What has changed since the end-of-August market debacle?
Head of Research – Managed Account Platform
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What has changed since the end-of-August market debacle?
i) Developed markets' (DM) economic releases weakened somewhat, reflecting rising business risk aversion and the summer slowdown.
ii) Meanwhile, Chinese and EM data gave early signs of stabilisation (Chinese PMI and FX reserves stabilised, credit growth bottomed) which suggests a hard landing in China may be avoided.
iii) Uncertainty regarding the situations with Volkswagen, Glencore and the US healthcare remain, but worries about a large scale impact have eased.
iv) Finally, softer US data (payrolls in particular) and dovish FOMC minutes have contributed to a broad re-positioning with regards to the Fed's normalisation pace. The expected timing for the first rate hike was pushed back to Q1 2016.
While waiting for more solid evidence, lower risk premiums from China and the Fed have granted markets the benefit of the doubt. The rebound was driven by attractive technicals after re-test of August lows, by some reweighting from the under-exposed smart money, and by short covering.
Easing growth scare supported equities, metals and EM markets. The repricing of the Fed’s pace weighted on the USD while compressing HY spreads. However, investors' cautiousness remains palpable: the efficiency of QE and the next global growth drivers remains very much in question, with few answers so far…
Hedge funds returns were contrasted. The most directional strategies – Long bias L/S Equity, Event Driven and L/S Credit – staged a rebound from depressed valuations. CTAs and Global Macro gave back some of their recent gains. They were mainly hit by weaker USD crosses, while marginally losing on their long bond exposures. CTAs short-term models repositioned faster and outperformed their longterm peers. Market neutral funds suffered from the asset rotation, which violently reversed multiple momentum plays.
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