The deflation and growth scares morphed into a vicious cycle last week. Multiple trading anomalies were observed, especially on Monday, suggesting that systematic and algorithmic trading amplified the sell-off.
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The deflation and growth scares morphed into a vicious cycle last week. Multiple trading anomalies were observed, especially on Monday, suggesting that systematic and algorithmic trading amplified the sell-off.
The bottoming process has already begun, but the sentiment remains febrile. On the one hand, the apparent disconnection of this sell-off with macro data is opening bargain opportunities. On the other hand investors are pondering whether a more fundamental change is being priced in, which would suggest a more bearish phase for risky assets.
Current concerns include:
- The true magnitude of the Chinese slowdown
- The risk of an FX crisis in some of the weakest EM countries
- The actual resilience of global growth to another round of deflationary pressures
- The uncertainty around the Fed’s normalization (the plunge in EM assets and commodities follows the April rout for sovereign bonds)
- Monetary policies' ability to deal with any of these potential shocks.
Over the week, global equities plunged by 9 per cent, the USD trade weighted dropped by more than 2.5 per cent, energy spots plunged by another 10 per cent and base metals lost 4 per cent.
The Lyxor Hedge Fund Index was down 3.5 per cent over the same period. Event Driven funds were the main losers. There was high dispersion in managers’ return, with losses in some heavy-weight funds. Overall, CTAs and Fixed Income Arbitrage funds proved to be reasonably resilient. A milder pressure on credit and govies supported credit strategies. The losses in the L/S Equity space were reasonable, with the notable exception of Asian and US long bias managers. A high dispersion was recorded among Global Macro funds.
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