Alternative Markets Update And Macro Outlook September 2019

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RESEARCH PERSPECTIVE VOL.115 September 2019 Alternative Markets Update September 2019 Hedge funds achieved a performance of 0.31% in August 2019, despite the continously increasing unstable economic environment. Brexit is getting more chaotic with the suspension of the UK parliament and a newly created law, which forcing the PM to delay Brexit to 2020. A general election was denied twice. The trade war between China and the US tightens further with the new tariffs on consumer goods. Furthermore, the conflict in Hongkong does not seem to end very soon either. Aside from political problems, the current economic situation with diminishing yields of fixed income and the inverted yield curve in UK and the US does certainly not help. Despite these developments in the fixed income market, our strategies have yielded an 0.80% gain in July. Alternative assets getting further boosted by pension funds, as they are looking for yields, due to the current fixed income market situation. Bitcoin was more or less stable over the last month. However, the interest in Bitcoin surely did not decline, as for example China starts its own cryptocurrency and Bitfinex issuing leveraged trading on Bitcoin and Ethereum with 100x. There may be several drivers for this development, such as its increased acceptance as well as its market development during the year. The Bitcoin Altcoin Actively Managed strategy achieved the best YTD performance of all strategies on our platform. Another key driver might be, that investors seek uncorrelated assets, for which cryptocurrencies are ideal investments, as shown in Figure 1. Figure 1: Correlation of Different Asset Classes When Comparing Weekly Returns from Q2 2016 to Q2 2019, Source: Binance Research Report: Bloomberg Macro Outlook September 2019 by Aquila Markets When looking at “performance”, it is important to consider the time frames. Easily said, but critical to get a sense of what is really driving markets. With that in mind, I looked at the normalised performance of markets over the last year (horribly arbitrary, but how many people look at 1 year charts!),since start of 2019 corresponding to the beginning of the recovery post Q4 selloff, and then since May1st, when the trifecta of concerns to the global economy – trade wars, Hong Kong, Brexit- ratcheted up. Figure 2: Differences of Looking onto Return Within One Year: September 2019, Source: AquilaMarkets We can make a number of simple but important observations; that stocks are roughly unchanged over the whole period after the recovery from the selloff in Q4 2018, that oil is volatile (!), that the dollar is not volatile (!), but that the moves in both Gold, and in US rates have really occurred since May1st. As I and many others have written, the moves into fixed income and gold have been driven by expectations of aggressive central bank action to ease (lower rates) and actively debase Fiat currencies (higher Gold). Chart of the whole period shown below.   It is easy to extend the narrative that these moves in higher gold and lower rates can continue; after all the global news flow remains poor especially from China, the US ISM last week was horrendous, and we have already seen decent pullbacks in both US rates and Gold. The chart below shows the moves in Gold, 10year YIELDS and 1y1y forwards US rates; gold has reversed 2%, whilst rates in both periods are roughly 20bps higher, roughly the removal of a Fed rate cut in the front end. But – bear in mind in that 1y1y forward since 1st may has moved from 2.29% to 1.14%! A back up to 1.35%, in that context, does not seem so far. I wonder if the pain trade here is a deeper pull back lower in bonds / higher in yields, and lower gold, which could be driven by central banks who UNDERWHELM in their easing over the next couple of weeks,. In effect, the market reverts to less easing means less recession risk, and risk reduction of fear trades.   My usual stance here would be to recommend buying gamma (which is valid), and fx vols have been hammered over the past week with the pause in rates and rise in equities (adding strength to my “good is good” argument). I like to own EURUSD gamma off this vol base over the ECB and Fed meetings to allow for what I think could be surprises from both banks and additional variance. But I wanted to search for a lower vol proxy for gold and rates, so I ran correlation analysis since 1st may which are below.   What jumps out is the best correlating FX pair is ….. EURCHF. This is especially interesting running into the ECB, as the SNB is likely to at a minimum mirror any action by the ECB. Interestingly, I looked at EURCHF fx plotted against the 1y1y forward interest rate differential – there is a significant divergence highlighting how relatively strong the CHF is compared to the EUR. Looking at the charts, EURCHF is now tracking higher on the daily charts, and I would like to see 1.0880/1.0900 hold, take out the 55dma at 1.0980. My initial target for longs is 50% retracement at 1.1144, with secondary target at 1.1200-1.1220 (220dma and 61.8% retracement). On the weekly, we are testing 9/13 zone I watch at 1.0948/82. A weekly close above 1.0982 reinforces the bull. The weekly RSI is breaking up too.   I have attached a screen shot of the volometer below. With the risk reversal in EURCHF firmly for puts, using risk reversals is a potential play, but I prefer to be long spot and potentially use owning short dated puts to protect against any short term volatility over trade entry. Finally, USDJPY also looks like a possible vector for this trade, and owning downside to cover the FOMC versus being spot is a trade too. But I like the low vol, high risk reward setup of EURCHF. Figure 3: Normalised Assets Over 1-Year Period: September 2019, Source: AquilaMarkets Figure 4: US Rates and Gold Since 1st May 2019: September 2019, Source: AquilaMarkets Figure 5: Gold 20-Day Correlation over Last 6 Months: September 2019, Source: AquilaMarkets Figure 6: US 10-Year Yields 20-Day Correlation over Last 6 Months: September 2019, Source: AquilaMarkets Figure 7: EURCHF vs 1Y1Y Forward Rate Differentials: September 2019, Source: AquilaMarkets Figure 8: EURCHF Daily: September 2019, Source: AquilaMarkets Figure 9: EURCHF Weekly: September 2019, Source: AquilaMarkets Figure 10a: Risk and Volatility of Currency Pairs: September 2019, Source: AquilaMarkets Figure 10b: Risk and Volatility of Currency Pairs: September 2019, Source: AquilaMarkets The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer. Chris Eagle Aquila Markets E : chris.eagle@aquilamarkets.com M : +447712885718   Chris is an experienced executive who runs his own consultancy service which focuses on business development, market structure, financial market analysis and training. He worked on the sell-side for twenty years. He left Jefferies in 2015, where he worked in the Global Foreign Exchange and was Head of FX product distribution. This perspective is neither an offer to sell nor a solicitation of an offer to buy an interest in any investment or advisory service by Stone Mountain Capital LTD. For queries or for further information around our research and advisory services please contact email: research@stonemountain-capital.com under Tel.: +442037228175.     STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London and Swiss representative office. 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