Alternative Markets Update Q1 2019 - Macro And Political Outlook April 2019

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RESEARCH PERSPECTIVE VOL.105 APRIL 2019 Alternative Markets Update 1Q2019 After a rather disappointing last year, hedge funds bounced back and are enjoying their strongest quarter since 2006 according to data from HFR, with macro and CTA strategies leading the race so far with gains driven from their fixed income exposure. Private equity is also enjoying a good first quarter with growth equity strategies raising almost $25bn and the number of deals has also increased compared to the last months of last year. Private debt fundraising on the other hand has slowed down, with larger firms claiming the largest part of the pie and creating a rather concentrated industry with high level of dry powder and uncertainty due to geopolitical reasons.  Bitcoin and Ethereum enjoyed a strong rally during the first quarter of 2019, surpassing $5,000 and $160 respectively.   Macro and Political Outlook April 2019 MacroEagle 1. The Plunge-Protection-Team (Powell-Fed, China-Stimulus and Trade-Truce-Trump) has done its job and we do respect momentum when we see it. Especially when combined with lack of euphoria and not much evidence of FOMO. The numbers speak for themselves: S&P500 with best start to the year since 1998 (best 3-months since Sep 2009); Nasdaq with best 3-months since March 2012; Chinese equities with best quarter since 2014; oil with best quarter in a decade. And even global bonds made money (yields lower) although for the wrong reason: weak data! Which brings us to the problem of having to ask ourselves … Source:MacroEagle   2. HOW CLOSE IS THE NEXT US-RECESSION? The inversion of the US yield curve (US 10s3s) has spread worries for obvious reasons: it last happened in 2007 (before the Great Financial Crisis) and has predicted every US recession since the 1950s. The reasons we are not worried yet: (1) a recession usually starts 6-18 months after an inversion is spotted, which would make it fall bang on Trump’s re-election bid in 2020, and he is most likely going to do something about that (see below). (2) of the traditional “bear market indicators” only one is flashing red (valuation), two are “on watch” (economic data, yield curve) and two are still “green” (unemployment and inflation). (3) Equities typically rally when the Fed tightening cycle ends. (4) China is in stimulus-mode. Bottom Line: We remain long risk, looking for implementations that protect my downside, watching data (especially NFP and CPI/PCE) and not relaxed.  3. WHAT ABOUT THE MONTH AHEAD? Almost no monetary policy meetings (except for the BOJ), but heavy on elections (Ukraine, Israel, Indonesia, India, Spain). The Brexit Drama will certainly keep us entertained, while Easter Holidays is one of those weeks when Head Traders will want to take off, which could affect liquidity. Towards the end of the month we run into key US GDP Q1 data (April 26th) and FOMC (May 1st). Source:MacroEagle 4. IS BREXIT GOING TO HAPPEN? Yes – We still think the UK will leave. Polls show that while 80% of Brits think the negotiations are going “bad or very bad”, only 55% would vote Remain if asked again (which is the same the polls predicted the night before the 1stReferendum – and we know how that ended). That is way too close and makes revocation of Article 50 or a 2nd Referendum a political Molotov. Bottom Line : We continue to believe a deal will be done. Hence we are long GBP, but with downside protection as the "default option" is still a "No Deal" and we could "sleepwalk" into it if nobody blinks. 5. WILL THE UK PARTICIPATE IN THE EU ELECTION? We don't think it would be welcome in the UK, where the EU’s proportional representation system gave rise & funds to UKIP (which the British First-Past-The-Post wouldn’t have allowed ... and that UKIP EU election win in 2014 is what led Cameron to call the Referendum in the first place). It is likely that the EU election would strengthen both UKIP and TIGers at the cost of Tories and Labour. Also from an EU perspective, with the “centre-parties” (EPP, S&D, ALDE) in the EU struggling to keep their majority and talk of the EU-sceptic blocks (ENF/RN, EFDD/AfD, ECR) uniting – We can’t see Brussel keen on having the UK participate if it is likely to re-enforce “the wings”. Which brings us to the question … Source:MacroEagle   6. HOW IS THE EU DOING? The Brexit-Drama sometimes gives the impression it is all well on the other side of the Channel. Not quite. Just looking at the 7 most populous countries: (1) German growth is slowing fast and potentially facing car tariffs; (2) France is still dealing with the gilet jaunes; (3) Italy is bend on annoying the former two – see latest endorsement of China’s Belt & Road Initiative; (4) Spain might see VOX in government after this month’s election; (5) Poland is fighting Brussels over the rule of law, (6) Romania is fighting Brussel over corruption; (7) Holland just held provincial elections and was stunned by the victory of a new right-wing populist party (Thierry Baudet’s ‘Forum for Democracy’). And that is just the top seven. Which brings me to the point I have made for a while: Brexit is a symptom, not a cause. If the EU does not start reforming fast – the structure might come down ‘first slowly, then suddenly’. That makes the EU election (May) and the next EU leadership post Juncker/Tusk/Draghi (all out by October) so critical to watch and understand. Until then, I'm light on Europe.  7. TRUMPLAND. Great month for the Donald: (1) the Mueller Report wasn’t the “Gottesdämmerung” many had craved for. Apart from being bad news for most Democrats, this (again) is going to damage the credibility of the ‘intelligence community’ which had been feeding journalists for the past 2 years with talk of evidence of collusion. (2) Similar to UK's Labour, the Democrats seem to have an anti-Semitic problem (Omar’s “Benjamins”), which Trump didn’t miss to exploit - recognizing the Golan Heights and hence making himself the most pro-Israel US president ever. (3) Lastly, the noisy rise of AOC allows him to brand all as “socialists” - which in the US is not a term of endearment. So yes, this was a good month for Trump. Also, compare this to the troubles Macron/Trudeau are having and it is all quite remarkable. Three things to watch from here regarding the White House: (1) We don’t understand why Trump/DoJ last week suddenly decided to attack Obamacare, when the mid-terms showed that healthcare is a clear election winner. (2) On the trade front – the next important date is May 18th, by which time Trump will have to have decided what to do about European Car Tariffs. We think the EU and especially Germany (huge trade surplus, no defence spending, Russia gas pipeline) will feel the pain (in fact – it already does: see their latest manufacturing PMI – now close to 2012 through and triggering a global bond rally). (3) Trump’s biggest problem is the timing of the next recession (as mentioned above) – which more likely than not will fall bang on his re-election bid in 2020. Which probably explains why he wants to place Stephen Moore at the Fed. Would also not be surprised if we see some infrastructure spending (which the Dems will agree to) to support the economy into November next year.  8. ELECTIONS. Three stand out in April: Ukraine, Israel and Spain. In Ukraine we have a Comedian (Volodymyr Kolomoisky) leading in the polls with a party (“Servant of the People”) that has the same name as his TV show – supposedly on an anti-corruption mission (although supported by an oligarch). Very much shows that what worked for Trump (and others) still works: media-savvy, outsider, no political experience and pledging to be anti-establishment/-corruption. It is a truly global trend (professional politicians beware). In ISRAEL Bibi Netanyahu has been championing anti-establishment and muscular nationalism long before others imitated him, so it will be interesting to see if “Bennyhuta” Gantz (former Chief of Staff and known for his luck) will be able to beat him. As for SPAIN, should the centre-right win, the PP-Ciudadanos-VOX coalition will create a very interesting precedent for Europe. 9. TRADES WE LIKE (which might or not be in our Theoretical Portfolio - and certainly are not a recommendation). Overall, we are staying net long risk (especially China related). The long Japanese Yen position is new (as other G10 bonds turn negative – repatriation becomes attractive). New as well is the long Russian Ruble/short Colombian Peso position (Venezuela implosion risks spilling-over into Colombia, which YTD happens to be 2nd best equity market in the world and 3rd best currency performance … shorting COP vs. RUB makes it carry positive and “oil neutral”). Quick overview of where we stand: 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. In his external functions he was Member of the ECB's FX Consulting Group. Before Goldman Sachs, Bobby worked at Deutsche Bank and UniCredit/HVB. 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