Having maintained radiosilence for much of 2018, on Thursday afternoon JPM’s top quant reemerged, and pointed out that “many clients are asking if the recent risk-off move was significant enough to drive broader de-risking of such ‘delayed response” systematic investors as CTAs, Volatility Targeting and others.”
And while the two-day selloff at the start of the week was indeed unexpected, and quite violent, resulting in numerous sharp position reversals as Nomura’s Charlie McElligott wrote on Tuesday, Kolanovic is far more sanguine, and writes that the recent market sell-off and spike in volatility was not large enough to trigger broad deleveraging among systematic investors, as the following excerpt reveals:
After a few days of market sell-off and an increase in market volatility, many clients are asking if the move is significant enough to drive broader de-risking of systematic investors such as CTAs, Volatility Targeting and others.
Consistent with our previous research, we think that the move was not large enough to trigger broad deleveraging. Equity price momentum is positive and trend followers are not likely to reduce equity exposure. While the recent move was concerning for its correlation properties (bonds, equities and commodities all going lower), overall the volatility of multi-asset portfolio is still very low, and the increase was relatively small (e.g., increased from —4% to —5%).
Also, there are other circumstances that are not in favor of a continued sell-off — we are in the midst of one of the strongest earnings seasons in the US, and global growth continues to be strong.
He also notes that while the sharp 2-day move was concerning for its correlation properties, overall the volatility of multi-asset portfolio is still very low, and the increase was relatively small.
“That we are in the midst of one of the strongest earnings seasons in the US, and global growth continues to be strong” also does not favor a continued sell off Kolanovic says.
Kolanovic on bond yields: “We think that the current level of rates do not yet pose a major risk for equity multiples.”
So if JPM’s clients shouldn’t be nervous now, then when? To that, JPMorgan’s Gandalf also has a response: give it a few weeks.
“In terms of timing market downside risk, we would be more concerned about the period after the Q1 earnings season, when fiscal reforms are likely to be priced in and central banks make further progress on the normalization of monetary policy.”
via RSS http://ift.tt/2BNnrTZ Tyler Durden