CTA Signal Strategies – September 2017

Heading into the last quarter of 2017, climate matters created the greatest concern for economic turmoil. In the past month hurricanes battered the western hemisphere. These types of natural disasters will always impact the financial markets as regions and countries begin to rebuild their infrastructure. In order to provide the financial support to the US economy the Federal debt limit was raised, and funding was provided towards hurricane relief. According to the Congressional Budget Office an agreement to raising the US federal debt limit was crucial. Otherwise the Treasury would be forced to cut back on its discretionary spending. This could be as early as mid-October. Bearing in mind that the Treasury is already undertaking ‘extraordinary measures’ to maintain its funding capabilities. Consequently, for our trading signals we assess the market factor impacting our CTA signal strategies.

What Markets are Pricing-In

The yield policy rates in developed countries are generally exhibiting upward movements. The market implied view is pricing-in this trend on yields. This is a result of global production capacity diminishing that has a direct impact on inflationary pressure. Consequently, how the financial market begin to price-in the possible growth in yield will partially determine or moderate any recession risk in the near future. When assessing the global equities markets, the priced-in earnings growth has generally risen during the past year. This was a contributing factor that boosted earnings. Furthermore, this growth in earnings added to global equity valuations. Corporate earnings in the Eurozone are supported by a trend built on economic recovery. Combined with wage growth and improved profit margins, European equity markets look to fair better than US equities.

Capturing the Currency Momentum

Combining factors of low inflation with moderate growth and monetary easing benefited the financial markets in building momentum. Consequently, we have seen markets trend higher even in the case of the US equities that look over-stretched. A short burst in negative sentiment or news could result in a pull-back in US stocks. The CTA signal strategies have picked up on short to medium term market trends. In the currency markets the cycle in turning in favour for the common currency. This is a result of the ECB winding down their quantitative easing policy. As for the US Dollar it continues to weaken. The Euro is definitely benefiting from a tailwind supported by a solid trend in momentum. By contrast, the US Dollar still appears to be expensive despite having taken a downward slide since the end of summer.