Jean-Baptiste Berthon

Jean-Baptiste Berthon

Senior Strategist, Cross Asset Research

Lyxor Asset Management


Inflation Forces Turn Global Macro To The Bear Side

07 May 2018

Investment Partners

More of the same on markets, which remained hesitant. Investors are weighting the implications of a U.S. withdrawal from the Iran nuclear deal, to be announced in few days. Trade tensions also remained live amid negotiations between the U.S. and China in Beijing. One area of greater conviction was the dollar. Its drivers seem to be shifting: growth and inflation differentials now matter more than capital flows and national accounts prospects. Hedge funds indices were overall positive this week but most strategies negatively contributed. CTAs, which are short USD and long energy retraced, along with L/S Equity funds. By contrast, the sudden reversal in many M&A deal spreads contributed to boost Merger funds.

We focused on Macro funds this week. We have long argued that monetary normalization and late cycle features would result in greater economic volatility, more fundamental pricing, and asset returns dispersion. This should ultimately improve the macro traders' backdrop. Since February, macro assets have become more responsive to economic and monetary developments. Currencies are reconnecting with rate and breakeven differentials. Moreover, the market correction reset many extended trends in most segments. A large share of assets, now range-trading, seems ripe for a make-or-break directionality.

However, adverse factors continue to outweigh the above positives. Synchronized central banks keep on compressing relative opportunities. Flattish DM yield curves are capping arbitrage potential. Besides, the multiple on-going geopolitical wildcards keep managers’ focus on risk management.

Interestingly many managers are growing nervous about inflation. Some turned short equities, others strengthened their long bond positions. A majority now favors relative trades while some focus on idiosyncratic country developments. As a result, macro funds are now positively correlated to volatilities while displaying limited or negative correlations with other hedge fund strategies. Their environment might not be that appealing, yet, they bring diversification and protection.


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