Strategy update – 6 January 2017
Asset Class Recap
Weekly recap The first week of 2017 started on the right foot. Reflation trades extended further thanks to a flurry of optimistic macro data prints. Dec PMIs (ISM and Markit) came above expectations in almost all geographies, highlighting a marked manufacturing recovery (seemingly in the wake of oil prices). The oil base effect was also clearly visible in the upswing of EMU CPI prints, which drove sovereign 10Y about 10bps higher in the region. On the other hand, UST 10Y yields tightened 10bps with the release of the Fed Dec minutes. FOMC members highlighted their uncertainty with regards to the appropriate rate path in light of the looming fiscal push. This pause in DM rates’ divergence strengthened the USD by roughly 1% against EUR and JPY. Through the week, all equity markets progressed: +0.9% in the US, +1.4% in EMU, +2% in Japan and +2.1% for EMs.
SCENARIO Asset Classes 05 Jan 17 S&P 500 2,269 Euro Stoxx 50 3,316 NIKKEI 225 19,521 MSCI World 1,384 MSCI EM 48,465 VIX 12 CRB 194 Oil Future (BRENT) 57 Gold 1,180 Fed Funds Target 0.75 ECB Refi rate 0.00 US 10Y yield 2.34 German 10Y yield 0.24 Japan 10Y yield 0.06 US IG (Spread & TR) 64 EU IG (Spread & TR) 69 Asia IG (A) (Spread & TR) 196 US HY (Spread & TR) 340 EU HY (Spread & TR) 286 Asia HY (B) (Spread & TR) US Lev Loans TR EUR/USD USD/JPY
1W 0.9% 1.4% 2.0% 1.2% 2.1% -12.7% 0.4% 1.3% 1.9% 0 0 -13 7 2 1.1% -0.3% 0.3% 0.9% 0.4%
Cross / 16-Dec
YTD
0.5% 1.3% 1.8% 0.8% 0.6% 2.1% 1.0% 1.5% 2.2% 1.7% -4.3% -16.9% 1.2% 0.6% 3.0% 0.1% 4.0% 2.4% 0 0 0 0 -25 -10 -7 4 -2 2 2.4% 0.9% 0.3% -0.2% 0.8% 0.3% 1.6% 0.9% 0.8% 0.4%
458
0.6%
0.8%
0.5%
1.06
0.2% 1.2%
0.4% 1.4%
0.1% 0.8%
115.4
-0.9%
-2.1%
-1.3%
With the US earnings season and Trump’s inauguration looming large, another bout of fiscal optimism could lift US markets. The countdown to Donald Trump’s inauguration has only 2 weeks left. We believe that the fierce new Cabinet that should swiftly be put in place will work on a mighty first-100-day plan to be announced on Jan 20. The start of the earnings season next week could also provide positive surprises, in particular on bank stocks. We believe that market optimism could be boosted in Jan, before facts get checked later this year. We extend our long call on Reits and add one on US banks. Inflation set on upswing mode for a few more months: O/W on US and EMU breakevens we stay. This week recorded above consensus CPI prints in the Eurozone. Although we have long been expecting most of the momentum that is coming from the oil base effect (to spur headline CPI through March), markets are saluting the actual figures. With the US Dec CPI print due on Jan 18, we expect inflation expectations to be revised higher once again. US breakevens fare near 2%, and we think that they could drift progressively toward the higherend of their historical corridor at 2.5% thanks to wage dynamics and Trump policies. EMU seized in structural vs. political crosswinds, while some hurdles on banks are being lifted: we recommend tactical buy calls. Dec Markit PMIs were revised higher this week across the zone, leading the euro composite to a cyclical high (since 2011) at 54.4. The recent thread of above consensus macro data has led our tactical long call to perform, and we believe it has more potential until political stress come back into headlines. Another positive news came from the sine-die report of the Basel recommendations originally due next week. While recapitalization negotiations are underway, we reinstate our long call on EMU banks.
Lyxor Cross Asset Research | 1
Strategy update – 6 January 2017
Recommendations
Lyxor CAR Strategic Recommendations & Tactical Calls as of 06 January 2017 10:26 AM (CET) Strategic Recommendations Asset Class (local currency) Equities
Credit
FX
Commos
Inception Price
Last Price
3m Reco.
ITD TR (%)
Tactical Calls
1w TR (%) 12m Reco.
Call
Target
Stop Loss
Perf (%)
Dist. to Target (%)
Buy
560
520
0.0%
5.9%
S&P 500 (SPXT)
16-Dec-16
4,312
4,337
N
0.6%
1.4%
US Domestic vs Global (GSSBDOMS/GSSBGLBL)
16-Dec-16
15.2
15.19
sOW
0.0%
-0.3%
US Healthcare (SPTRHLTH)
16-Dec-16
1,169
1,187.47
sOW
1.6%
2.6%
US Banks (SPTR5BNK)
22-Dec-16
531.2
528.60
N
-0.5%
0.7%
sOW
US Banks (SPTR5BNK)
5-Jan-17
528.6
528.60
US REITS (RUUS)
16-Dec-16
6,351
6,605
N
4.0%
2.1%
sUW
US REITS (RUUS)
24-Nov-16
6,126
6,605
Buy
6,500
6,000
7.5%
US REITS (RUUS)
5-Jan-17
6,605
6,605
Buy
6,950
6,500
0.0%
5.2%
16-Dec-16
150.1
152.62
Euro STOXX (SXXE)
9-Dec-16
341.8
353.03
Buy
360
330
3.3%
2.0%
EMU Banks (SX7GT)
16-Dec-16
67.6
68.83
EMU Banks (SX7E)
23-Dec-16
119.3
122.25
Buy
130
118
-0.9%
EMU Banks (SX7E)
5-Jan-17
122.2
122.25
Buy
130
120
0.0%
EMU Construction (SXOT)
16-Dec-16
731.8
742
sOW
1.4%
0.3%
sOW
Irish Equities (ISEQTR)
16-Dec-16
13,685
13,943
sOW
1.9%
1.5%
sOW
FTSE 100 (TUKXG)
16-Dec-16
5,715
5,866
sUW
2.6%
0.7%
sUW
NKY 225 (NKYTR)
16-Dec-16
29,583
29,706
N
0.4%
1.8%
N
NKY 225 (NKY)
14-Dec-16
19,254
19,454.33
Buy
20000
19000
-0.7%
MSCI EM (GDLEEGF)
16-Dec-16
100,816
103,354
sUW
2.5%
1.7%
sUW
UST 10Y TR (USG4TR)
16-Dec-16
437.8
447.11
sUW
2.1%
0.8%
sUW
US Breakevens 10Y TR (IBXXUBF1 Index)
16-Dec-16
88.8
89.47
sOW
0.7%
0.1%
sOW
EMU aggregate Govies 7-10Y TR (EUG4TR)
16-Dec-16
254.9
254.67
N
-0.1%
-0.7%
N
EMU Breakevens 2-10Y TR - FR/GER basket (IBXXEBF1 Index)
16-Dec-16
93.7
94.25
sOW
0.6%
0.3%
sOW
UK Gilts 10Y TR (UKG4TR)
16-Dec-16
630.7
637.76
N
1.1%
-0.4%
N
Japan JGBs 10Y TR (JNG4TR)
16-Dec-16
271.8
272.70
N
0.3%
-0.1%
N
EM Govies, hard currency (JPGCSOTR)
16-Dec-16
237.3
243.31
N
2.5%
1.4%
N
US IG (IBOXIG)
16-Dec-16
259.4
265.70
N
2.4%
0.9%
sUW
US HY (IBOXHY)
16-Dec-16
251.3
255.37
N
1.6%
0.9%
sUW
EMU IG (IB8A)
16-Dec-16
216.2
216.93
N
0.3%
-0.2%
N
EMU HY (IBOXXMJA)
16-Dec-16
182.9
184.30
sOW
0.8%
0.4%
sOW
EU Cocos (IBXXC2CO)
16-Dec-16
119.4
121.12
sOW
1.4%
0.5%
sOW
USDJPY
16-Dec-16
117.9
116.12
N
-1.5%
-0.7%
sOW
EURUSD
16-Dec-16
1.05
1.06
N
1.3%
0.7%
sUW
GBPUSD
16-Dec-16
1.25
1.24
N
-0.9%
0.4%
N
Brent Crude (CO1)
16-Dec-16
55.2
56.91
N
3.1%
0.2%
N
Euro STOXX (SXXGT)
Fixed Income
Inception Date Close Date
4-Jan-17
28-Dec-16
30-Dec-16
N
N
1.7%
0.8%
sOW
N
1.9%
3.9%
N
6.3%
Lyxor Cross Asset Research | 2
Strategy update – 6 January 2017 PERFORMANCE (%)
MSCI World (USD) MSCI EM (USD) Glob Sov Bond Index Eurekahedge HFI HFRX Global Hedge Lyxor Hedge Fund
03 Jan 17 1,758 868 112
1W -0.1% 2.8% -0.1%
Cross / 20-Dec -0.2% 2.0% 0.0%
1M 0.4% 0.7% -0.4%
7.8% 13.0% 0.4% 4.4% 3.2% 0.0%
Strategy L/S Equity Long Bias US
N
OW
L/S Equity Variable US EU JP EM
1.0% 0.0% 0.1%
1.0% 0.1% 0.3%
1,363 1,028 1,289 995 1,041 965 920 1,383 977 916
-0.9% -0.2% -0.2% -0.3% 0.5% 0.8% 0.3% 0.0% -0.3% 0.0%
-1.1% -0.2% 0.4% 0.1% 1.3% 1.0% 0.2% 0.2% -0.6% -0.2%
Repli CS Long/Short
1,463
-0.5%
-0.3%
0.0%
0.3%
Repli CS Event Driven Repli CS Merger Arb
1,423 1,108
0.0% 0.3%
0.2% 0.4%
0.2% 0.1%
9.8% -0.3%
CTA Short Term
Repli CS Global Macro
1,122
-0.2%
-0.2%
0.4%
5.1%
CTA Long Term
0.6% -5.7% -0.2% -4.3% 0.0% 2.8% 0.2% 1.4% -0.2% -2.5% 0.7% 2.3% 0.0% 5.6% 0.1% 5.6% -0.3% -10.1% -0.2% -6.9%
UW
EU JP EM
423 1,205 1,030
CTA Long Term CTA Short Term ED - Merger Arbitrage ED - Special Situations Fixed Income Arb Global Macro L/S Credit Arb L/S Equity Long L/S Equity Neutral L/S Equity Variable
0.0% 0.2% 0.2%
YTD / 31-Dec
Hedge Fund Recap
L/S Equity Neutral US EU JP EM
Merger Arbitrage Special Situations Distressed L/S Credit US EU EM Structured
FI Arbitrage Global Macro Diversified Sov FI / FX Bias EM focus Quant / Trading
SCENARIO Alternative Strategies An uneventful week for hedge funds. The reflation trade tempered at the end of the year, but investors weren't ready to give it up, ahead of the earning season starting mid-January and the Trump investiture. Amid reduced year-end trading volumes, most Lyxor indices were about flat. CTAs and Global Macro stood out, still in symmetry: they are positioned at odds on most equity and bond markets. The former lost on declining US yields and equities, the latter gained on lower US yields and rising Euro yields. We are not altering our current top down positioning CTAs' fate depends on the pace of the regime shift, which could offer firmer trends. The recent pause reduced the risk for abrupt reversals. Thematically, they are now implicitly "long Trump and Fed, hedged by short global Inflation". We are sO/W LT models. Global Macro should benefit from increased fundamental pricing and asset dispersion as Fed normalizes its policy and as Trump starts deploying its program. Elevated political uncertainty will remain a challenge which should increase funds returns differentiation. Event driven funds should benefit from heating up corporate activity. In the L/S Equity, we favor approaches based on fundamental analysis in the US, where the regime shift is more advanced. This would be at the expense of Neutral funds in Japan and Europe, still under QE constraint and political uncertainty. Lyxor Cross Asset Research | 4
Strategy update – 6 January 2017
Jan 4: Fed minutes
Jan 6: US NF Payrolls
Jan 8: Basel meeting postponed (March?)
Jan 12: Start of US earnings season
Jan 18: US Dec CPI
Jan 20: Trump’s inauguration
Jan 28: Chinese New Year
Jan 29: US Q4 GDP
Jan ?: UK Supreme court on Article 50
March 15 2017: Dutch elections
Spring 2017: French elections
Fall 2017: German elections
2018: Italian scheduled elections
2020: UK scheduled elections
Calendar & Economic surprises
Lyxor Cross Asset Research | 5
Strategy update – 6 January 2017 Cabinet Vice President Mike Pence State Rex Tillerson Treasury Steven Mnuchin Defense James Mattis Justice Jeff Sessions Interior Ryan Zinke Agriculture Commerce Wilbur Ross Labor Andrew Puzder Health Tom Price Housing Ben Carson Transportation Elaine Chao Energy Rick Perry Education Betsy DeVos Veterans Homeland John Kelly Cabinet-level Officials UN ambassador Nikki Halley Environment (EPA) Scott Pruitt Trade Representative Robert Lighthizer Budget (OMB) MickMulvaney Head of CEA Small Business Admin Linda McMahon & SEC Walter Jay Clayton Executive office of the President WH Chief of Staff Reince Priebus Counselor Steve Bannon Counselor Kellyanne Conway National Security MichaelFlynn Deputy Nat. Security K.T. McFarland Domestic Policy Nat Econ Council Gary Cohn Homeland Security Tom Bossert Press Sec. / Comm. Dir Sean Spicer WH Public Engagement WH Office Dir. WH Counsel Don McGahn Drug Control Science & Technology Trade Council Peter Navarro Regulation Advisor Carl Icahn
Trump’s Fierce Entourage post Jan 20 inauguration
Governor of IN CEO of ExxonMobil CEO of Dune Capital, former GS partner Retired General of the Marine Corps Senator of AL Representative of MT, former Navy Seal Invesco billionaire CEO of CKE Restaurants Representative of GA, orthopedic surgeon Former director of Pediatric Neurosurgery at JH Former (GW Bush's) Labor secretary Former Governor of Texas Former chair of MI Republican party
Vast IN tax cuts & infrastructure spendings Free trade defense Focused on Iran threat Pro Civil forfeiture & torture
Pro lower minimum wages Former US persident candidate Taiwanese-American Board member of Energy Transfer Partners
Retired General of the Marine Corps Governor of South Carolina Attorney General of OK Former (Reagan's) deputy trade representative Representative of SC
"Climate change denier" (NYT) Accused China to "rig trade" and US to be "passive"
Former World Wrestling CEO Sullivan & Cromwell lawyer
< Strong connection with GS (wife, S&W 100Y ties)
Chair of the RNC Media executive CEO of the Polling Company Former director of the DIA Fox News National Security Analyst
< Former GS. Breitbart News (KKK links) funder
President and COO of GS Deputy Homeland security advisor to GW Bush Communications director of the RNC