Tactical FX: Long Gold (realized 30 Oct), short MXN (raised 30 Oct, realized 3 Nov)
Cash-Plus: Long EUR-HUF (raised 3 Nov), short SGD-CNH (realized 2 Nov, re-engaged 3 Nov)
Strategic equity shorts: Egypt (reduced 2 Nov), India, long VIX (raised 3 Nov)
Strategic FX: Long GBP, short CAD (reduced 3 Nov)
Strategic FI: Long US Treasuries
Tactical equity longs: Pakistan, Qatar
Tactical long GBP (realized 26 Oct)
Tactical short KRW (realized 1 Nov, re-engaged 3 Nov)
Tactical US Treasuries short (realized 3 Nov)
Short TWTR: An outsized 21% rally Thu/Fri the previous week was bound to mean-revert ahead of the Russia ad-buying congressional inquiry. Twitter -7.4% on the week.
Long India Sensex: If undercapitalized, NPL-burdened banks have held back Indian growth prospects – a longstanding view – then the govt’s bank recap program (announced week before last) is a game-changer: Growth accretive and therefore positive for Indian equities (Sensex). We ought to have reduced (further) – or even flipped to positive – our long-held strategic short on India equities.
Short NOK and SEK: We had anticipated these Scandinavian currencies could underperform EUR post-ECB.
Short Thai equities: Now that 1yr mourning period has passed, downside risks/position re-adjustment should be expected.
Con-Cor model: Last week’s qualitative model-predictions were good – with 8 out of 20 best-/worst-performers anticipated. I could have added more allocations to equities (European and North Asian) and oil (if not via Brent contracts, then through producers).
Rank of Conviction-Correlation model output (Predicted) vs Actual week-on-week returns:
Learnings/what struck me:
Failed trade #1 – Long GBP: Whilst we rightly predicted the 7-2 BOE vote split (in it of itself, a hawkish signal upon which we based our bullish sterling bias for the week; ref: last weekend’s Week Ahead), we underestimated all the other factors – eg Carney’s dovish commentary and growth warning – that could have completely overwhelmed it. This bullish GBP view was the single largest detractor of performance this week, our first since at least Sep.
Failed trade #2 – Short UST duration: The dust has settled from the flurry of new info out of the US (Mueller probe, Fed Chair Powell, FOMC, House GOP tax bill, NFP/ISM – and company earnings). And UST yields are lower, curve is flatter, SPX slightly higher and USD unchanged. Price action seems to support anecdotal takeaways from this week’s events:
1/ Fed policy reaction function of gradual tightening is intact (market did not ‘sell the fact’ on the Powell nomination; instead yields ground lower)
2/ The long-awaited GOP House tax plan was underwhelming – or there are fresh doubts over its speedy passage and/or its ability to reflate the economy through fiscal stimulus.
3/ Economic data was generally ‘a wash’ – neither bullish nor bearish. Post hurricanes rebound had been expected and/or the data is too distorted to glean any special insight over economic momentum.
… Intriguing then that Fed Funds Futures pricing has risen over the past week – with now 1 hike by Dec-2017 and 2 hikes by Jun-2018 priced in at 92% and 68% as of Friday, 3 Nov (a month ago these were 66% and 43% respectively). Moreover, Fed Fund Futures now price-in a 44% chance of at least 3 hikes to 1.75-2.00% by Dec-2018 (this was just 7% 1mth ago). This repricing occurred as 10yr UST yields fall (past ten days -12bp, this week -4bp to 2.33%) and while 2yr UST yields hover at 1.61%. Since the GFC, the UST curve has only been this flat 1-2X before – in 2012 during the Fed’s Operation Twist (deliberately intended to flatten the yield curve) and just before the 2016 US election gave way to expectations of ‘Trumpflation’. After a week that offered little evidence of neither immediate reflation (be it monetary or fiscal) nor wage growth (to interest Phillips Curve holdouts), it might now require something dramatic – perhaps structural – to significantly and persistently re-steepen the UST curve. We move from a strategic UST steepening bias to neutral, though we will continue to opportunistically short UST duration on a tactical basis.
Onward and upward: At -1.5%, this was the first ‘down week’ since at least September. It won't be our last. And we remind ourselves it could've turned out worse ...