Commodity Focus Q1 2017 Commentary
|Quarterly Return:||-21.3% (net of service fee but gross of any applicable performance fee)|
|Q1 2017 daily return volatility:||1.55%|
|Average Trades per week:||11 (since inception)|
The final quarter of 2016 (Q4 2016) and the first quarter of 2017 (Q1 2017) saw the greatest sequential reversal of ETF flows in history. Over $11.5bn left the commodity markets in Q4 2016, and almost $8.5bn flowed back in Q1 2017 resulting in a $20bn reversal.
Initially, this seemed counter-intuitive when put into the context of the on/off ‘reflation trade’, which was ‘on’ during Q4 2016 and then ‘off’ during Q1 2017. The USA, Japanese & German economies grew in 2016 and then ran out of steam in Q1 2017. Those economies’ bond markets responded to these changing inflationary expectations with breakeven rates declining throughout the Q1 2017.
It is difficult to tell whether the commodity flows were in anticipation to, or in response to these changing reflation expectations. In any case, the result is that the diversified Bloomberg Commodity Index remained range bound throughout H2 2016 and Q1 2017.
The Commodity Focus trading strategy had a disappointing quarter. Performance has been a direct result of the range bound movement in commodities, as the trading strategy is most likely to perform positively in trending markets. Moreover, the model seeks to identify medium-term trends. Upon reflection, an example of this is during the bear market of 2014 & 2015 and also the bull market during the first half of 2016, when performance was positive over both periods, but has struggled in the recent ranging market. A more anecdotal note is that financial & commodity markets seem to have displayed substantially more price static, or ‘white noise,’ than usual.
It is difficult to tell how long the existing range bound behavior will continue in commodity markets. In today’s conditions interpreting data including weather, politics & economics, which influence the agriculture, energy & metals commodity sectors, remains challenging.
Commodity markets have now had three consecutive range-bound quarters to digest. This movement follows a 23% rise in the first half of 2016 and a painful bear market before that, from the mid-2008 highs to Q1 2016 lows, during which the index lost 66% of its value.
The strategy manager’s view is that the commodity market is waiting for a catalyst to break the range bound movement, and that geopolitics could break the deadlock. Moreover, the Trump-lead USA has just taken the first step to reassert American global power, evidenced by the recent missile strikes in Syria and sending a warning signal to Syria, North Korea, Russia & China.