to the incoming general election in Italy. 
    "The parliamentary elections at the beginning of March are the highlight of the coming
weeks", Sentix said, noting that the "elections" component of the barometer had the largest
    (Julien Ponthus)
    And instead Jacob Mitchell, CIO of Antipodes Partners and manager of the Antipodes Global
Fund, says to look towards Asia and emerging markets.
    Mitchell adds that investing in the global MSCI All Country World Index is "unlikely to lead
to a great long-term return outcome" as regions such as the U.S. and Europe account for such a
large portion.
    The chart below shows that emerging markets are certainly lagging the rest of the world in
terms of valuations, but only the U.S. is more expensive than the world as a whole - so would
you agree that Europe (ex-UK) is also looking pricey?
    (Kit Rees)
    Anticipation is building up ahead of Kering's results on Tuesday with Barclays and Berenberg
both noting that the French luxury group's Gucci brand has got a lot of play on social media
    "We are positive going into Kering results tomorrow as Gucci not only remained
champion on all social channels throughout Q4, but even jumped higher in January," Barclays says
in a note analysing which brands shine on social media.
    For its part, Berenberg notes that "Gucci still tops brand trends: Both Baidu and Google
data still show a clear outperformance of Kering-owned Gucci, further confirmed by Business of
Fashion’s and Lyst’s index which ranked Gucci as the hottest brand of 2017". 
    Here's a chart showing how Gucci compared to other brands such as Louis Vuitton or
    (Julien Ponthus)
    The VIX was out of regime for most of 2017, Quant Insight analysts note: unusually, no
combination of macro factors could explain VIX movements. 
    "That shifted abruptly at the start of this month," they write. "VIX movements can now be
explained... there is now a strong pattern of associations between VIX moves and macro factors."
    In particular, the VIX is now highly sensitive to actual volatility and real yields, as well
as credit spreads. VIX futures contracts have also normalised significantly since last week. The
March contract now trades at 20.45, against a current spot price of 26.65.
    There was doubt brewing in the market last year about the viability of VIX as a measure of
volatility - will its normalisation now renew trust in it?
 (Helen Reid)
    Risk parity funds and CTAs were at the epicentre of the convulsions in markets last week, JP
Morgan global strategists say.
    CTAs (originally Commodity Trading Advisers but now labelling funds advising on futures
trading generally) and risk parity funds (which allocate risk rather than capital, and use
volatility to define their measure of risk) sank sharply last week as volatility exploded and
they rushed to rebalance.
    The unwinding has been so severe already that there shouldn't be much further to go, JP
Morgan's Nikolaos Panigirtzoglou and team write, adding that it resulted in a collapse in open
interest of futures contracts.
    "This, combined with the low equity exposures of Discretionary Macro and Equity Long/Short
hedge funds, leaves retail investors as the main residual risk for equity markets going
forward," they write. 
    Flows figures indicate retail investors rushed out of U.S. equity ETFs last week. These have
lost $25 billion so far - already more than half the $40 billion pumped into these products in
    But, according to JPM's number-crunching, they are still pushing money into short VIX ETFs.
    Last week net inflows to inverse VIX ETFs increased to just over $1 billion, from around
$850 million the week before, despite the collapse in prices of these volatility products.
    (Helen Reid)
    "We do not yet find the excesses in credit, investment, wage growth or inflation that would
require a cleansing recession," says Berenberg's chief economist Holger Schmieding, arguing last
week's sell-off does not mark the end of the post-crisis upswing in markets.
    "We look for the current situation to turn into a minor version of 1987 when the economic
cycle even gathered some momentum in the years after a much-discussed stock market sell-off," he
    While the steep correction was sparked by a rise in a measure of US wage inflation,
Schmieding argues "across the developed world wage growth is still way off the danger zone."
    Below you can see how labour costs have developed over the past two decades in the euro
zone; the past two years have seen compensation per employee and total labour cost tick up
 (Helen Reid)
    The multiplication of M&A deals in the pharmaceutical sector has sure got some investors
excited, equity investors that is, as those focusing on debt might take a more sobering view. 
    "M&A poses downside risks to the credit quality of Europe's six largest pharmaceutical
companies in 2018 and will likely dampen any benefits from expected improvements in operating
performance in the coming year", Moody's said in a report this morning. 
    "While the 2018 guidance from the larger European pharma companies is modestly more upbeat
than for 2017, this is unlikely to translate into any major improvement in credit quality,
mainly because of the impact of recent M&A transactions and the risk of possible future deals".
    Take a look at this story for a recap on the action that took place in January:
GRAPHIC-Biotech M&A explodes with $27.5 bln of January deals    
    (Julien Ponthus)
    Away from last week's roller coaster ride in markets, the earnings season is shaping up to
be a decent one as we reach the halfway mark, according to Morgan Stanley strategists.
    They say that weighted earnings are now tracking 4.7 percent ahead of consensus and the
median stock has beaten by 2.7 percent - with both measures stronger than in the third quarter.
    Morgan Stanley highlights that we're seeing the broadest earnings beats in financials,
energy, consumer discretionary and IT.
    And here are MS' EPS growth forecasts for Europe:
    (Kit Rees)
    With computer-driven trading on everyone's minds following the historic spike in volatility
last week, Britain's financial regulator has just published a report on algorithmic trading - a
happy coincidence as regulators take note of investors' worries after last week's meltdown. 
    Automated technology brings significant benefits but "can also amplify certain risks", the
FCA report says. 
    "In the absence of appropriate systems and controls, the increased speed and complexity of
financial markets can turn otherwise manageable errors into extreme events with potentially
wide-spread implications," the FCA argues.
    While the regulator says firms have overall taken steps to reduce risks, improvement is
needed. Some firms had no process in place to identify algorithmic trading across their
business, the FCA said. Firms also need to consider how their algorithmic trading activity might
impact the wider operation of markets.
    The Bank of England has also just launched a consultation off the back of the FCA report. 
    The concern from investors has been palpable, particularly around algorithms linked to ETFs,
which some think accelerated the rush to the exits. "Does selling create more selling?" asked
Hawksmoor fund manager Daniel Lockyer. 
    "The amount of money in passive strategies is far bigger than at any time in history and
therefore any previous bear market. Probably computers drive those funds, and I am worried about
the huge amount of money in ETFs that have to sell when markets go down."
    (Helen Reid) 
    UBS strategists have looked into the key market question of whether this is just a simple
correction or the start of a bear market. Even though they caution against potential risks
ahead, their conclusion is rather upbeat.
    "We see this as a short term correction rather than an end of cycle event. What could change
that would be a significant move up in bond yields, well above current levels, combined with
major inflation fears," the Swiss bank's strategists led by Nick Nelson write in a note.
    "The fundamentals for European equities are currently supportive with strong Eurozone and
Global growth alongside a robust earnings recovery now entering year 2," they add.     
    That being said they stick to their 440 points price target for the STOXX 600 at year end:
an upside of more than 17 percent.    
   While markets corrected, 12-month forward earnings for Europe have been revised up by 2.7
percent since early December, they note, making valuations more attractive: P/E multiples have
fallen to 13.7 times now from the 15.6 peak in mid-Jan.
    (Danilo Masoni)
    It's time for some rotation in the UK equity market, L&G writes in a note, making the case
that UK "bond proxies" and "dollar earners" stocks have had their time and that it's time to
move on.
    For the first group, the pound has made quite a recovery since the Brexit vote and "as a
result, that tailwind is set to become a headwind," writes Stephen Message, manager of the L&G
UK Equity Income Fund. 
    Also with the BoE cutting rates in the aftermath of the referendum, "stocks that paid
regular and often steadily increasing dividends – consumer goods, for example – appeared highly
attractive" but with the prospect of monetary tightening, this is no longer the case.
    "In light of these changes, we prefer to have greater exposure to UK domestic earners while
holding an underweight stance on bond proxies," Message says noting, like Accendo Markets did
last week, (see) that utilities don't currently look very attractive. 
    He believes banks and financials are likely to benefit from bond yields rising and is also
keen on consumer services, noting that "the equity market may be factoring in more bad news for
UK-orientated retail, leisure and media stocks over Brexit than the currency market is for
    Here's a chart comparing the performance of sterling against the dollar, and the FTSE: 
    (Julien Ponthus) 
    As a relief bounce takes shape across European markets, some investors are still reluctant
to dip their toes back in.
    "We're looking to sell into rallies, not buy on dips," says Daniel Lockyer, senior fund
manager at Hawksmoor.
    Lockyer says the fund has been gradually derisking for some time already.
    "There's almost no more risk to take out of the portfolios or we would have too much cash or
a binary bet on markets going down."
    Other assets could provide a buying opportunity, however.
    "If there's something we like and we own that's not correlated to bonds or equities, like
some of our property funds, if those shares get marked down lower because of everything else, we
don't think anything has fundamentally changed and we might be buying some of those," says
    JP Morgan strategist Mislav Matejka, on the other hand, is a believer in the relief bounce.
"One should only sell from here if you believe growth will start to disappoint," he writes. 
    (Helen Reid)
    Following the lead in Asian stocks, Europe's markets are looking brighter this morning with
a relief rally taking shape across the major benchmarks, up 1 to 1.3 percent. The cyclicals
sectors which had led the sell-off last week are back in the driving seat: banks, chemicals and
basic resources are the best-performing sectors.
    A mixed bag of stocks are leading gains, with Victrex taking the lead after BAML
gave the UK polymer firm a double upgrade to 'buy'. Also benefiting from broker upgrades to
target price is Umicore, while Credit Suisse is up 2.9 percent, leading the 
banks index, after its shares were particularly badly hit last week as its inverse VIX product
    Akzo Nobel is up just 1.3 percent, in line with the market, as investors don't
seem to be overly enthused by an FT report of takeover interest.
    Luxembourg-based telecoms firm SES is falling sharply, however, down 6.8 percent
at the bottom of the STOXX after it announced management changes with its CEO and CFO stepping
down by April 5.
    (Helen Reid)
    Stock index futures are pointing to a strong rebound in Europe this morning after the
region's equity market lost 5 percent, or around $1 trillion in market cap, during last week's
sell-off. DAX futures were leading the bounce, up 2 percent.    
    Shares in Akzo Nobel are expected to rise 1-2 percent after a source-based
Financial Times report said that US private equity giant Apollo had teamed up with the biggest
Dutch pension fund to buy Akzo's 10 billion-euro speciality chemicals unit.
    Eyes also on raft of earning updates, although price moves could be distorted by last week's
broad-based sell off. Heineken will be in the spotlight after the brewer lowered its
margin growth target, blaming a volatile market environment and an acquisition in Brazil. Bayer
however posted a 2017 underlying operating profit that was in line with a Reuters poll forecast.
    Other stock movers: 
    Renault board member quits ahead of CEO succession meeting; 
    Game Digital to open concessions in Sports Direct stores; 
    Standard Life Aberdeen takes on Mexican airport developer in rare move; 
    Airbus ordered to pay $99 mln fine in Eurofighter case; 
    Intesa chairman says sale of bad loan unit won't take long; 
    Italy's Carige bank pledges to act more quickly to cut bad debts; 
    Acacia Mining scraps dividend after profit hit by Tanzania export ban; 
    EU says Bayer Monsanto must not hurt competition in digital farming-paper; 
    Suedzucker sees 2 yr transition after deregulation - Boersen-Zeitung; 
    Ladbrokes Coral reports 4 pct rise in full year revenue; 
    Switzerland's Clariant halts strategic update pending talks with SABIC
    (Danilo Masoni)
    That's the question on everyone's lips after a weekend of mulling over the most serious
sell-off to hit markets in years.
    UniCredit global chief economist Erik Nielsen says while most market commentators have
labelled this correction as mainly "technical", it's worth digging into the reasons why more
fundamental drivers could be at play, especially in the US.
    "My fear of more fundamental weakness relates only to the US, which really is at the centre
of the present markets chaos," writes Nielsen, arguing the US economy may be in more trouble
than widely thought.
    "If US balance sheet issues are causing trouble, then we may be in for a more complicated -
and volatile - ride during 2018 that'll see US equities slide through must of the year, as US
yields climb higher."
    Nielsen sees non-US equities as likely to de-couple therefore, as Europe and Asia benefit
from more moderate valuations, better relative growth and 'much stronger' balance sheets.
    "In contrast to European firms, US companies are much more exposed to rising financing costs
because of recent years' strong increase in net debt," he notes, adding most of this money was
used to inflate shareholder payouts rather than for investment.
    Nielsen adds a word of warning on thinking it's all over too soon: "Corrections are rarely
done within 10 working days. On average these types of disruptions normally rumble on for 30-40
    Fasten your seatbelts...
    (Helen Reid)
    Stock index futures are pointing to a strong rebound in Europe this morning after the
region's equity market lost 5 percent, or around 1 trillion euros in market cap, during
last week's sell-off.
    DAX futures are leading the advance, up 2 percent, as you can see below. Meanwhile,
S&P 500 e-mini futures are up 0.6 percent.
    (Danilo Masoni)
Heineken guides for lower margin growth in 2018
Renault board member quits ahead of CEO succession meeting
Credit Suisse hit by U.S. lawsuit over writedowns, says case "without merit"
Standard Life Aberdeen takes on Mexican airport developer in rare move
Airbus ordered to pay $99 mln fine in Eurofighter case
Intesa chairman says sale of bad loan unit won't take long
Maersk profit miss, outlook put shipping shift in spotlight
Switzerland's Clariant halts strategic update pending talks with SABIC
Ladbrokes Coral reports 4 pct rise in full year revenue
UK's Tesco is plans a chain of discount stores -Sunday Times
Cardiff University defends joint venture with Apple supplier IQE
Italy's Carige bank pledges to act more quickly to cut bad debts
MEDIA-French insurer CNP could be merged with La Banque Postale -report
BRIEF-CGG Raises About 112.2 Million Euros In Rights Issue
Switzerland's Clariant halts strategic update pending talks with SABIC   
Vontobel must pay 13.3 mln euros over untaxed German assets    
Nestle buys majority stake in organic food company Terrafertil   
EU says Bayer Monsanto must not hurt competition in digital farming-paper
BMW close to 10-year supply deal for battery minerals - FAZ   
Porsche, Audi to develop joint electric car platform to save costs   
South Africa's Wiese slashes stake in Steinhoff to 6.2 pct   
Suedzucker sees 2 yr transition after deregulation - Boersen-Zeitung
BRIEF-Carl Zeiss Meditec Sees FY Adj EBIT Margin At 14-16 Pct
    (Danilo Masoni)
    Stats from last week's sell-off reveal exchange-traded funds saw massive trading volumes on
the London Stock Exchange, while the exchange's dark pool cleared record amounts of trades as
investors sought to put through large block trades incognito.
    Last Tuesday was the strongest day of ETF trading activity ever on the LSE, a spokeswoman
said, with some 1.3 billion pounds traded in ETFs. 
    Dark pool Turquoise saw a record amount processed in its large block platform Plato Block
Discovery, with 2.46 billion euros in trading over the week as investors sought to put through
big trades without moving the market. 
    Turquoise overall beat its previous weekly record by 18 percent, with 7.43 billion euros
worth of trades executed in the dark.
    (Helen Reid)
    Good morning and welcome to Live Markets. 
    European investors will be returning to their desks this morning having had time to digest
the past week's events, and a tentative bounce in European stocks could give them hope, while
volatility is set to stay elevated. 
    Asian stock markets recovered overnight with S&P futures also trading higher, but investors
were looking ahead to U.S. consumer prices data due out on Wednesday for the next potential sign
of inflation rising at a concerning pace.
    Spreadbetters call the DAX 175 points higher at 12,281.8, the CAC 40 up 56 points at
5,135.1, and the FTSE 100 83 points higher at 7,175.5. 
    (Helen Reid)

 (Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)
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