Market stress materially rose this week. De-risking ahead of the British referendum accelerated as polls and bookmakers depicted an increasingly uncertain outcome....
The UK wildcard was not the only factor at play. The early-June US payroll numbers shook confidence that the Fed would be able to move before the summer. It was confirmed by this week’s FOMC, unequivocally dovish. Six members now envisage only one hike this year, and the median dots for 2017, 2018 and the terminal rate were revised down.
As the Fed fails to find a window to continue its normalization, doubts also grow deeper that the reflations in Japan (and in Europe to some extent) will produce any meaningful result, especially if they lose support from their currencies. As a result, Japanese and European markets reverted back near their February lows, JPY appreciated, government yields kept on heading south with the 10Y Bund steeping into negative territories, banks were sold out.
It strongly supported CTAs, clear winners in this risk-off phase. Merger funds, reasonably isolated, also outperformed. By contrast, Special Situation and L/S Equity long bias funds suffered. Macro players took a dent from an umpteenth shift in monetary stances.
We reiterate our CTAs slight O/W, as hedges in portfolios, and ahead of fresher trends after weeks of range trading in number of assets. Amid persisting macro uncertainties, we confirm our downgrade to Neutral for diversified macro funds. However, we keep our slight O/W on the ones focusing on FX & FI, and for the high frequency traders. We still favor Merger over Special Situation funds, better positioned at this stage of the cycle. Tight spreads and limited credit picking potential keep us neutral on Credit funds; we see better relative opportunities for global and multi-credit approaches, both in slight O/W.