Alternative Markets Update - Macro And Political Outlook June 2019

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RESEARCH PERSPECTIVE VOL.109 JUNE 2019 Alternative Markets Update Mid-June 2019  June started in a more dynamic fashion for hedges funds are already recouped May’s losses. The anticipation of an interest rate cut this year as a result of Fed’s announcements resulted to a strong bounce back for equity markets. Equity hedge strategies profited the most during the first weeks of June, a month that so far is characterised by the trade war discussions and further tariff plans from US. Macro and CTA strategies had their bets right so far this month and they are waiting to capitalise on future volatility events. Bitcoin’s momentum slowed down in June and its price has receded from $8,740 to $7,900, reaching a market cap of $140bn. Ethereum had also a slightly negative month so far and is keep following the same pattern as bitcoin. Macro and Political Outlook June 2019 by MacroEagle I. WHO HAD THE WORST MAY?  Our top candidates are: (1) the Markets – with S&P down 6.6% and the Dow down for 6 weeks in a row – its worst streak since 2011. (2) Prime Minister Theresa May finally announcing her resignation on May 24th after the Tories worst local election result since 1995 and on the day the electorate delivered a drubbing at the EU election. (3) Austria – with the Strache/Ibizagate video released on May 17th bringing down the government on May 18th and Chancellor Kurz on May 27th. (4) Barcelona – after one of the best ever semi-finales come-backs by Liverpool on May 7th. (5) Anthony Joshua getting trashed by Andy Ruiz Jr – although that was technically on June 1st. (6) The “establishment” centre-right and centre-left party block results in the European Election on June 23rd-26th. (7) Australian pollsters completely misjudging the Liberals chances to stay in government – which they did. (8) India’s Congress Party for yet another humiliating electoral defeat at the hand of Modi’s BJP. (9) Big Tech – getting hammered from all sides: Uber shares significantly down post IPO, semiconductor shares hit by trade war, Facebook hit by WhatsApp hack, etc.      We are happy to report that our portfolio has been rather lucky, as we did exactly what we wrote early last month i.e. “We are starting to ‘lighten up’ early, as we plan to be flat over the summer … basically switching from ‘hedged-long’ to ‘coupon-clipping’. For those staying long-risk we would advise to use the current low-volatility environment to look for attractive draw-down hedges”. That's what we call nice timing.   II. LOOKING AHEAD. Following the old adage of “never catch a falling knife”we are staying out of the market until we see what Trump and Xi have to tell to each other at the G20 in Osaka on June 28-29th. In general, the most interesting events in June are all “back-loaded” (see table below): apart from the G20/Osaka, we have the EU Council (20th-21st) where we may get more clarity on who will get Juncker’s job and hence can start guessing who the other two EU presidencies (ECB, Council) will fall to … Jared Kushner to reveal the economic component of his Israel-Palestine plan in Bahrein (June 25th-26th) … and obviously the Fed (June 19th). The by-election in Peterborough (June 6th) is quite critical for Labour as Corbyn is starting to feel the heat post EU and local election disappointments … and obviously on June 10th the Conservative leadership election starts. Then, as we enter July the US will officially enter record territory in terms of economic expansion, having broken the previous 10-year record (Mar-1991 to Mar-2001 … although average growth back then was +3.6% vs. +2.3% now).   Source: MacroEagle   III. EUROPEAN ELECTION. The usual pattern observed at national level in most ‘proportional representation’ systems continued at the European level: (1) increased political fragmentation combined with (2) the rise of the “political wings – all very much in line with our core view that geopolitically the next decade belongs to the rise of the “country-first” right combined with the “interventionist”-economic left. The party which manages to combine both policies will clean up. Who has already benefited from this trend and will continue to do so are the Greens (more below). The good news about fragmentation in the EU parliament is that the centre-right (EPP) can technically claim victory, but with only 24% it doesn’t really have a claim on the Commission presidency. That in turn weakens the “lead candidate” principle [Spitzenkandidatenprinzip] which throws the Juncker-succession wide open. As we have always said: if Weber gets the Commission, we go EU short … if Vestager gets it, we go EU long. Once we know we can work out the rest of the presidencies (i.e. Council and ECB). Until then: no rush in touching anything European other than watching the EU election knock-on effects at local level: (1) Germany: where the centre-left SPD is about to bring the German government down given poor electoral performance and (2) Italy’s Salvini getting ever more confident in his new role as de-facto Italian leader. Source: MacroEagle   IV. THE GREENS. So above we mentioned that the Greens will most likely do quite well in a world that is turning “socially right” (country first) and “economically left” (fiscal & interventionist policies). The Green’s focus on nature has at its heart a ‘national’ element, which partially explains their strong performance in conservative strongholds like Bavaria. On the other hand, they can claim being globally-liberal (“climate change”), so they cover both angles. The only thing they have to be careful with is what they state on the fiscal side: if they argue that to pay for green policies taxes should go up, then they get French “gilet jaune”-type reaction or conservatives re-elected like in Australia last month. That is quite simply because people are happy to declare themselves in favour of saving the planet, but not yet ready to pay for it. Hence a better approach is to finance it all via “Green New Deal” bonds (AOC) or other debt-fuelled ideas straight out “Modern Monetary Theory” (Sanders & Warren) - as that defers the problem of repayment neatly to the next generation. Notice how well the Greens have done over the last two years in all Nordic elections, as well as in the recent UK local and/or EU elections. Or check out the upcoming Danish election on June 5th – where we are sure the Social Democrats, having toughened up on immigration (“country first”) and the Greens will do quite well. Bottom-Line: the magic mix is being “country first” + “economically left” and everything we have seen this month confirms it.   V. BREXIT.  So far pretty much fully in line with our expectations as written last month. Our current guess is for Boris to become Prime Minister, unless some story from his rather colourful personal past catches up with him. In that case our money is on Gove. In any case – it will most likely be a Brexiteer. And it feels like the leadership race could be decided faster than many think, i.e. by June EOM it could all be done and dusted. Then the Tory party will hope to find an acceptable solution to the Irish backstop. In principle we don’t see why that shouldn’t be achievable – it just requires some goodwill, imagination and legal gymnastics … although we acknowledge that the first two are in short supply at the moment. If there is no progress, then we think passing the Withdrawal Agreement through parliament will remain a challenge … and our only big view change from last month is that we now consider a second referendum much more likely than a General Election. On the former the Tories are likely to win, on the latter the Tories (especially without having delivered Brexit) would get trashed. So a PM Johnson would call for a second vote, if he doesn't manage to push a new Withdrawal Bill through and doesn't manage to get Parliament behind backing 'No Deal' (which is unlikely). Notice also that the Tories are suffering from the success of the Brexit Party, set-up only 12 weeks before the EU election. To put Farage's remarkable achievement in perspective: since February all the speculation was about the potential of the Remain-focused “The Independent Group/Change UK” (TIG/CHUK) movement … which got zero seats, while Farage won. Granted, the Liberals and Greens did very well as well – but their party is not 12 weeks old.  Bottom line: take a chill-pill, wait-and-see – the interesting thing about any Tory leadership elections is that the favourite usually never wins. The Tory party is the oldest party in the world for a reason: very strong survival instinct. So sit-back and enjoy the show ... until the leadership fog clears. Source: MacroEagle   VI. TRADE/TECH WAR. Donald’s tariff increase on China (May 10th), the subsequent Huawei related sanctions (May 15th) and certainly the Mexico-tariffs (May 31st) have caught many by surprise. We worry that the market may now be hoping for the G20 meeting in Osaka on June 28th-29th to deliver a repeat of the truce struck at the Buenos Aires G20 in November last year (also after a similar market sell-off in October). The problem is obviously that Trump likes to keep his audience entertained and that means: “SURPRISES!” which for us means “volatility”. What becomes really interesting now is the Chinese response, which so far has been un-characteristically restrained. The “war” would truly escalate not with China imposing “counter-tariffs” but with targeted measures such as (1) weakening the RMB beyond 7.00, (2) targeting US firms at international level – for example by delaying M&A approvals, tightening regulatory approvals and inspections, (3) stoking “consumer boycotts” – such as those unleashed against Japan (Senkaku-dispute, 2012) or Korea (THAAD-dispute 2017/18). Our view is that China will continue to show restraint to get through this 30th Tiananmen anniversary (June 4th) and the 70th anniversary of the PRC in October … but it obviously all depends on how far Trump pushes them. Two changes of view from our side with respect to last month: (1) We don’t think anymore that Trump will unleash car tariffs on the Europeans in the foreseeable future, so that’s marginal positive for Germany. (2) We do think that there is increasing likelihood that Trade War becomes Tech War – since Trump would probably love to see Apple et al relocate their production chain to the US, which means you better cover that Tech-Long.   USA 2020. Looking at the odds of UK bookmakers, the Top 4 Democratic contenders (Biden 3:1, Sanders 6:1, Harris 6:1, Buttigieg 7:1) are starting to detach themselves from the rest, with only Warren (13:1) still in the running and possibly making this a “Favourite Five” rather than a “Favourite Four”. Given Biden’s non-zero chances to stumble, the odds of Kamala Harris do not look that bad, although we consider her far too cautious (she is always keen to “contemplate things further”) to have a chance to win against Trump. In the meantime, Pelosi will keep “impeachment” off the agenda, although Mueller has recently complicated that agenda somewhat. Expect more noise from DC – but all focus for June will probably be on foreign policy and the G20 in Osaka as mentioned above.      VII. OTHERWISE WORTH KEEPING AN EYE ON...CHINA - Ironic that in the “Year of the Pig”, African Swine Fever is literally ravaging Chinese pig farms. Prices are already up 40% and expect CPI to feel some of that action. Since US suppliers are under tariff disadvantage, we would think that European and Latam producers are well positioned to supply Chinese demand and hence worth a closer look. (2) India  - Modi pulled out an historic successive electoral majority, last performed by Indira Gandhi in 1971. Worth watching what his priorities are now – and a possible long-carry position given the broad EM sell-off.   VIII. TRADES WE LIKE. As mentioned last month, we are pretty much tactically flat and intend to stay so unless there is some overwhelmingly positive news from the G20 in Osaka. Unlike last month, we have also cashed in on most of our draw-down protection positions, as implied volatilities have spiked pretty much everywhere. Staying away from adding protection until we see vol levels come lower again (which they will – they always do). As for the strategic tilt: (1) adding to US inflation break-even payers, great entry levels, on tariff pass-through and Fed inflation target review; (2) long South-East Asia on Tech supply chain relocation out of China; (3) the rally in government bonds somewhat contrasts with the lack in US fiscal discipline and the noticeable rise of MMT-adherents, which makes us want to take the contrarian stance and pay - but not yet ... let the knife first fall. (4) Although we are not fans of current vol levels across asset – we do think that medium-term EURUSD vol (5-handle) is an attractive entry point for directional plays – especially if you need to protect your portfolio against USD strength. Worth considering - given that it is about the last major vol market left that hasn’t spiked higher (see table below). Source: MacroEagle   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 please contact Alexandros Kyparissis under email: [email protected] and Tel.: +447843144007. For further information around our research and advisory services please contact Oliver Fochler under Tel.: +447922436360 and email: [email protected]. 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.   Bobby Vedral MacroEagle E : [email protected] M : +447899996595 Bobby is a macro-political analyst who runs his own fund MacroEagle. He is also the UK representative of the German Economic Council (Wirtschaftsrat Deutschland) focused on the German-British relationship post-Brexit. Bobby left Goldman Sachs in March 2018, where he was a Partner and Global Head of Market Strats. His previous responsibilities included Systematic Trading Strategies, eProduct and FX/EM Structuring. 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