Discretionary trading Q4 2018 commentary
|Instruments traded||FX spot and CFDs|
|Asset classes||FX, equity indices, commodities, government bonds|
|Investment style||Discretionary (non-systematic), volatility, opportunistic|
|Quarterly return||+23.1% (gross of fees but net of any trading costs)|
|Quarter daily return volatility||1.8%|
|Average trades per week||12.9 (since inception)|
It was an eventful quarter in the markets, with steep declines in equities (with a 20% intraday move of the SPX 500), the collapse of oil prices, a trend reversal in bonds and yet-muted currency movements.
Key drivers behind the equity market fall were overly optimistic expectations that could not prevail during earnings season, growing concerns about an economic slowdown centered around China, alleged lack of "Fed put" and a deteriorating outlook in a market structure that is driven by momentum and technicals.
There were arguably positive developments regarding USA-China trade negotiations and the potential end to Fed hikes, but these were overwhelmed by bearish momentum. The expectations of oil market shortages and Iranian sanctions were completely wrongfooted. The announcement of waivers to almost all Iranian supply resulted in the market finding itself extremely oversupplied and even worried about demand, amid a slowdown in Asia.
Such a big risk-averse move influenced bond prices, and participants are now reviewing if the rising yields trend has come to an end. Currencies, however, were rangebound and surprisingly calm, despite the looming Brexit negotiations which failed to incite big movement.
|Total return in 2018||88%|
Returns include transaction costs but are before the service and performance fees.
It was a good quarter, heavily driven by October’s returns and with a slightly negative return in December.
With the positive returns speaking for themselves, it is worth noting why December incurred a negative return. Amid the sharp decline of equities and significant daily volatility, the strategy manager decided to play equity markets in December from both sides: long and short. Volatility is generally a positive attribute for the strategy, but timing and execution is key, and costly if actioned incorrectly.
December was very unusual in that markets rarely (if ever) incur such big declines at yearend, when volatility usually declines with investors closing their positions. There was also a disparity between news flow and price reaction, reflecting the change of market structure whereby trading is more technical than fundamental. The fact that Brexit “crunch time” was postponed had a negative impact for GBP trading, which the strategy manager is following closely with an eye on big currency moves.
The strategy manager continues to expect a positive trading environment.
The big question for the quarter is how real is the economic slowdown, especially in China? There are also big developments on the horizon, including the resolution of USA-China trade negotiations, the reinstatement of "Fed put", the Brexit deadline and growing doubts about US economic management where tax cuts failed to exhibit multiplier effects leaving big budget deficits.
We look forward to providing further comments, next quarter.