EMMA Program was down 1.0% in May and up 10.3% YTD.
The macro environment for 2018 so far still hinges on rising inflation and interest rate expectations, which leaves geopolitics as the likely catalyst for either directions. However, the lack of fear has prevented a breakdown despite North Korea flip-flop, Iran deal withdrawal, Middle East tension, trade war escalation, and disappointing European growth. The Italian election’s populist twist and Spanish prime minister’s ouster haven’t even done that much damage other than extending the dollar’s rally. The U.S. market’s remarkable resilience in the face of headline risk is a testament to the strength of U.S. economy but we see the fragility festering.
In a recent article we argued that things don’t matter until they do. In fracture mechanics, cracks can exist in a material until an incremental load pushes it over the edge and the energy releases itself in the form of propagation, and the system collapses. We believe this is analogous to the stress buildup in markets and we are currently in the “necking” phase.
In May we had a string of decent trades but they were entirely offset by gold’s break below $1,300 from the sudden breakout of 10Y treasury yield above 3%. Recall that we held long gold in anticipation of geopolitical risk rearing its ugly head. It did but was quickly absorbed, which forced us to take a loss.
Markets are pretty calm and look well-adjusted at the moment. Oil is trending up but is checked by OPEC's loosening of production cap. Natgas supply/demand is balanced, just waiting for summer heat to show up. Copper, palladium, gold, silver are bouncing in a tight range. Grains and meats are caught in a series of binary events related to trade war so we decided earlier in the month to stay out. Other than holding on to long volatility positions, this maybe a sign to take a vacation.
Also, in light of the Iran situation in early May, we published an article in HFM-CTA Intelligence about the second order effect of the unraveling of the Iran deal.