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Progress in trade talks between the U.S. and China and in Brexit negotiations knocked down safe assets last week.
Bond yields rose in most developed countries and gold prices fell, as the stance on both thorny issues reversed and
turned positive. In FX markets, the EUR and the GBP appreciated while the JPY and the CHF, which are typical safe
havens, depreciated vs. USD.
The reversal is likely to have negative consequences on CTA strategies, which have sizeable long positions on fixed
income and gold. Their long positioning on the USD (vs. the EUR and the GBP in particular) has also been caught
on the wrong side. Nonetheless, this may be partially offset by their long positioning on equities, which has benefitted
from the easing of the geopolitical risk premium.
Meanwhile, the impact on Global Macro strategies is likely to be positive.
Several blue-chip systematic strategies
maintain short positions in fixed income, and the rebound in equity markets should also be supportive. Yet, the USD
depreciation should partially offset such gains. Global Macro strategies are notoriously heterogeneous and can have
an opposite positioning on a given theme. Although they do not take explicit positions on geopolitical issues, their
portfolio is implicitly exposed to this risk factor and varies significantly according to the strategy. This is the reason
why we frequently argue that investing in Global Macro strategies is more a bottom up than a top down exercise.
Concurrently, the rebound in EM assets (FX and sovereign credit) will likely be supportive for EM-focused Global
Macro strategies on which our stance has been constructive (O/W). Our stance on Discretionary and Systematic
Macro strategies is unchanged, at Neutral, but with a positive bias at present.
What lies ahead? Hopes of an easing of trade tensions have regularly been dashed in recent quarters. Will this time
be different? Our view is that a trace truce is likely, but a broad trade deal is unlikely in the near term. This is
nonetheless enough to lift bond yields and depress safe assets in FX and commodity markets.
In the space of
alternative strategies, back in July we suggested to diversify CTAs with Global Macro strategies and we
reiterate that view.
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