Is it time to reach for the 1970s and 80s playbook?

The month of May provided further evidence that European and U.S. equity markets may have somewhat decoupled. Alternating dovish or hawkish statements from Fed members seem to drive volatile equity trading in North America. However, here in Europe, the VSTOXX declined over the month from the mid-30s to the mid-20s as the benchmark EURO STOXX 50? made gains in sharp contrast. With the index components of the European benchmark being less technology exposed, it is perhaps a relatively favorable pace to weather the current storm and the apparent switch towards the value factor.

As macroeconomics takes center stage, investors are reaching for their 1970s and 80s playbooks and the word ‘stagflation’ appears more often among research notes. However, for me, this would represent a rather benign scenario. I see more downside risks. How do central banks tame inflation which is of the external ‘cost-push’ type rather than ‘demand-pull,’ without tripping up the fragile post-pandemic recovery back into a more severe recession? This uncertainty keeps the demand for portfolio hedging high. We see strong volumes across our familiar EURO STOXX 50? and STOXX? 600, Banks sector, DAX, SMI and KOSPI benchmark index futures and options, a continuation of recent trends.?We also saw a new record for a non-roll month in MSCI derivatives, where the World contract is increasingly the dominant product. On the options, the EM contract took over the lead from World in open interest terms. In addition, MSCI China futures grew to EUR 2.7bn open interest, the highest level since 2018, and ACWI reached EUR 3.3bn EUR, up from 1bn at the end of 2021. The FTSE segment?had the most active two-week period since launch, with 66.5k lots traded at the start of the month with 90% of FTSE 100 TRF trades hedged with the respective vanilla FTSE 100 index futures at Eurex. The combined open interest crossed the 100,000 lots mark, an impressive EUR 9.2bn equivalent.

With markets reacting negatively to a confluence of heightened economic and geopolitical risks, how do you catch the proverbial ‘falling knife’? To me, the answer lies in skillfully utilizing derivative tools. Eurex continues to provide those deep and liquid futures and options markets to serve that very purpose.