Lynn Strongin Dodds looks at the SGX sentiment report and how different segments of the derivatives industry are responding to market conditions.
Overall industry sentiment across the global derivatives markets improved in the third quarter due to a more upbeat sell side and proprietary trading community, according the SGX Global Market Sentiment Report, a new quarterly benchmark of business attitudes across the global derivatives industry released by Acuiti and Singapore Exchange Group (SGX).
The index is calculated based on a survey of Acuiti’s Expert Networks, comprising 465 senior executives from across the buy and sell side. Each quarter they will be asked their views on a range of subjects including their outlook for the next three months. The report also draws on data compiled by Acuiti over the past 12 months to build the historic data.
While views differed over the future, there was no doubt volatility was a main feature for all respondent in Q3. It was not only ongoing geopolitical tensions in the Middle East and Ukraine that rattled markets but also a larger than expected interest rate hike from the Bank of Japan and concerns over economic growth in the US and China. The turmoil hit its peak in August with 26.1m contracts traded – the second higher monthly volumes in VIX options since February 2018.
However, research from JP Morgan shows that the quarter ended with healthy returns across most major asset classes. Developed market equities in particular had a strong showing of 6.5% return over the period. Investors concerns abated somewhat thanks to the Federal Reserve finally making a move on the interest rate front in September, along with a less hawkish tone from Japanese policymakers and new stimulus in China.
This helps explain why the inaugural report found that overall, 68% of respondents were optimistic about the three months ahead, up from 65% in Q2. Back calculations of the Index indicate that Q1 2024 was the high mark at 69%, while Q4 2023 was the lowest point at 57%.
Breaking it down into different sector segments, 90% of ultra-low latency firms were the most optimistic about their business performance compared with 62% of point and click and hybrid firms. This reflects the ability of these firms to capitalise on recent volatility, as market moves have been shorter and sharper than in the past.
As for the sell side, senior executives managing equity derivatives and commodity execution desks were the most bullish compared to those overseeing OTC and interest rate who were more negative. On the clearing front, confidence was highest among multi-national banks, at 85% versus 65% of non-bank future commission merchants (FCMs). In terms of geographies, North American participants were the most hopeful while those based in Europe (excluding the UK) were notably more pessimistic than their peers elsewhere.
These views were in sharp contrast to their asset manager colleagues. Only 55% expected the short-term future to be bright with the main concerns including rising costs, market volatility and squeezed margins. In fact, a recent report from the Boston Consulting Group found that although total assets under management (AUM) in the global industry ticked up 12% last year to nearly $120 trn with a 0.2% rise in revenues, costs rose by 4.3%, triggering an 8.1%t slump in profits. The Acuiti study did note though that those at the smaller end of the size spectrum were more enthusiastic about the next three months than those with over $500bn in AUM. This marked a reversal of an earlier trend. As for jurisdictions, the US were the most cheerful while those based in Europe and APAC who were the most downbeat
