Global Markets & Economic Data
Risk enthusiasm remains ebullient despite various setbacks such as the US government indefinitely shutting down.
- US: Pre-govt. shutdown, regional Chicago Manufacturing PMI data was deep in contraction territory, but country-wide manufacturing PMI remains at expansion levels. ADP Sep Jobs numbers (covering the private sector) surprised to the downside at -32k, now falling 3 out of the last 4 months � the worst streak since 2020.
- Europe: UK Q2 GDP final is 0.3% q/q growth, slightly better than forecast � but slower than Q1's 0.7% rate. Aug. PMI data rose to 53 suggesting rising growth. Eurozone Sep inflation rose to 2.2% from 2% in August. Industrial sentiment data remained downbeat. The ECB is expected to be on hold at 2% until YE.
During the early fall period when seasonality is supposed to correct many of the summer technical imbalances, we are instead seeing vol crushing speculation run rampant.
Oracle's shocking AI announcement in early September has unleashed a torrent of speculative fever in the market. The combination of a hawkish Fed and ample liquidity have lit a spark in the more speculative corners of the US equity markets. The ARKK ETF does not even fully encapsulate the bid in the weakest companies that is taking place. Quantum computing, aviation innovators and any company that seemed to be on the precipice of valuation rationalization one month ago are starkly outperforming the general market in recent weeks.
The lack of a meaningful pullback in equities for multiple months has emboldened brazen investors to push for even greater upside in an equity market that seemed to have run its course amid multiple headwinds including a slowing US economy, ongoing geopolitical risks and greater turbulence on the domestic front. Not even the closure of the US government can stand in the way of the bulls.
- Asia: The Q3 BoJ Tankan Survey showed improved sentiment but also ongoing concerns on a shortage of labor and inflation. China's Sep NBI Manufacturing PMI data rose to 49.6, which was a slight improvement.
- None of the aforementioned concerns matter and this type of environment is one of the most dangerous for long/short hedge funds because derisking/hedging options are limited outside of de-grossing, which in itself technically pushes speculative trends in further.
Market Spotlight: Fixing the glitch
- Oracle's big news in September calmed AI Bubble fears, lighting up the next inflows into AI themes.
- AI Bubble google searches have collapsed since late August when a MIT study concluded that 95% of generative AI pilots at companies are failing.
- Upon further review of Oracle's new strategic initiatives in AI, there is growing concern by technology industry veterans that a circular vendor financing scheme is taking place at a massive scale. Schemes such as these prevailed during the dotcom boom in the late 1990s with telecom suppliers.
Market Spotlight: The dragon awakens
- The average Chinese Equity Long/Short fundamental fund is up over 20% YTD amid an over 40% return for the MSCI China index. � It turns out the Deep Seek moment in late January was a buying signal for global investors to overcome their Chinese great depression fears and
start participating the pent up upside in select Chinese equities. � Chinese equity managers themselves were among the greatest skeptics and Liberation Day's Chinese equity market weakness was a vindication
for PMs to err on the conservative side for Chinese equity risk levels. � Since April as global equities generally have performed, the Chinese domestic situation has shown signs of stabilization while the potential for the
Deep Seek moment in Chinese tech has unfolded. � Given the Chinese government and Chinese tech leaders have finally synced, this will be a powerful force that can serve to spur on greater
advancements in Chinese tech and corporate share prices over the medium-term.
Chinese EQ L/S HF YTD Performance
Market Spotlight: EU HF equity flows
- Enthusiasm around opportunities in Europe has become more nuanced than at the start of the year.
- Europe benefited in Q1 from ROW ex-US capital flows and investor anticipation of a long awaited valuation convergence in European listed public company shares versus US listed ones.
- After Liberation Day, as international investors hesitantly turned to undervalued U.S. opportunities, the outlook for a revaluation in European equities grew uncertain.
- HF managers have become less bullish on European equities, evidenced by the guarded net exposure of European Equity Long/Short hedge fund exposures.
- Now there is greater sector and individual stock differentiation on the long side while macro products hedging flows are trending higher.
- Healthcare and financials are the favored sectors over the past month while the weighting of consumer discretionary and industrials sectors is trending lower.
Market Spotlight: Roktoberfest!
- Germany recently formalized its ambitious future spending policies, leading analysts to take note of the magnitude and historical context of the spending.
- German reunification in the early 1990s sparked a decoupling of German interest rate policy from the US. The current German spending plans rival the spending levels from this period.
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