Discretionary Trading Q1 2017 Commentary
|Instruments traded:||FX Spot and CFDs|
|Asset Classes:||FX, Equity Indices, Commodities, Government Bonds|
|Investment Style:||Discretionary (non-systematic), Volatility, Trends|
|Quarterly Return:||-10.07% (net of service fee but gross of any applicable performance fee)|
|Q1 2017 daily return volatility:||0.91%|
|Average Trades per week:||12.5 (since inception)|
Markets in the first quarter of 2017 incurred low short term volatility and generally lacked strong short term price trends that have historically benefited this strategy. Treasuries remained range-bound, in a tight 30 basis point range. Within currencies there was a USD correction, but for many USD crosses, movement was contained within a narrow range. Equities continued to enjoy a bullish environment albeit in a steady and controlled fashion. Moreover, we have now reached a record number of days without incurring a 1% daily move on the SPX index. Nasdaq on the other hand, accumulated meaningful performance. In the commodities space, oil and copper remained range bound, with only precious metals incurring decisive moves.
The biggest themes anticipated and positioned for in first quarter of 2017 include:
- An unwinding of the "Trump trade", anticipating stronger moves and a correction in the market post US presidential election. This was based on expectations of the Trump administration agenda hitting obstacles.
- A more hawkish US Fed, expecting more frequent interest rates hikes than in previous years.
Key positions taken to express these themes were unable to produce positive returns. The first was to short equity indices, anticipating a 5-10% correction after the gains realised since the election, but also after a year-long rally since February 2016. Such correction did not materialize as equities remained immune to these factors and were driven more by expectations for economic improvement, earnings and internal bull market dynamics. The most costly position of the quarter was to take a short stance against the Nasdaq, despite some of the loss being partially offset by long positions in European indices in a latter part of the quarter.
Elsewhere, the portfolio benefitted from gold price appreciation, with USD movement acting as a catalyst. This position was reversed with the expectation that the USD would strengthen on approach to the March US Fed meeting, in anticipation of a rate hike. This was expressed via a long EUR-USD position, but uncertainty about the ECB monetary policy countered any Fed impact, resulting in flat performance.
The Mexican peso was bought as a part of the unwinding “Trump trade" theme. Whilst this idea proved correct, entry was too early meaning early losses were incurred before the trade began to work.
In the Treasuries market the trading strategy was positioned for rising yields but a flat market meant flat performance for the quarter, in this space. A profitable strategy in oil and copper helped the otherwise negative performance this quarter.
More volatility in economic data, a possible change of ECB policy and upcoming political events both in Europe and the USA, may result in trending bond and currency markets. The strategy manager continues to expect a correction in equities market, which should create opportunities with greater short term volatility.
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