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What's behind the rally in Global Macro strategies

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According to our estimates, CTA and Global Macro strategies have extended their winning streak thus far into the month of July.

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What's behind the rally in Global Macro strategies

According to our estimates, CTA and Global Macro strategies have extended their winning streak thus far into the month of July. While we recently explored the reasons for the outperformance of CTAs (+9.3% year-to-date), the performance of Global Macro strategies is a bit more ambiguous due to the elevated dispersion between strategies. 
Global Macro strategies are up 5.3% year-to-date according to the Lyxor Global Macro Peer group, which pools together 40 UCITS funds. A significant part of this performance was delivered by Emerging Markets (EM) strategies (+6.9%), while Discretionary and Systematic strategies lagged (+4.6% and +3.5% respectively), in line with our expectations. Our stance on EM-Macro has been Overweight for several months, while we were more defensive on Discretionary (at Neutral) and Systematic strategies (at Underweight). 
The factors behind EM-Macro returns are quite immediate. We explain the bulk of their returns over the past 12 months with two variables: an EM currency index and an EM hard currency sovereign bond index. Concurrently, Discretionary manager returns during the same period can be partly explained by: i) curve flattening trades in the 2-10y segment in the US, ii) buying positions on both long-dated Treasuries (30 year) and EM assets (FX, bonds, equities), and iii) selling positions on FX carry. From there, explaining the returns of Systematic strategies becomes more complicated. We have only been able to explain 30% of their recent returns with five variables (all statistically significant): i) buying positions on global developed equities, ii) selling positions on the momentum equity risk factor, long-dated Treasuries and FX carry and, iii) positions that benefit from a tightening of EM sovereign spreads. 
Looking ahead, we upgrade our stance on Global Macro strategies from Underweight to Neutral. In particular, we upgrade Systematic Macro strategies to Neutral on the back of expectations that the Fed will manage to lift both growth expectations and long dated bond yields. We believe the Fed has both the room and the willingness to act. We push forward with our expectation of the first rate cut to be announced at the FOMC meeting at the end of July. Meanwhile, our stance on EM sovereign bonds stays constructive and we have upgraded US equities to Overweight. Our scenario assumes that the trade truce will be extended since the US administration is cornered by the presidential election next year. Trade uncertainty has caused a growth deceleration. Further escalation could dip the US economy into a recession.