CTA Multi Strategy – August 2018
This month investors were confronted with increased volatility in the currency markets . This was a result of a sudden devaluation of the Turkish Lira which fell over 15% against the majors. Consequently, investors with carry-trade positions were forced to unwind their interest seeking trades as risk too a battering. Our CTA multi strategy trading programs were fortunately able to capture this trend on the positive side. In hindsight though the impact from the devaluation of the Lira was a throw-back to the period of extreme currency market volatility. The events that happened two decades ago resonated just last month. Originating from the Russian Debt Crisis in 1998, market volatility spilled over to the Brazilian Real. As a result by 2002, the extreme market volatility in South America created panic for all emerging currencies. This ended with a massive devaluation from Argentina as the country defaulted.
The response from Turkish government policy was to stand against market pressures. Instead, the impact of the devaluation continued without the impositions of capital controls. Furthermore, government officials opposed the option to hike interest rates in the bid to stem the rate of the devaluating currency. Financial markets responded to this news out of Turkey with broad selling across global equities. The negative impact was greater in Europe due to the risk of contagion through the banking sectors. The good news was that CTA multi strategy programs were able to isolate this risk though.
Trade Protectionism on the Rise?
The ongoing market theme of global trade wars is nothing new to 2018. Since last year the US administration has made it clear on it views of global trade relations. In order to protect domestic jobs growth the US has imposed a number of tariffs on imported goods. What is clear is that China has been the main target. Canada and Europe however, have not been excluded from these tariff impositions. Combined these two trading blocks account for nearly a quarter of total US trade. In hindsight, have these policies improved the domestic economy of the US?
Looking at the US jobs employment report data from July this year, domestic hiring was buoyant. Furthermore, unemployment was only marginally above the recent 18 year lows. As a consequence the labour market is reflecting an economic trend that is growing at a steady pace. The greater impact of the protectionist policy can be see on Chinese equities. Across the largest global indices the Chinese stocks are performing the worst. Fresh rounds of tariff impositions will only add to trade concerns and potentially tighten monetary controls.