July saw further evidence of the diverging paths of the U.S. Fed versus other central banks and policymakers. The Fed released its semi-annual Monetary Policy Report, citing expectations of gradual acceleration of U.S. economic growth and decline in the U.S. unemployment rate – making the prospect of an interest rate hike by year-end even more likely. In contrast, other central banks signaled an opposite direction. The Bank of Canada, for example, announced its second rate cut in six months.
Investment managers faced difficulty across an array of markets, as many primary markets traded in sideways ranges, replete with overnight gaps and intra-day reversals. Most of this erratic action during the month was driven by the ups and downs of the Greek financial crisis. Finally, following three weeks of political turmoil, on July 12 European leaders agreed a broad set of conditions for a third bailout program that will lend the Greek Government up to €86 billion.
However, toward the end of the month the markets were overtaken by concerns over the true state of the Chinese economy. Moving into August (which we will cover in more depth in next month’s letter), these concerns were confirmed when, on August 10, the Chinese central bank cut its daily reference rate by 1.9 percent, triggering the yuan’s biggest one-day drop since China ended its dual-currency system in the early 1990s.
The market reaction that followed (and is still continuing as of this writing) was further ignited by depressed oil prices, which are being viewed as leading indicators of a recession. Together, these were a double whammy. At this time, the jury is still out as to whether equity markets – predominantly emerging markets- will continue to plummet or whether this a buying opportunity. Economists are reminding us that – at least in the developed economies - the fear of recession will be overcome by growth, as lower energy prices result in a benefits to consumers. However, they also caution that this growth effect will be felt in countries that are net commodity importers (developed countries) at the expense of commodity exporters (typically emerging markets).
As a final note, the current market uncertainty has presented the U.S. Fed with a dilemma. The Fed’s traditional knee jerk response to serve as a safe haven is now incompatible with its current plans to see interest rates higher. Which force will win out remains to be seen.
Global Macro: Macro managers overall appeared to generate positive returns in the month, with the outperformers being able to navigate the Greek crisis – and the choppy sideways markets that resulted - more adeptly. The common theme among many programs was playing the flattening of the US yield curve correctly, and being long the US dollar against commodity and emerging currencies. One of our top Hydra performers for the month was a global macro program, bringing in +6.71%.
Systematic Trend: Systematic trend managers came back to life in July, igniting a reversal in performance from the first half of the year. Despite the choppiness and thin volume presented by the Greek crisis and the U.S. national holiday, managers found lucrative trends in various sectors - primarily commodities. Energy was by far the biggest contributor with downside momentum rippling through the oil complex, hard hit as the price of WTI plunged early in the month and then slid lower, ending July down about 20%. Trend programs also benefited from negative price trends in base and precious metals as uncertainty about Chinese demand saw copper prices continue to slide.
Commodities Strategies: July was the seventh worst performing month in the history of the S&P GSCI going back to 1970. Every single one of the 24 commodities in the index was negative for the month except lean hogs. Throughout the history of the index, 23 commodities have been negative together only during a two-month stretch in September-October 2008. Several of our commodities-focused programs took advantage of this slide, with our best performer being a multi-commodities program finishing up +9.79%.
Currency Strategies: As with the global macro sector, the winning position for currency programs during the month was long USD against nearly any commodity or emerging currency. This has also made FX managers wary of any USD-pegged Asian cross rates, which are likely to follow the example of the Chinese yuan and depreciate – especially given the US Fed’s movement toward a rate hike. Hydra’s best performing FX program, up 0.61%, was a mixed fundamental-technical strategy focused on G10 currencies.
Short-Term / Higher Frequency: Shorter-term strategies also generated profits in July. Our own measure of this style class, the Hydra ST Traders Index, ended the month up +1.66% (estimate).
Jon is CEO of Kettera Strategies, the operator of Hydra — a platform registered with the U.S. Commodity Futures Trading Commission — that allows qualified investors access to easily invest in a carefully curated array of CTA, FX, and Macro strategies.
(This article was first published in August 28th 2015)
