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Daily Agenda: Hollande Names New French Cabinet

Macro indicators in France and Germany show lags; euro zone government bond yields hit historic lows.

With yesterday’s record-setting close for the S&P 500, ending trading above 2,000 for the first time ever, is helping to drive sympathetic buying in stock markets around the globe today. The MSCI emerging-markets index is trading at its highest levels since August 2011. Yet overall market strategists are increasingly cautious, as earnings multiples in the U.S. remain above historical averages. Despite strong corporate earnings for the recently reported quarter, some analysts have questioned whether macroeconomic factors will blunt the ability of some sectors to expand revenues in the near term. Even without the heavy geopolitical concerns at present, there seems to be sufficient reason for equity investors to tread lightly. Despite this all, the bulls continue to reap the rewards, as confidence begets confidence and markets reach new record highs.

The Cabinet of France gets a shake-up. French President François Hollande replaced multiple members of his cabinet, including Minister of Industrial Renewal (effectively the economy minister) Arnaud Montebourg with Emmanuel Macron. Montebourg’s antiausterity comments earlier in the week sparked a rift that led to the dissolution of the cabinet. Prior to his appointment, Macron had served as an economics adviser and, as a former Rothschild banker, is perceived to be a pro-business voice within the Socialist Party. This the second French cabinet reshuffle in six months. Among the minister staying on are close Hollande allies Prime Minister Manuel Valls and Finance Minister Michel Sapin.

French factory sentiment sinks. The manufacturing sentiment index from French national statistics office INSEE contracted to 96 for August, the lowest the index has reached since July 2013 and lower than consensus forecasts. Taken in aggregate with declining purchasing managers’ index levels in recent months, the outlook for France’s industrial sector is increasingly negative.

Consumer sentiment in Germany is down. German consumer confidence as measured by the GfK survey registered weaker than consensus forecasts at 8.6 in September, down from 8.9 in August. This contraction is the latest in a string of disappointing data points from the euro zone’s largest economy since July.

Europe sees record-low yields. With expectations that weakening economic conditions throughout the euro zone will drive further market actions on the part of the European Central Bank, yields on German ten-year bunds reached historic lows today of 0.921 percent. Yields on French, Italian and Spanish ten-year government bonds also hit record lows. The next ECB policy announcement is scheduled for September 4.

Portfolio Perspective: Timing is Critical for Volatility StrategiesScott Jacobson, ClearVol Capital Management

If option overwriters stuck with the strategy and did not use timing rules, they have paid a significant price over the past two years. Although many studies — including our own — show that a simple buy-write strategy can beat the S&P 500 with less volatility, the strategy is subject to substantial tracking risk over shorter periods of time. For example, from 2012–’13, the S&P 500 was up 53 percent while the Chicago Board Options Exchange BuyWrite index was up just 19 percent. That severe drag negated several years of favorable returns, generated through a buy-write strategy.

Is overwriting attractive today? Maybe. Stock market valuations are full (not yet foolish), so future advances may be limited. That favors an overwrite strategy. The other primary variable to consider is the level of volatility. Although implied volatility (VIX) appears low, our models indicate that it relatively fair, given market conditions. Since we have one favorable condition plus one neutral condition, some degree of option writing makes sense. Additionally, option writers may look to different maturities and strikes to find a comfort zone of risk-reward for this strategy.

Scott Jacobson is the founder and chief strategist for ClearVol Capital Management, a Brookside, New Jersey–based alternative asset management and consulting firm focused on market volatility.

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