The key macro curves are all pointing in the right direction. UBS Asset Management’s Macro Monthly takes a deep dive into futures curves. While the the key macro curves fortify our stance that there is more upside in global equities, we are even more enthusiastic about the relative value positions beneath the surface in stocks. For procyclical trades that are performing well lately – value stocks vs. growth, US equal weight relative to market cap indexes, and international equities vs. the US – there is considerably more room to run.
But we are cognizant that this bright, early-cycle backdrop will not persist in perpetuity. We will closely monitor shifts in these curves, along with other economic and market indicators, to judge whether the macroeconomic environment is changing or the procyclical rebound is fully priced into different asset classes.
Progress on vaccinations also varies widely between different countries, which provides a potential catalyst for relative value trades. The UK is a standout among major economies in terms of getting shots in arms. This outperformance informs our constructive view on the British pound and UK equities, among our most preferred in each asset class. We believe that both are relatively undervalued and should benefit from inflows amid the ebbing of the Brexit uncertainty overhang as well as a more expedient services sector recovery.
We believe this trend steepening of vaccination curves can continue and broaden across advanced economies as production increases and the approvals of additional candidates make doses less scarce. Mutations of the virus are a risk to the outlook, but vaccines appear to be reasonably effective in preventing severe illnesses from these variants.
Bullish backwardation
Commodity futures curves, such as crude oil and copper, are in a downward-sloping term structure known as backwardation. Near-term contracts being priced higher than longer-dated futures are indicative of a market in which demand is outstripping supply. Accordingly, both crude and copper have posted robust gains in 2021.
The advance in oil is attributable to both continued supply discipline from OPEC+ and an anticipated resurgence in demand. The crude curve thus reinforces the message from the vaccination curve – mobility will improve, and so too will demand for gasoline and, with a lag, jet fuel. The copper curve suggests that markets share our belief that any pullback in Chinese stimulus will not be abrupt, and that goods sectors will continue to perform well amid a rotation to services-led growth as vaccinations allow for progress towards pre-pandemic norms.
Backwardaration also means that long commodity positions can generate positive roll yield over time, which can help increase the attractiveness of commodities as an asset class.
Future fears are your friend
The VIX curve is generally in an upward-sloping structure called contango (the opposite of backwardation). Currently, the front of the VIX futures curve is an especially steep contango. Thecurve is pricing a pronounced pick-up in market volatility in the not-too-distant future. In addition, longer-dated contracts trade at a significant premium to their historical averages. This is in part due to a continued imbalance in volatility markets, where supply continues to be constrained following the intense 2020 bear market.
This term structure sends a strong signal that complacency does not reign in US equities. We do not believe this persistent medium-term skittishness is warranted given the fundamentals. Elevated levels of market volatility are unlikely to prevail for an extended period if our anticipated backdrop of a broad acceleration in economic activity and colossal earnings growth comes to pass. A compression in this fear premium could provide an additional tailwind for stocks in the months ahead.
Here you'll find the complete Macro Monthly from UBS Asset Management.