UBS: The likelihood of significant fluctuations in the VIX in the future has decreased.

UBS Knowledge Network held a weekly conference call "One Week Outlook" on April 9th, where four guests shared their views on the credit market, stock market, hedge fund flows, and macro signals. The view is that the recent stock market trend is influenced by short covering and unwinding of hedge positions, resulting in an initial rise followed by a fall. Investors are currently adopting defensive strategies, but the effectiveness of defensive strategies is questionable in a deleveraging environment. On the macro side, the S&P 500 index has shown important signals, indicating a digestion process in the market, completion of a specific trend in VIX, and a reduced possibility of substantial volatility. Key points include: Credit Market: Funds flowed orderly last Thursday and Friday, with clients net buying risk assets, but interest rate market volatility poses a challenge in the fixed income environment. Credit spreads are not significantly different from other asset categories compared to historical periods of volatility. Market may continue to differentiate further, with low-quality market segments showing weaker resistance while investment-grade bond market benefits from slowed supply and stagnating M&A activity. Stock Market: The recent stock market trend is influenced by short covering and unwinding of hedge positions, resulting in an initial rise followed by a fall. Investors are currently adopting defensive strategies, but the effectiveness of defensive strategies is questionable in a deleveraging environment. Consumer cyclical stocks are impacted, while industrial and capex-related stocks show better performance. China and some European markets perform strongly due to policy support, with market focusing on policy impacts on economic data. Hedge Fund Flows: Despite recent deleveraging efforts, the market remains orderly and not driven by pressure. Hedge funds have positioned themselves reasonably well, with varying strategies performing differently. High beta strategies are under pressure, while low net exposure market-neutral strategies perform well. US and European hedge funds show net buying after tariff announcements, with purchases in large-cap and energy stocks, while the diversified financial sector in Europe experiences selling pressure. Macro Signal Analysis: The S&P 500 index shows important signals, predicting a market digestion process and suggesting reduced likelihood of substantial volatility. Bond market sends sell signals, indicating potential reduced stock-bond market volatility in the coming weeks. The bond-stock ratio suggests that the stock market may outperform the bond market, with upward risks in the current market. Investors may consider opportunistically building positions and wait for signals to increase positions. The main content of the program is as follows: Hello, welcome to "One Week Outlook", a weekly conference call organized by UBS Knowledge Network, aimed at sharing insights and viewpoints from the Global Trading department of the investment bank. I am Nana Ntedu from UBS Knowledge Network. Today, we have invited four outstanding guests to discuss the latest market dynamics. You may have just woken up to find the market trends quite interesting, with some situations matching your expectations, but conventional market rules not fully applying. Currently, the credit market is one of the focus areas in the market. My colleague Andrew is also here at the conference. Andrew, the credit market has always been a focus of attention, especially the spread between investment-grade bonds and high-yield bonds. More broadly, what observations have you made in the market? Do these observations release any signals? Sure. Last Thursday and Friday, despite various news reports and market price fluctuations, fund flows were actually very orderly. Data on fund flows show that clients were net buying risk assets during this period, and I believe the market's initial response was normal. Historically, the market has shown strong performance. Clients saw widening spreads, especially in high-quality credit products. Therefore, on Thursday, Friday, and at the market open yesterday, we saw significant buying interest in most products in the investment-grade bond market, as well as the higher quality segments in the high-yield bond market. At the market open yesterday, there was even a rush for risk assets. High-yield bonds saw an increase of up to two percentage points at the open. The Investment Grade CDS spread significantly narrowed, showing a positive trend in overall fund flows. However, as the day progressed yesterday, the situation changed. I am currently closely monitoring, and I think it's a key point, the volatility in the interest rate market. Interest rate fluctuations make the entire fixed income market environment more complicated. Interest rate fluctuations can cause price fluctuations in the entire fixed income product, while fixed income markets are typically an area where investors seek stability. When the market lacks stability, the likelihood of capital outflows increases. In a scenario with a higher possibility of capital outflows, market price trends may become more unstable. Compared to volatility in other asset categories, the current credit spread levels have not left a strong impression on me. Taking the Investment Grade Credit Default Swap Index (IG CDX index) as an example, the index is currently fluctuating significantly but generally staying around 82 basis points. In October 2023, the index also stood at 82 basis points. I believe that compared to today (March 2023), the market environment in October 2023 is much calmer, with the spread at 91 basis points at that time. In September 2022, the spread was about 112 basis points; in June 2022, it was 102 basis points; in August 2020, it was 97 basis points; in March 2020, it was 250 basis points; in February 2022, it was 120 basis points. The spread was noticeably wider during other market volatility periods. So, I don't find the current spread levels exciting. Moreover, given the changing macroeconomic environment, there is a high possibility of more market volatility in the future. Additionally, I expect the market to further differentiate. Parts of the market with lower quality will definitely have weaker resistance to potential market shocks. Of course, there are positive factors to consider as well. With a possible slowdown or halt in corporate M&A activity, the supply in the Investment Grade bond market will decrease, which is positive for the market. This also benefits the higher-quality segments in the high-yield bond market. Overall, credit spreads have indeed widened, but not significantly compared to previous levels. Considering the changing macroeconomic environment, there is a high possibility of increased market volatility in the future.As for now, from a historical perspective, I predict that the market will further differentiate. This is where I'll end my sharing, and I welcome any questions. Many questions, such as deleveraging, additional margin notifications, and so on. However, according to the model data, the actual situation is not as we have heard.In the past few days, there have indeed been some deleveraging operations, but the market as a whole is relatively orderly. Currently, it appears that the widespread deleveraging is not caused by market pressure. Hedge funds' previous position layouts were quite reasonable. As early as the beginning of March, when the market experienced volatility, there were already some deleveraging operations. Subsequently, investors took advantage of this opportunity to adjust their positions before the implementation of tariffs. They sold off many stocks that might be affected by tariffs. Therefore, the performance of hedge funds is currently relatively stable. Although high beta strategies may face some pressure, overall, low net exposure market-neutral strategies are performing well. In fact, yesterday was a good day for fundamental long-short strategies in the US, Europe, and Japan markets. Yesterday, the monthly returns of the US fundamental long-short strategy returned to breakeven, which I think is quite good performance in the current market environment. The monthly returns of the European fundamental long-short strategy are currently slightly below 1%. In terms of quantitative stock strategies, the returns in the US, Europe, and Japan markets so far this month are around 50 basis points. These figures indicate that I believe the current deleveraging process is not driven by market pressure, but rather a gradual process. So, how have hedge funds' fund flows and positions been in the past few days? Yesterday, for the first time since the announcement of tariffs, US hedge funds showed net buying, as did European hedge funds for the first time since the end of March. On Tuesday, the risk exposure of US hedge funds increased by approximately 65 basis points, equivalent to a 1.6 standard deviation increase in risk exposure. The risk exposure of European hedge funds increased by about 4 basis points, with net buying driving a 2-standard deviation increase in risk exposure. Clearly, these events occurred before the US released related news. Yesterday, hedge funds bought some large-cap stocks. In the European market, they bought some cyclical stocks. However, after the US announced tariffs on China, the European stock market closed, and these trading strategies may not have been successful. Looking at industry sectors, there was a significant net buying volume in the European capital goods sector yesterday, with a net buying volume of 3 standard deviations, favoring stocks like Schneider Electric. The European diversified financial sector continued to be heavily sold off, with sell-off volumes reaching 3 standard deviations on Monday and Tuesday, possibly due to market fluctuations caused by some IPO activities in the US market. Additionally, we also saw hedge funds buying energy stocks in large quantities on Monday and Tuesday, with particularly high buying on Tuesday, mainly to close out short positions. That's all for my sharing, thank you. Thank you very much, Joshua. Finally, Jason Paul also joined the meeting. Jason, earlier today, you released the latest macro signal analysis report. Could you share with us your main points and observations on market fund flows? Sure, thank you. I will mainly discuss the stock market, as there is too much content to cover everything. The cash price of the S&P 500 Index at the closing price yesterday hit an important signal, which is the first significant signal on a daily chart since the sell signal on December 5th last year. Another similar indicator also issued a sell signal on December 4th, but the signal lagged by a few days. This allows us to analyze the signal in the short term, as the signal itself contains multiple factors and some noise interference. Currently, the market price has reached this level. But I expect the market will not immediately surge significantly, but will have a digestion process, allowing higher price ranges to gradually fade out the retracement period so that the market price can gradually converge closer to the current spot price, making it easier to break through resistance levels in the future. You may still remember that since I suggested investors buy at a VIX of 14.02 on November 13 last year, and expected a significant increase in VIX at the close on Friday until this expectation was realized. Currently, we have completed the C-wave trend of VIX on the weekly chart and entered the 5th wave stage on the daily chart. This is very important from a technical analysis perspective. Because the 5th wave usually means that most of the uptrend has passed, and from now on, the likelihood of significant market volatility is low. Meanwhile, in the bond market, related indices issued sell signals at the close yesterday. In other words, in the next few weeks, we should see a gradual decrease in volatility in both the bond and stock markets. For the "exhaustion level of divergence" within a monthly timeframe, in the past 25 years, the market has only broken through this level and continued to decline twice, and one of them quickly rebounded after the breakthrough. These two cases occurred during the COVID outbreak in March 2020, which was followed by a V-shaped reversal; and the other during the global financial crisis in 2008. The value of this level on the cash price chart of the S&P 500 Index is 48.20. I expect the market may test this level again, but considering the current macro market environment, I believe it will be difficult for the market to sustainably break through this level. Moreover, earlier this year, I also paid attention to the relative performance of the bond and stock markets. When the "bond-stock ratio" is falling, it means the stock market is underperforming compared to the bond market. But I believe this is just a short-term fluctuation before the stock market regains dominance. Most of the downward trend in the bond-stock ratio is behind us, and we are at a turning point. In the remaining time this year, we should see the stock market outperforming the bond market again. This view is also confirmed by Elliott Wave Theory, as the market has completed the C-wave trend, and the length of the C-wave is equal to that of the A-wave, which is a very positive signal. Just as Zahn said, it is not wise to blindly buy in the current market environment. If I recommend doing so, it would be irresponsible. But what I described here is a positive outlook.Some mixed signals indicate that there are some opportunities in the current market.Everyone doesn't need to engage in large-scale transactions and put their entire fortune at stake. Positions can be established timely according to market fluctuations. Initially, it is not necessary to invest all funds, one can start with small positions and wait for signals to appear. For example, wait for the signal to trigger a few days behind and then further increase the position. Do not rashly establish large positions before the closing price is higher than the closing price of the previous four trading days, stable signals appear in the market, and there is an upward trend. What I want to say is that although the market may still have room to decline at the moment, various indicators show that the market does not only have the possibility of falling, in fact, there is a considerable amount of upward risk. Looking at various signals, it is wiser to buy now than to sell. Of course, if your investment period is not just one week, from now on, the upside potential of risk assets is much greater than the downside potential. One last thing, yesterday the yield on the U.S. 10-year Treasury reached my target of 72 basis points that I predicted earlier, but I still expect the yield on the U.S. 10-year Treasury to rise by another 5% by the end of this year. I have been sticking to this target since the market's low point in September last year (when the S&P 500 index was at 359 points). So, even if this target is achieved in the near future, I still believe that the market will move in this direction for the remainder of this year, rather than completing it in the next few days or weeks. Thank you. Thank you very much, Jason. Also, thank you to all the guests for sharing. We look forward to meeting everyone again at next week's meeting.