Price action in Q1 has lead to complaints in financial markets. It’s always the same – there weren’t enough trends! I got topped and tailed! Where’s the theme? Why is there no conviction? One way to work out the degree of buy side angst is to look at whether it’s been profitable recently to buy out of the money options – ie – highly leveraged bets in favour of large price moves. Broadly speaking, when it has been, discretionary macro hedge funds (ie, punters) are happy – because at least some of them made good money, some will have taken a slice of the trend at some point, and even if they didn’t make much themselves, they know investors will be excited by the performance of the leading funds and more money can come their way. Q1 saw ranges mostly hold, and popular positions (short bonds, long $) stopped out.
I can understand this carping, but nevertheless it can be a little wearing! Just because the most vanilla, liquid FX pairs or government bonds or stock indices haven’t gone in a big straight line this quarter doesn’t mean it was impossible to make money. I didn’t recommend my full suite of ideas for 2017 here on the blog as they’re a bit distinctive and one shouldn’t mix day job with pleasure – but a good number worked. I’ve been fortunate as well in my PA trading to be long stocks and the Euro – as well as even more fortunately perhaps purchasing some cryptocurrencies that are doing their best to act like a breakout tech stock rather than a spooky alternative investment. Before the cynics of twitter jump down my throat and remind me I’m but a sell side spiv writing puff pieces online etc, just relax chaps. I’m being open and honest about my positions, successes and failures, and it’s all small beans anyway!
Anyhow. what to do as we move into Q2? Close on most people’s minds is the French elections. It would take exceptionally low turnout for there to be any realistic chance that LePen actually has a shot in the 2nd round, but she will probably get the largest vote share in the 1st round. US retail flows into European equities make me feel that this could result in quite a dramatic selloff in stocks – as investors who are *ahem* not used to dealing European stocks and may not be able to find France on a map decide that it may have been a bit rash to invest in a country where the principal opposition is promising to devalue the currency and default on debt. Sure, there are plenty of constitutional impediments to this, and smart people tell me that it won’t be that big of a deal if she wins, but I seriously doubt that many holders of equities and French bonds will figure that out on the day. I therefore join the crowd of macro funds salivating over the potential opportunity to load up on risk at the point of the election for my PA!
Some trades that I like before then are, broadly, to be short in European front end rates. Yes I know the data has become weaker and various speeches have confirmed that they’re going to be ponderous about removing low rates, but 2y1y OIS (EONIA) swaps are -14bp – so the market is pricing no exit from 0 rates for over 2y! I’d pay this here after the recent rally. The strength of UK fixed income this quarter makes me highly circumspect about the cross market trade that everyone likes to do of paying £ long end rates vs EUR – but I’m also happy to have a paid £5y2y position on the book. At that maturity, you roll relatively flat, and don’t really have to fight the LDI flow as much as if you pay in the long end – and with historically low entry, I would load small size and tough it out. On the 2y1y EONIA i would bet the farm. The ECB’s ability to whipsaw the markets based on communication via leak is legendary, but they’ve shot a lot of bullets trying to talk rates and the Euro lower- so I say take advantage of their largesse.
With two shorts in my imaginary book I need a long! My Q1 recommendations were all either fwd steeepeners or selling vol so I needed the same then and recommended going long UK ASW, which I lucked out on – I was just picking an ASW trade that’d benefit from excess liquidity in the system, or a sudden return to looser policy, and the UK having been smacked on ASW post brexit and being on historical lows looked the right answer. It’s done well so I’d take it off, and enter instead some conditional bullish steepeners on the US curve – buying receivers on the front part and selling them on long end. The inconsistency and hollowness of white house foreign policy is beginning to scare me a little. War is a massive curve steepener – you can’t put up front end rates but you sure as hell need to issue bonds to fund it. With the Fed no longer there to fund the US’s bond issues, the long end should be vulnerable while all the steepness currently residing in fronts and reds would come out. 1y2y 1y15y or similar did the trick for me in Q1 – so i’d re initiate here.
The macro investing community has had a rough time in Q1 – but it needn’t. The narratives of ECB tightening, Brexit, Trumpaggedon etc are all on the table for Q2 this year – and buying them cheap now whilst conviction is low seems the way forward to me!