Too Far into the Woods
Interesting times again, with growth expectations slowing, dovishness increasing, but many stocks still feeling toppy. A positive real yield on USD cash is the main thing to concentrate on to my mind.
Hope you all have a great Christmas.
A quiet month, perhaps unsurprisingly for the summer. August is shaping up to be more interesting, but that's for the next report!
Our Joint Venture Rsquare (combining Arkus and BeeAM) just received the certification from Finance innovation.
The 2Y keeps creeping upwards, but (other than EM countries) we haven't seen flows associated with it, yet.
One to watch.
Should we worry about the flattening of the yield curve?
It's still a much more interesting year from a volatility perspective at least than last year.
Watch the 2Y US bond yield! Cash is becoming more and more compelling an investment than risk assets...
Last month we previewed the extraordinary impact of forcibly winding down inverse VIX strategies; a reminder here:
The S&P broke its record-breaking run, and markets have had a huge shake-out, much as we had been warning (possibly for too long?). The taking away of the punchbowl from the party (i.e. ending of QE) may have been too late to avoid a hangover. What happened? Our take is as follows. The average hourly earnings data surprised on the upside (we have been suggesting for some time that the very low levels of unemployment would eventually lead to wage inflation; we’ve just been surprised it’s taken this long). This led to a sell-off in markets, and a consequent spike in the VIX volatility index. Over the last few years shorting implied volatility has been a winning trade, as realised volatility has consistently run below implied for quite some time. As a result a large number of funds and strategies have been built on this trade. However as implied volatility spiked, there were large losses in this trade, which had a “negative gamma”, meaning the more markets fell the more the strategies needed to sell. Couple this with thin trading volumes late in the day and the result was a sharp sell-off, accompanied by unprecedented intra-day moves in the VIX index.
Although we still see the shock to (equity) markets as technically driven, we would still suggest that there has been a wake-up call, and markets are likely to be more sensitive to future inflation surprises. Cash, at least in USD, is looking increasingly less unattractive; the US 10 year government bond yield is now close to 3%, and the 1 year yields more than the S&P500. If labour markets remain so tight and economic growth strong, it seems unlikely to us that there won’t be further upside inflationary pressures, and eventually cash will look a better bet than risk assets. It feels we are getting closer to that tipping point.
Meet us today and tomorrow at the EAM Conference !
Find and discover us directly on the badges !
Taking away the punchbowl
It's almost out of date as soon as it was written! Although inflation expectations are still low, the US wage number spooked the markets and led to a feedback loop.
that technical trade is now mostly over. but it remains to be seen whether it's left a scar on investor sentiment.
It's like the old days again!
Evolution, not revolution
Evolution, not revolution.
Disruption» is probably one the most used buzz words over the past few
years. Disruption of business models, disruption of traditional market segments, and disruption in finance is a common subject of many articles and conferences. In that respect, disruption is often associated to radical innovation. But is it really the case? Is radical innovation the only way to innovate? And what is the aim of innovation, disrupting or brings progress? And for entrepreneurs and even well-established companies, how to handle this fast-moving environment and take advantage of it?
New Lecture on Risk Management at the University of Trier
For all the persons interested in having Risk Monitoring lecture, please join our COO, Martin Ewen, at the University of Trier.
A hard act to follow
2017 was a year of positive surprises. All major economies showed good, improving and synchronised growth, unemployment plummeted, but despite this inflation didn’t appear. Even politically almost everything went right.
2017 will be a hard act to follow, and 2018 is likely to be a more difficult year. But, as with 2017, the very benign economic backdrop combined with still subdued inflation could continue for some time, driving asset prices further up and keeping volatility low.
But at some point economies are likely to either get too hot (leading to rising inflation and/or rates) or cool (leading to lower corporate profits and rising defaults). Higher levels of volatility are very likely to return at some point in the next year.
Risk Monitoring for Asset Managers
New video aiming to introduce new functionalities on Risk Radar platform.
Check it out on this link.
15th Anniversary - Arkus
New Year, new chances and fresh starts!
On behalf of the Arkus team we would like to wish you a Happy and Prosperous 2018.
At Arkus we are also happy to be celebrating our 15th Anniversary during 2018 ✨
All is calm, all is bright
The “Goldilocks” scenario continues: growth remains firm all around the world, but not so hot that inflation starts rising. Volatilities remained mostly low or medium, although they were slightly up on last month.
We still believe that investors for too long have become used to inflation and rate rises constantly undershooting estimates, and hence bond, and then equity, markets only going upwards. And we still see that the market has more and more similarities to both 2007 (good economic growth, rising markets, unusually low volatility and a hunt for yield) but also shades of 1999/2000 (a tech bubble). The times are good. But good times inevitably lead to complacency. How long it takes before the spell is broken remains to be seen.
But in the mean time, we wish you all a very merry Christmas and a calm and bright new year.
CSR in Risk Management Framework
The topic of Corporate Social Responsibility (CSR) increasingly impacts the board rooms of our clients. The idea of writing an article on CSR, when it was suggested, appealed tome as we continue to engage in dialogues to develop practical frameworks to apprehend these dimensions not only from a risk point of view, but also from a strategic one.
by Yves de Naurois
Season's Greetings 2018
Wishing you all the joys of the Holiday Season and a happy New Year.
Switzerland (Zurich and Geneva) Alfi Roadshow
See you tomorrow at the Alfi Roadshow in Switzerland!
As one of the main sponsors, Arkus team will be pleased to welcome you !
Risk Management : never say never
We all manage risk since the very beginning of humanity. In times past, risks were directly related to rewards that would enable an individual and the tribe to survive. Nowadays, the situation is roughly the same. People take risks, hopefully reasonable ones, for a reward and intuitively compare the respective levels of risks and rewards to assess whether it is worth taking the risk. It is in everyone’s nature to do so but hopefully tools can help people in general and specifically directors and executives of companies in the difficult exercise of risk management.
PE & RE Conference
Arkus will sponsor the PE & RE Conference, have a look on your badges ;) .
Arkus Focus November 2017
The year that was all set to see the return of volatility has continued to tease us. Volatility is stubbornly low, and in many cases at 12-month lows. (Implied volatility is comfortably higher, so it's expensive to hedge downside risk).
I'm more and more convinced downside risk is at similar levels to 2000 or even 2007, although the risks and mechanisms are different to either of those. But valuations are toppy, and many metrics stretched. Fascinating to watch though.
The “Risk Specialists"
New regulatory requirements aim to monitor and ultimately reduce risks for investors. For the past 14 years, Arkus Financial Services has been analyzing and mitigating those risks.
An interview with Christophe Pessault, Chief Executive Officer of the company.
Check out our last article!
Operational Risk: a promising exploration field
As with many risk related matters, operational risk is not a new notion nor a new practice. Identifying operational risks, their likelihood, their potential impact and assessing mitigation factors is a common practice across many industries particularly well illustrated in the energy or transportation sectors.
This practice is more recent in the financial sector. In that respect, banking and insurance sectors were pioneer, in particular following the Barings bankruptcy; investment management and fund industries followed.
For more details, click on the link!
Have a good reading
Arkus Focus October 2017
Newsflow was relatively light in September, with politics dominating but North Korea moving out of the spotlight. Continuing good economic growth and still no real signs of inflation proved positive for equities, slightly less so for bonds.
But Mark Carney’s warning that rate rises are coming should be seen as a warning sign. US and UK unemployment are at multi-decade lows, and eventually inflationary pressures will appear as per the historic Phillips Curve. Why they haven’t already is the real mystery. Investors for too long have become used to inflation and rate rises constantly undershooting estimates. The reversal of this could prove to be a large source of future volatility.
Arkus Focus September 2017
Atomic bomb tests and major hurricanes haven’t stopped the S&P500 making new all-time highs, and the VIX has not risen much above 10. Massive corporate deleverage “back to pre-87 levels” and low earning volatility cannot fully hide a very disparate situation with enough example of companies who have piled up debts on flat to declining cash flows, and not just in the oil sector; some valuations look much stretched.
Emerging market spreads have continued tightening while yields have resumed their decline, resulting in stellar performance and extraordinary inflows into the EM debt market. The continued “rush for yield” is raising concerns of increasing systemic risks, with additional pressure arising from large portion of the outstanding debt coming to maturity in the next 12 months.
In both cases indiscriminate allocation via passive investment and other ETF’s is hiding growing structural imbalances while central banks are very slowly starting to close the taps; wage inflation could accelerate the process .
Arkus Focus August 2017
There are currently many parallels with the situation preceding the last financial crisis 10 years ago (record high stock markets, record low volatility, record consumer debt, record M&A, big current account deficits etc…). Banks and corporate balance sheets are clearly stronger, not a problem this time. But like in 2000, valuations of many stocks and bonds seem high. The catalyst for a sell-off is almost impossible to predict and of the few candidates lurking in the background, if one discards political skirmishing, our preferred one would be the record number of zombie corporates and that is at the current low level of interest rate.
Arkus Focus July 2017
Every day that passes feels more like 2007. Volatility is low, markets are high, global growth is strong, M&A and PE deals are high, as are house prices and debt levels; and cracks are certainly beginning to appear: witness the sell-off in bonds and tech stocks last month. Hopefully the bubble can be deflated rather than burst.
But there are positives: the relief rally on Macron’s success having moved out of our sample period, the modelled distribution of the eurozone equity market has returned to normal; coupled with the sharp drop in inter market correlation we are encouraged to think that the markets are behaving efficiently with a caution that was certainly not present in 2007 and signs that many fund managers are holding high levels of cash.
Arkus Focus June 2017
A new deal? Bye-bye old Europe, welcome version 2.0.
On the surface not much has changed since last month; volatilities are still surprisingly low, markets keep climbing and agitation around president Trump seems to only impact newspapers.
Markets are focused on the EC: the fear of a Frexit with a potential 2nd tour of the French election between the extreme right and the extreme left saw a 230% jump in expected volatility, followed by an extraordinary optimistic shift of expected return distribution, still persisting to date.
A new leadership is emerging , hope is in the air.
European Risk Management Conference
Starting 31st of May, Arkus will be one of the main sponsors at the next Alfi European Risk Management Conference!
Martin Ewen, Chief Operating Officer, will be one of the speakers at the European Risk Management Conference (in association with ALRiM) and would be delighted to meet you on-site.
Happy to welcome you at our stand.
Arkus Focus May 2017
Towards the end of last year we had a list of near-term events which had significant impact but mostly binary outcomes, as with the Brexit vote. These included the US election, Greek debt renegotiation, US debt ceiling and the French election. Whilst the outcomes haven’t always been as expected (see President Trump), without exception the market reaction for each has been positive for risk assets. Admittedly our worst fears for some of the alternatives weren’t met, but we do wonder about the reactions. Was so much downside priced in? Were the results really that surprising? Or was it that a lot of cash was sitting on the sidelines waiting for clarity? We sense the latter might be the most significant.
But we don’t think we are out of the woods yet. Quite the opposite. We are living in somewhat of a Goldilocks world: solid economic growth, record high corporate profitability, low unemployment and yet almost no signs of inflation. Can it really get any better? And remember who Goldilocks met.
Alfi London Cocktail & Conference
Starting 22nd of May, Arkus will be one of the main sponsors at the next London Conference !
Happy to welcome you at our stand !
Arkus Focus April 2017
The mood in the markets is far from complacent, indeed many are outright cautious at present. But valuations are high and the list of tail risks remains long. Economic growth remains good, but at some point volatility will return, and potentially lots of it. But as 2007 taught us, we might have to be patient.
Arkus Focus March 2017
Volatility changes were downwards again almost everywhere.
It’s a full 10 years on from 2007 when equity market volatility had all but disappeared. And the parallels don’t stop there: equity markets and debt to GDP have reached new highs, there is a “hunt for yield” and investment managers are missing volatility “target ranges” to the downside and have started asking us how to increase their volatility.
And yet in the face of this the list of tail risks remains long: US rate rises, French and German national elections, a possible post-Brexit breakup of the UK and/or EU, the ECB starting to taper, rising inflation in the UK and US, and further fallout from the lower oil price in oil producing countries as deficits remain high.
It seems very unlikely that volatility will remain so low for long.
The Risk Management Function under AIFMD for Private Equity funds
A year ago an association of risk professionals asked us to comment on the impact of the regulation on risk management practice within Private Equity Funds. Was it effective and was it meeting the needs of investors?
For more details, click on the link!
Have a good reading
Arkus Financial Services : The risk specialists
New regulatory requirements aim to monitor and ultimately reduce risks for investors.
For the past 14 years, Arkus Financial Services has been analyzing and mitigating those risks.
Quantitative Finance Symposium
We cordially invite you to the third Quantitative Finance Symposium "Quattro Pole++" at Trier University on April 4, 2017, sponsored by ARKUS.
Arkus' Satisfaction Survey - 2017
Please Check out our new Satisfaction Survey and share your feedback!
Event Paris - Hotel Hilton Paris Opera
Save the date: Event 21 Mars
Shortly, you could attend the new event organized by Arkus, Fuchs, FundGlobam and Mebs which will take place at the Hotel Hilton Paris Opéra,
The topic will be the following: L'internationalisation de la place de Paris : comment rendre les fonds des promoteurs français plus exportables ?
Arkus Financial Services : Le spécialiste du risque
Les nouvelles réglementations cherchent à réduire les risques des investisseurs. Arkus s’est spécialisé dans l’analyse de ces risques et leur prévention depuis 13 ans.
Une interview de Christophe Pessault, CEO de la société.
Arkus Focus February 2017
The list of tail risks remains long: French and German national elections, a possible post-Brexit breakup of the UK and/or EU, US rate rises, the ECB starting to taper, rising inflation in the UK and US, and further fallout from the lower oil price in oil producing countries as deficits remain high. And valuations are very high with a Chinese debt bubble, a tech bubble and record high equity markets and near-record high bond markets. Normally these two lists together would lead to high volatility, or at least high implied volatility (which in fairness is well above realised now). And yet we have seen neither in the markets, almost as if central bank intervention, or even the prospect of it, continues to squash volatility out of markets? It’s been suspiciously quiet.
The Challenge of Investment Managers
New video aiming to introduce Arkus services !
Check it out on this link.
Risk Measurement in Practice
Monday 6th of February,
Martin Ewen, COO of Arkus Financial Services, will give a lecture to the University of Trier.
Arkus Focus January 2017
We start the new year looking at much firmer economic growth and with markets having weathered Brexit, the US elections, a Fed rate rise and the Italian banking crisis. But the list of tail risks remains long: French and German national elections, a possible post-Brexit breakup of the UK and/or EU, US rate rises, the ECB starting to taper, the Chinese debt bubble, a tech bubble, rising inflation in the UK and US, and further fallout from the lower oil price in oil producing countries as deficits remain high. And valuations are very high, and most people have a rational fear of heights. We’re all set for an interesting year!
Arkus Focus December 2016
2016 has been an unpredictable and tumultuous year, with sub-$30 oil, Brexit and Trump to name but a few. We think everyone deserves a break; wishing you all a very merry Christmas and a prosperous new year.
Arkus Season's Greetings - 2017
Best wishes for 2017!
NOSCE TE IPSUM - DO YOU KNOW YOUR LIMITS?
Following the recent publication of the CSSF Annual Report 2015 (currently only available in French), we would like to attract your attention to their comments regarding UCITS’ risk profiles.
Arkus Focus November 2016
Low volatility last month took me a bit by surprise given all the things that could have gone wrong. I put it down to a "presidential pause".
The central banks are keeping the plates spinning, but at some point one is going to drop.
Arkus Focus Octobre 2016
There is a long list of potential things that could cause vol to spike in Q4, "President Trump" being just one. But will the central banks be able to ride to the rescue?
Alfi Leading Edge Conference London
Starting the next 12th of October, Arkus will be one of the main sponsors at the next Alfi Leading Edge Conference London!
Arkus Focus September 2016
It was quiet in August, even compared to most Augusts. The VIX got close to multi-year lows. Maybe a combination of central banks squeezing all the vol out of markets and also a lot of people taking time off?
It's beginning to get more interesting in September. Hopefully not too interesting!
Arkus Focus August 2016
So last month saw the calm after the Brexit storm.
I'm still concerned about how much central banks are distorting markets. How long can it go on for? And what happens when it stops? Might yesterday's failed BoE QE purchase programme be the first sign of a trouble ahead? Interesting times, as ever.
Arkus Focus July 2016
Brexit dominates the news of course, as it does every dinner party conversation. It's interesting to see how surprised the London elite are at their apparent misunderstanding of the rest of the UK. We're a very divided country, and those divisions have now been made clear.
Event Genève - Hotel Kempiski 28 juin 2016
Arkus Focus June 2016
Realised and expected volatilities continued their lower trend ahead of the ECB’s Corporate Sector Purchase Programme which has been added to the Asset Purchase Programme. Surprisingly or perhaps not so unsurprisingly given the Fed hinted rate rise and the UK votes on the EU referendum in late June, some nervousness is creeping back in the market as the realised volatilities ratio has left neutral territory and the recent distribution of equity returns displays some renewed excess kurtosis.
Arkus Focus May2016
There’s not really much to say this month: market moves (ex-Japan) were small and although there was plenty of newsflow markets are quiet. The FTSE is currently tracking for its third consecutive down year, and I think a lot of people in the UK are sitting on their hands waiting for the EU referendum. I'd be very interested to hear your thoughts on the EU debate.
Alfi & Alrim European Risk Management Conference
Starting the next 26th of May, Arkus will be one of the main sponsors at the next ALFI & ALRIM European Risk Management Conference!
Fund Factory Magazine - The Virtuous Circle
FUND FACTORY aims to create synergy with actors of the same size, experts in their own domain: Distribution, Risk, Governance and Management. In this first issue, you will discover articles written by experts and read about recent developments in our profession.
Distribution et gestion cross-border des fonds d'investissement
Mardi 28 juin 2016, de 8h00-12h00.
Petit-déjeuner de travail
Grand Hôtel Kempinski, Genève.
Risk Measurement in Practice
Monday 23th of May
Martin Ewen, COO of Arkus Financial Services, will give a lecture to the University of Trier.
What does it involve? How do you calculate VaR? σ?
Arkus Focus April 2016
The market environment absorbed the initial shocks observed beginning of the year and now shows a general declining in volatility during the month of April.The declining trend in excess kurtosis and implied volatility is to be assessed versus a background of declining corporate profits, stretched valuation and rising corporate defaults. Accommodating monetary policy can only go on so far and there is little room left for maneuver.
Could we be approaching a perfect storm?
Arkus Focus March 2016
Now that oil has found a floor we're back in more fundamental-driven territory. Not that that might reduce volatility. The moves into negative rate territory may have unintended and unforecasted implications. Interesting times, as ever!
Arkus Focus February 2016
It's clearly been a tough time for everyone, unless you're in government bonds.
I see the big driver as slowing china, falling commodities prices, SWF outflows. Market feel VERY flow-driven, with big moves happening gradually over the day with no clear micro or macro events in the price charts.February has so far been a continuation of January, with the added fun of banks facing both falling NIM due to negative deposit rates and higher provisioning should there be further economic slowdown.
Arkus Focus January 2016
We had discussed before how the impact of falling oil and commodity prices hadn’t yet appeared to stress the system as much as it might. We still think that is the case and we are now seeing what is to my mind a combination of a stronger dollar pressuring EM countries whilst simultaneously seeing a regime change in commodities leading to seismic shifts in global current accounts with all the economic and political impact that will entail. Interesting times indeed.
Arkus Focus December 2015
Volatility changes were slightly downwards. Volatilities are now low or medium for all asset classes.
We suggested last month that the market might try one more time to spook the Fed into a(nother) postponement. As of the time of writing the markets are down somewhat, but the high volatilities seen in previous “taper tantrums” have not (yet) materialised.
Arkus Focus November 2015
Interest rate lift-off seems to keep approaching, the markets panic and then the lift-off can gets kicked down the road again. Surely this pattern can only go on for so long?" Looks like the Fed have dared the markets to misbehave before the mid-December meeting. That, we think, will be the big focus over the next 4 weeks. Unless something big and unexpected happens...
Arkus Focus October 2015
Interesting times, as ever it seems these days. Interest rate lift-off seems to keep approaching, the markets panic and then the lift-off can gets kicked down the road again. Surely this pattern can only go on for so long?
Arkus Focus September 2015
We had many price moves similar to 2008. What happens next? We think the recent gyrations were more about the Fed liftoff (rather than China directly) and effectively were a taper tantrum mk2. If that's right then at some point we will see some more turbulence.
Please see attached the latest volatility report for a more in-depth discussion.
Arkus Focus August 2015
It's clearly been a bumpy ride with the Greek drama, but that's now (temporarily, again) over, so we suspect we'll have a quiet month or two for now. After that we're getting oh-so-close to the first US rate rise, and that, coupled with some very weak macro data out of China (not to mention Brazil and Russia) is likely to make the road a little bumpier.
Arkus Focus July 2015
The seemingly rapid rise of the VSTOXX from 20 to 32, remains far away from previous bursts of 2009 (22-71) or Sep 2011 (21-54), giving apparent credit to politicians’ faith in the “Eurozone firewall” ability to hold against contagion.
Will our attention be attracted elsewhere as we are getting ever closer to a likely September rate rise in the US?
Arkus Focus June 2015
Is it really Greece driving the markets, or are we really seeing the beginnings of the end of QE-inflated assets? Either way it makes for interesting watching both in bonds and equities...
Arkus Focus May 2015
Last month was relatively event-free. It looks like the stress might be beginning to build for this month instead: first in bunds and last night in US treasuries. But the very weak US GDP print suggests the "day of reckoning" has been pushed further out, again.
Arkus Focus April 2015
April proved to be an even quieter month than the prior one, probably in part due to the run-up to Easter. The big stories again were central bank related. The ECB has pushed German 10 year bonds down to -15bp (and 2Y down to -28bp) as this is written, and the Fed opened the window for rate rises. The market either doesn't seem to believe the Fed will raise rates, or if it does it won't matter. It's quite likely to turn out to be wrong on both counts.
P.S. as an aside, everybody we speak to wants yield, and doesn't seem to care how they get it. It's VERY reminiscent of 2006/07.
Arkus Focus March 2015
A much quieter month. But now we have two big forces pulling in opposite directions: the ECB trying to buy a very limited and very sticky supply of sovereigns (hence German 10Y at 20bp, vs Japan at 40bp...) and the US getting the markets ready for the start of tightening. It should be fun to watch.
Arkus Focus February 2015
Volatility trends were in general upwards during January. Almost every asset had High volatility relative to their 12-month averages. The big news was all in Europe: QE, Swiss Franc and Greece. At least high volatilities seemed justified for a change.
Arkus Focus January 2015
Clearly oil was the big news in December (and continues to be so now).
I'm still surprised we haven't seen any collateral fallout. Maybe it's just a matter of time?
Arkus Focus December 2014
It was a bit "back to normal" last month, at least compared to the bumpy ride of October. Volatility was in general low, but any exposure to either Japanese assets or oil-related assets could have led to big price swings and high volatilities. You could have been very right or very wrong last month, and not being aware of portfolio biases could have been costly. Another lesson for risk managers! Anyway, here's wishing you a very merry Christmas and a prosperous New Year.
Arkus Focus November 2014
Volatility is certainly back!
We saw some pretty dramatic price moves over the last 30 days. It feels something big being forcibly wound up: big, sharp moves, often intra-day with little real news driving it and still no indication as to what it may be or whether it is just a flare of money flow. We may yet find out. We mentioned last month the sharp fall in oil hurting someone. So far the only big hit has been the Russian ruble. But we may well see more fallout if it stays at these levels or falls further.
Arkus Focus October 2014
After a very quiet summer, risk has returned. Unfortunately, as is often the case with rising risk, it is being accompanied by sharp sell-offs. In this case in equities, high yield and commodities (and any currency not the dollar).
The silver lining is that firstly this will be positive for economic growth (of which there is increasingly little in Europe) and secondly people are now starting to be rewarded for risk. The "hunt for yield" (a la 2006) is probably over for a bit.
A possible negative is that the falls are deflationary. And Europe doesn't need more deflation.
Oil is particularly interesting as at below 90, it's fallen to such a low level so quickly that something will have to give. It could be an over-leveraged oligarch, or we could see another popular revolution in a country that relies on oil/gas revenues as it has to cut budgets. Hopefully more the former than the latter.
Also, the big thing that might happen with a falling oil price could well be - and is even likely to be - a default by Venezuela.
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