UBS sees short-term support for equities from easing volatility

Investing.com -- Equities and credit markets are set to remain supported in the near term as volatility retreats and trend-following funds re-leverage, according to UBS, though the bank cautioned that downside risks remain elevated.

Analyst Nicolas Le Roux said UBS expects realized volatility to decline by approximately three percentage points in the coming weeks, which "should support long positioning as CTAs re-leverage."

However, he warned that systematic funds are likely to remain more sensitive to downside risks, with any setback in U.S.-Iran negotiations potentially triggering adverse outflows, "particularly in a context of hawkish Fed signals and reduced forward guidance."

In credit, CTAs are long and adding to positions, which UBS said creates "a supportive backdrop."

With the summer period and events such as the World Cup typically compressing volatility, the bank expects carry trades to "remain well supported, with credit at the forefront."

In currencies, UBS noted that CTAs have bought around $100 billion in U.S. dollars since its last update, with a further $40–50 billion of dollar buying expected over the coming two weeks, primarily against G10 currencies.

Sterling, the Chinese offshore yuan and commodity-linked currencies were flagged as most at risk.

Commodities presented the most negative picture, with CTAs selling aggressively across all four cohorts. UBS said the pace of selling may moderate but is likely to persist, with energy contracts identified as "the most vulnerable."

In bonds, CTAs have begun covering duration shorts and remain biased toward further buying, particularly at the long end of the U.S. curve.

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