Were US Markets to Sneeze…
Signs of economic growth, steady US yields and a calm dollar greenlit a rebound in global risk assets after last week’s declines. Less noise about the controversial Trump’s ties to Russia and a relatively innocuous Fed statement helped US equities to recover. While the minutes reinforced expectations for a fully-priced June rate hike, they didn’t change investors’ prospects for at most two hikes in 2017. It supported dollar assets, including EM markets and non-energy commodities. Meanwhile, Eurozone assets had to contend with the firmer euro as economic growth in the region gained traction. Besides, investors took profits on OPEC’s decision to extend its production cuts by 9-months, with potential price gains already priced in.
Macro players took another beating this week for distinct reasons. Main CTAs’ losses were in short energy, long BRL positions, and in long equity futures. The bulk of Global Macro funds’ losses came from long US and for some in long European bonds. By contrast, most Micro equity and credit players proved more resilient. Among them Market Neutral funds were an exception. More concentrated, longer time horizon, and value focused quants recently underperformed. Losses are slow moving and managers do not see any signs of systemic deleveraging.Stable economic trends, Fed caution and more reasonable reflation expectations suggest that a major equity downfall could be avoided. Yet, rich US equities seem vulnerable to a correction. An unsustainable divergence between equities, rates and the dollar reflects recent mixed data. Meanwhile, buying pressure is on the wane, away from Tech where the momentum might be getting stretched. Past episodes of European economic catch-up have led to weaker correlations and better relative performance. However, when US stocks start falling, European stocks rarely outperform.
While the current backdrop remains overall supportive for equities, more cautious positioning seems reasonable.