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ALTERNATIVE MARKETS UPDATE AUGUST 2020 - FED WANTS OPTIONALITY - AND THAT IS BULLISH FOR VOL

27/8/2020

 
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​Alternative Markets Update August 2020
Covid-19 has caused a tremendous impact on central banks and leading to steep sovereign debt increases in the whole world. Figure 1 shows the global sovereign debt to GDP. It is currently at the second highest level it has ever been only behind WW2. As the level of 89.5% shown in the graph is just as of Q1 2020, it is likely that the level will surpass its previous high during WW2, as the most severe impact has been during Q2 2020. Furthermore, central banks had to use huge fiscal support, as shown in Figure 2. The means necessary outclass every economic crisis by far, except for wars. The differences are especially shocking when comparing it with the Great Depression starting in 1929 and the Global Financial Crisis starting in 2007.
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Global Sovereign Debt/GDP Levels from 1851 to Q1 2020, Source: BofA Global Research, IIF, IMF and Maddisson Database, August 2020
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Fiscal Support of the FED from 1901 until now, Source: BofA Research Investment Committee, Global Financial Data, White House Budget, August 2020
Fed Wants Optionality - and that Is Bullish for Vol! by Aquila Markets
*Fed creates optionality around Yield Curve Control and its “now in doubt” September review – which by definition creates volatility
*We are watching with interest to see if USD higher / risk lower persists, but we do not think the “highs” are in
*We believe the market is yet to begin considering a potential sweep by the Dems – this is a core theme on the radar for the Autumn
Despite having been quite sanguine about the Fed, the golden rule of the Fed “creates” volatility worked once again. There is clearly pushback within the FOMC itself to Yield Curve Control, recognising the upside of entering into a policy that the market is defacto already following is limited. Instead, the Fed has created optionality for itself. Additionally, the market started to question whether the results of the Fed’s policy review would indeed be presented in September, where average inflation targeting – ie letting inflation run Hot – would be a core part.
The timing of such a big announcement is creating an issue for the Fed, given the election, the recovery and the situation with the virus. September we believe will be entering a period of max uncertainty on the those three issues, which makes commitment to long term plans hard to justify, and it may be the Fed it trying to – again – create optionality for itself by delaying until, let's say, December.
​But given the correlations we have been highlighting between rates, equities, commodities (Gold is correlating strongly with TLT, for instance) and realised volatility, any sense that rates COULD go higher caused the spill lower in stocks, especially given the horrendous breadth in US equity leadership, weakness in Asian stocks and a stalling in European markets.

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ALternative Market Outlook h2 2020

13/8/2020

 
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YTD Price Development in US Equities, US 10Y Yields, USD and Gold, Source: MacroEagle, August 2020
AUGUST PREVIEW. The most exciting week this month is clearly the first. We get to know Biden’s pick for VP (more below); I do expect the ECJ’s answer to the German Constitutional Court and we will see the next tranche of the US relief package agreed before Congress breaks for its summer recess. In the second week, as usual, we get a lot of economic and sentiment data – the rate of change being more important than the number itself. As for the last two weeks, the main calendar focus will be the virtual Central Bank symposium at Jackson Hole. Spoiler alert: August has a real bad reputation for nasty equity sell-offs. Increased US-China tension (on the back of the US presidential campaign) is probably my No1 pick for “possible trigger” (more below).
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Important Events in August 2020, Source: MacroEagle, August 2020

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alternative market update h1 2020

29/7/2020

 
The SMC equity strategy index is up 5.94% in 2020 and outperformed all of its benchmark indices by more than 5%. The credit strategies were suffering and just recovered from their level of end 2019. The SMC tactical trading strategy index did very well in this turbulent environment and is up more than 20% in 2020, whereas most benchmarks are between -4% and 3% except the HFR cryptocurrency index. Our fund of hedge fund strategies were struggling as well and are still down 0.41% for the year, despite their outperformance of benchmark indices. The SMC cross-asset and single manager indices are up more than 5% in 2020. The best performing individual strategy is Discretionary Global Macro, which is up approximately 40% in 2020, despite a loss almost 10% in June 2020. Similarly, the best performing equity strategy is Market Neutral Equity US Algo with a YTD of 27.89%. 
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Further equity strategies that performed very well are Long/Short US Equity Consumer, TMT, Healthcare with a YTD of 26.76% and Long/Short US Equities Disruptive Technologies with 25.90% return in 2020. Further details are found in the table below the summary of H1 2020.
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Table: Performance of Stone Mountain Capital Indices Compared with Benchmarks, Source: Stone Mountain Capital Research, July 2020
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Figure: Performance of Stone Mountain Capital Indices Compared with Benchmarks, Source: Stone Mountain Capital Research, July 2020

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Alternative Markets Update and Macro and Political Outlook July 2020

9/7/2020

 
HISTORIC FIRST HALF
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Short illustration below to remind you how exceptional these last six months have been. We went from economic optimism (“Phase One” US-China trade deal) to geopolitical dynamite (Soleimani assassination) to trade wars (Saudi-Russia oil price war) to the mother-of-all curved balls: COVID. The latter killing half-a-million people (and counting), plunging the world economy into recession and triggering changes in the geopolitical and economic landscape that will last for years to come. With regards to the latter I have written about these in past editions (the rise of “localism”, the danger of the “blame-game” and “resilience over efficiency”).
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Figure: Monthly Headlines During H1 2020, Source: Macro Eagle, July 2020
JULY AND SECOND HALF PREVIEW
Three things will probably dominate. First, today’s start of Germany’s EU presidency with the focus on EU budget (MFF), recovery fund, COVID preparedness, Green Deal, China and Brexit - in that order. 
Second, the US election – with Trump becoming more erratic as his chances vanish; Biden picking his running mate and China/BigTech becoming a bipartisan punchbag. Three, COVID news on the medical and economic front. Expect the US$600-unemployment-add-on (expiry: 31-July) to be extended, but at a lower rate. Looking into Year-End, my main worry is the September/October period, when (1) the US presidential race heats up and China/EU will know about it. (2) Government pandemic-support programs globally start to taper, leading to bankruptcies, downgrades and job losses. (3) The return of colder weather and a potential 2nd wave. (4) The traditional hurricane season – since Climate Change is still happening.
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Figure: Overview of Event During July 2020, Source: Macro Eagle, July 2020

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Alternative Markets Update, Macro And Political Outlook June 2020

14/6/2020

 
Alternative Markets Update June 2020
Last week, on the highs, saw first significant equity fund inflows since first week of April, as the “cash on the sidelines” gets dragged in. with USD 4 trillion in US money market funds along and underweight equity investors aplenty, there is plenty of reluctant buyers to be dragged in.
Interestingly, the rate of change of the Fed balance sheet has collapsed over the past weeks; with the sheet only increasing by USD 4bn last week. It has been a core view of ours, that President Trump will regard the equity market as his primary scorecard for his presidency. The concept of reclosing the country, or acknowledging the virus and its implications, is being left behind by the US Administration. They will do everything they can to get stocks higher, knowing that IF Trump is voted out in November, the legacy of a record stock market he will be able to show that he left “the greatest economy ever”. So we know that US policy makers have huge firepower at their disposal to drive equity prices higher. ​
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The charts below – the first shows the Fed’s balance sheet in blue plotted against the SP500  in red. The top slide shows the absolute size of the sheet, note the correlation with the SP500. The lower slide shows the week on week percentage change in the balance sheet. As can be clearly seen, the rate of change of sheet expansion has collapsed. We should never forget, that getting the US equity market, which will in turn drive all equity prices higher, is now the primary policy of the US Administration.
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Figure 1: Comparison of the Fed Balance Sheet with the S&P 500, Source: Fred, June 2020

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Alternative markets update may 2020

28/5/2020

 
Alternative Markets Update May 2020
​The current crisis caused a huge spike in uncertainty. Figure 1 shows the VIX closing price and the VIX futures as measures of volatility in the market. Prior to the crisis, the index remained stable between 10 and 25. After the initial outbreak in Italy and as it began to spread rapidly, it spiked to above 70, while the futures exceeded 80 at one point. Since the spike the index has steadily declined and is now back at 30, as the virus outbreak is mostly under control now, but there is still a substantial fear of a second wave that might hit, if no vaccine is found. The scenario that a vaccine is developed prior to the possible second wave is highly unlikely, as many from health care industry claim that a vaccine will be available earliest in the late autumn and even more claiming that there will be no vaccine until 2021. The second wave however is likely to appear in autumn or if reopening measures are executed too fast.
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Figure 1: Comparison of VIX Closing Price and VIX Futures Within the Last Year, Source: CBOE, May 2020
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As a consequence of volatility, the gold price rose substantially. The gold price continuously increased over the last year, as visible in Figure 2. It started with the trade war between the US and China, which drove gold prices up until the virus induced crisis started, at which point it accelerated its gains. After the virus had spread in many developed countries, an unprecedented day occurred, at which all assets fell, even though the reasons were different. For gold, it was due to the fear of not enough supply being available. After this fear had perished, gold started rising significantly again, especially as the Fed and other major central Banks started printing huge amounts of money, which raises the fear of inflation. As gold is an inflation hedge, it rose even further, leading to the projection of the Bank of America that gold’s target price is $3,000.
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Figure 2: Gold Performance Within the Last Year, Source: Barron's & Market Data Group, May 2020

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