Global Markets & Economic Data
-1.56% -0.26% -0.30% -2.30% -0.38%
16.28% 20.74% 27.91% 39.54% 7.53%
Market volatility has picked up over the past week. At this stage it's hard to say whether BTFD is going to work, as bitcoin (a proxy for speculation) is leading the risk-off price action.
- US: No economic data was released due to government shutdown. US bank quarterly earnings releases have featured increased concerns around credit exposures. Outside of financials, earnings reports are mostly upbeat; of the 51 S&P 500 companies that have reported, 82% beat forecasts, 16% missed and 2% were in-line.
- Europe/UK/Switzerland: EU Aug. Industrial Production fell 1.2% m/m and is up 1.1% y/y. The latest inflation readings are sub 2% y/y, below the ECB's target. 2025 GDP estimates are for 1% annual growth. UK unemployment moved up to 4.8% and average earnings are trending higher. Consumer spending is keeping m/m GDP estimates marginally positive. Swiss 2025 GDP is estimated to be 1.3%, US tariffs are estimated to cost 0.9% to Swiss GDP over the next two years. The SNB is expected to be on hold at 0% after cutting rates six times since 2024.
Japan & China: Japan Machinery Orders were down 0.9% m/m and recent industrial and service measures were softer than expected leading to the BoJ leaning to a more dovish stance. Chinese Sep. CPI was flat y/y while PPI is down 2.5% y/y. Forecasts are for Chinese Q4 GDP to hit 4.3% and 2025 growth to be 4.8%, below the BoC's 5% target.
- The bull case is that the AI revolution is just getting started and the massive capex cycle justifies the next leg higher for this YTD rally in large cap tech.
- The bear case is that an abundance of liquidity and positive sentiment are moving equity valuations into "bubble" territory, which is the typical historical pattern when investors get excited over technology breakthroughs.
- Interestingly, the US regional bank ETF KRE was trading in-line with QQQs through Liberation Day but lagged QQQs throughout the summer and is now sharply breaking lower.
- The VIX was quiet since Q2 with large-cap growth stocks grinding higher (represented by the QQQs) since April. Market volatility has picked up markedly lately as credit concerns and various other "bogeymen" begin to spook the market, which comes at a critical juncture when fresh positive catalysts are needed to attract ever more speculative capital to bid it equity market valuations higher.
Market Spotlight: A look at Hedge Fund positioning
- It is a good moment to check in on hedge fund positioning. � Total gross exposure is running at the 80-90th percentile on a rolling 3-5 year basis but is only in the 44th percentile on a rolling 12-month basis. � Fundamental Long/Short net exposure is slightly elevated at 56.1%, but gross exposure is running in the high 90s percentile, exposing de-
leveraging risks ahead if market volatility continues.
Market Spotlight: Quant equity performance issues
- A range of issues are causing quant Equity Long/Short performance to suffer in recent weeks. � We attribute a portion of the performance issues to come from the fact that the US government shutdown has caused many economic data based
signals to not be available, thereby serving as a catalyst to de-risk exposures, which in turn hurts ongoing returns. � Additionally, the outperformance of small cap and lower quality stocks over higher quality large cap names is most likely causing some difficulties. � Perhaps a higher volatility market regime could help to augment the opportunity set for short and mid-frequency flows based strategies that have
suffered for months in the low volatility environment.
Market Spotlight: Dangerous Instruments
- Market complacency and risks can be represented by the proliferation in engineered financial products sold to investors. Some examples of risky products currently in the marketplace are 3x levered ETFs as well as Korean "Auto callables".
- The 3x levered bull products in the market at the index or individual stock level are exacerbating daily price flows and apply further upward pressure on popular trending themes. On the flipside, we are seeing more 3x levered bear products find themselves in winddown territory as their NAV creeps ever closer to zero.
- One of our favorite ex-HF manager market commentators, Russell Clark flags the riskiness in Korean Auto Callables, which are essentially structured products selling volatility on global market indices and securities.
- As market volatility starts to wake up, there are greater market stability risks posed if/when price action causes hasty unwinds of some of these dangerous instruments.
Market Spotlight: Tight situation for government finances
- There has been a relentless bid for gold in recent weeks, that is somewhat coinciding with the US government shutdown. � Perhaps the buying reflects growing investor apprehension in the ability for politicians and government officials globally to manage their
economies in a way that adheres to prevailing economic principles. � The US has long benefitted from hosting the world reserve currency, allowing for money printing and generous fiscal spending to plug all gaps
in growth and output. If/when the US debt to GDP situation became untenable within a modern economic framework, there could be widespread implications on the current world economic order, forcing a revaluation of all financial instruments to reset balance sheets.
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