|EMMA Program was up 0.7% in October and down 0.7% YTD. Not exactly crisis alpha as we planned to.
There were plenty of macro risks that spooked the market in October. From the looming midterm election to Italian standoff, trade war escalation to rising yields, slowing housing/auto markets to leveraged loans. The flight to quality lifted the dollar. Markets from equities to currencies to bonds are repricing risk. Sentiment has shifted to risk-off.
Our macro trading incorporates fundamentals, technicals, and sentiment. We know that fundamentals have been deteriorating for a while - most macro moves are obvious in hindsight. The difficult part is to tell when people start to care because until people care there is no problem. Back in August we published a piece in CTA-Intelligence about volatility returning
and we successfully captured the spike in VIX. This gain, unfortunately, was offset by a countertrend rally in metals. EMMA program is currently at > 10% DD so it is trading defensively at less than 3%, half the normal M/E ratio.
Volatility is staying elevated for now. But it is a bit early to tell if this market correction is “the big one”. Corporate earnings appear to have peaked and the narrow leadership in equity markets is breaking down. Now that investors have started caring, there are plenty of things in the upcoming quarters to worry about. How is the midterm election shaping tax cuts and fiscal spending? How soft is Brexit come mid-November? How aggressive is the fed given market reactions? Is more geopolitical and trade escalation coming if Trump is impeded domestically? How is China coping with the slowdown in trade and is it going to exacerbate the emerging markets woe? The way market absorbs events is what we will be paying more attention to.
2019 is shaping up to be a year of cross currents. Our ongoing thesis are as follows:
- With growth differentials and policy divergence between US and Europe (and the rest of the world), we anticipate strong dollar to resume.
- Merkel stepping down as German Chancellor leaving France's Macron as the only stalwart for EU sets up a highly asymmetric downside scenario.
- Although Chinese government still has lots of levers to pull, the softening economy and weak yuan will haunt base metals.
- Emerging markets are grappling with fx crisis and will get dragged down by China.
- Treasury auction amounts keep setting records amidst rising yield, but flight to safety should keep damage in check.
- Fed seems determined to return to normalcy before the next recession hits (hike until it breaks).
- Oil seems very vulnerable but may rebound on extreme oversold technicals or get a boost from OPEC/Russia jawboning.
- US is not likely to have another fiscal stimulus in the form of infrastructure spending or tax cuts.
Lastly, to the surprise of many, Bitcoin has been in an extremely tight range throughout October. We have no idea where it goes from here.