CTAs Rally as the Greenback Loses Luster

Recently released economic data in the US was somewhat below expectations dashing expectations of an imminent Fed rate hike. The US dollar weakened during the period under review and this has supported CTAs while hurting Macro managers who are respectively short and long USD against major currencies.

Equities also contributed to the positive performance of CTAs last week, in particular the long US equities stance.

In our previous report we commented on the respective stance of Macro and CTA managers on the US currency and signaled we were more comfortable with the bearish USD stance of CTAs. We maintain that view, despite the latest comments from Boston Fed President Rosengren, signaling that “gradual tightening is likely to be appropriate”.

This comment from a voting FOMC member provoked some market turbulence at the end of last week, pushing bond yields higher while equities and commodities edged lower. The Fed willingness to test the market may provoke higher volatility across asset classes in the short term. But the Fed is data dependent.

This week we should have greater clarity on the strength of the US and global economy. Major economies will release industrial production data for August as well as consumer price numbers. The US consumer confidence survey by the University of Michigan will also be closely watched. We still think that the Fed is unlikely to hike at the September 21st FOMC meeting.

The returns of CTAs and Macro managers will thus be tied in the short term to macro developments, in particular in the US. Beyond these two strategies, Event Driven and L/S Equity strategies experienced positive developments last week. Both were up, 0.2% and 0.4% respectively, extending the positive returns achieved in Q3 to date (3.4% and 2.2% respectively). On the Event Driven side, investments in healthcare, communications, financials and technology were particularly profitable.

Two deals in merger arbitrage books contributed significantly: Softbank completed its $30bn acquisition of ARM Holdings and Johnson Controls completed its merger with Tyco International.

Finally, on the L/S Equity side, long positions on consumer cyclical and financial stocks were the main contributors.