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>>>November: US elections spur 2 MTI regime changes

16 December 2016

November: US elections spur 2 MTI regime changes

Read our latest post written by our quantitative researchers.

Seeyond MTI indicator analysis –We had two regime changes in November:

On November 11th first, the Emerging Markets MTI moved from “Safe” to “Neutral”. The stunning victory of Trump was the catalyst for a negative EM equity trend that pushed the regime into the neutral territory [Chart 1].
On November 21st thereafter, the US MTI shifted from “Neutral” to “Safe” due to the momentum component which strengthened along with the growing reflation trade [Chart 2].

*The Market Tension Indicator (MTI) is a bounded metric which evaluates the degree of uncertainty and market risk.
MTI indicators range between 0 to 1 and transitions through 3 regimes (Safe, Neutral and Risky). The lower the value, the lower the risk.
A set of three main MTI indicators are developed to focus on different geographical areas (US, Eurozone, and Emerging Markets).

Source: Seeyond, Bloomberg

Source: Seeyond, Bloomberg

Analysis

In addition to signals coming from the quantitative side, we noticed that Economic Policy Uncertainty rose both for EM and EU. As a reminder, this indicator tracks the general state of the economy, based on the number of news articles containing the terms uncertain or uncertainty, as well as policy relevant terms (Bloomberg definition).

Policy uncertainties remain high, specifically in Europe, with many elections coming up [Chart3].
This warning is also visible in the US where the index surged to its highest level since 2013. It is likely to fuel market volatility… as it already happened in the past [Chart 4].

Source: Bloomberg

Source: Bloomberg

On the macro side, the chart below shows that US long term interest rates rose faster than short term ones.  This is a “bear steepening” configuration. This mainly occurs when inflation expectations pick up along with a gradual fed normalization.

Source: Bloomberg

Despite structural weaknesses (high leverage and low productivity growth), higher US interest rates amid potential infrastructure plan could have numerous implications. For instance, sectors such as financials, construction, material and defense could benefit from the new US government policy. The Bloomberg sector rotation analysis (RRG) below shows the improving performances of yield sensitive sectors [Green zone - Chart 6]. Finally, EM markets could react negatively to a stronger dollar and higher than expected US rate.
Stay tuned!

Source: Bloomberg - type RRG <GO> - Relative Rotation Graph
For more details on RRG : www.relativerotationgraphs.com