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The deflation and growth scares morphed into a vicious cycle last week. Multiple trading
anomalies were observed, especially on Monday, suggesting that systematic and
algorithmic trading amplified the sell-off.
The bottoming process has already begun, but the sentiment remains febrile. On the
one hand, the apparent disconnection of this sell-off with macro data is opening bargain
opportunities. On the other hand investors are pondering whether a more fundamental
change is being priced in, which would suggest a more bearish phase for risky assets.
Current concerns include:
- The true magnitude of the Chinese slowdown
- The risk of an FX crisis in some of the weakest EM countries
- The actual resilience of global growth to another round of deflationary pressures
- The uncertainty around the Fed’s normalization (the plunge in EM assets and
commodities follows the April rout for sovereign bonds) - Monetary policies’ ability to deal with any of these potential shocks.
Over the week, global equities plunged by 9%, the USD trade weighted dropped by
more than 2.5%, energy spots plunged by another 10% and base metals lost 4%.
The Lyxor Hedge Fund Index was down 3.5% over the same period. Event Driven funds
were the main losers. There was high dispersion in managers’ return, with losses in
some heavy-weight funds.
Overall, CTAs and Fixed Income Arbitrage funds proved to
be reasonably resilient. A milder pressure on credit and govies supported credit
strategies.
The losses in the L/S Equity space were reasonable, with the notable
exception of Asian and US long bias managers. A high dispersion was recorded among
Global Macro funds.
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