volatility ahead

Volatility defined 2018 and it will define 2019.

That was the view from Eurex, the conglomerate of exchanges which primarily trade derivatives in Europe, in its January 2019 newsletter.

“The story of 2018 was the long-awaited mean reversion of equity market volatility, driven by geopolitical tensions. Volatility showed an early blip in Q1 which quickly petered-out as markets rallied to mid-year highs. In Q4, a repeat bout in volatility occurred as the major index benchmarks retreated into red territory. Overall, almost every major asset class stumbled in 2018. This was not the consensus at the beginning of the year.” The newsletter noted.

Looking forward to 2019, the prediction was much of the same.

“So, how will markets evolve from here? Given the performance of equity markets over the past quarter, uncertainty has visibly increased. This provides an impetus for Eurex to expand its range of product solutions offering a suitable selection of derivative hedging instruments. Here Eurex sees certain themes that will continue to trend throughout 2019. We expect ESG benchmarks to further complement traditional index-tracking products, as well as the continued growth of European ETF options liquidity. Additionally, we expect further MSCI futures and options adoption by Asia based institutional clients and, for the equity markets in general, a continued migration from physical to synthetic derivative transactions.”

The newsletter continued: “The aftermath of volatility can lead to opportunities and here nimble investors may seek to profit. However, the bumpy ride may not be over as there is plenty of 2019 event risk to navigate. To name a few: the season finale of the Brexit soap, the now highly politicised Fed interest rate decisions throwing off a clear hike trajectory, the continued global trade tensions, the Trump presidency in general and the Mueller investigation in particular and a series of global elections in Argentina, Canada, Greece, India, Indonesia, South Africa and Thailand.”

Eurex noted that 2018 was an especially good year for its MSCI product.

“2018 was yet another record year for Eurex MSCI Derivatives. Futures volumes grew by 32% with more than 14.5 million traded contracts compared to 11 million in 2017. The open interest stood at 1.47 million following the December expiry compared to 1.37 million at the end of 2017. Options activity picked up even more with 1.4 million traded contracts (+68%) and an open interest of 507K at year-end (+99%). Most of the growth could be contributed to the Options on MSCI Emerging Markets and MSCI World. Including Futures and Options, Eurex Exchange has the highest global open interest figures in the MSCI segment.”

The MSCI, which stands for Morgan Stanley Capital International, are indices.

On its site, Eurex explains, “MSCI indexes are some of the world’s most widely tracked benchmarks, with more than USD 12 trillion linked to them. They also serve as the basis for almost 1,000 Exchange Traded Funds (ETFs). The massive amount of capital benchmarked against MSCI indexes and the improved tradability of index based products via ETFs has led to the increased need for futures and options. MSCI derivatives help managers facilitate in and outflows of funds, hedge existing equity exposure and enhance portfolio performance.”