CTA Trade Allocations – June 2018
The pace of global economic expansion remains on a path of expansion however developed markets are entering maturing cycles. As a consequence, the risk of a demand-driven slowdown is a growing factor in estimating future economic output. What has become more evident during the course of the year is the division in global growth rates. Global expansion is now less synchronised between the continents, with the pace of the overall activity extending beyond its peak. Financial markets are impacted by moderating growth under tightening credit controls. Therefore in seeking returns, CTA trade allocations will shift towards broader diversification. Tightening monetary policy will lead towards slower liquidity growth. The result of this reduced market liquidity can lead to an inadvertent increase in volatility in the financial markets.
In response to global economies progressing across the business cycle, broader diversification can reduce the unwanted volatility. Making adjustments to a portfolio with CTA trade allocations will benefit in seeking the medium term trends. Additionally, reducing exposure from risker assets can stabilize a portfolio as the economic cycle continues to mature. Market data along with financial releases suggests that we are in the midst of a transitioning economic environment. This scenario unfortunately is supported by a less accommodating monetary policy stance.
Guarding against a Trade-War?
Political discussions between the United States and its main counterparts have recently centered on a trading tariffs. However, where would the potential impact of a Trade-War lead the global markets towards? If trade tensions continue to escalate then potential consequences could result in a stronger US dollar, or economies experiencing stagflation. In response to this possible scenario, it is clear that the Eurozone has not followed suit with the US beginning to raise interest rates. Ending quantitative easing can prompt a rise in the euro.
However, in an environment of challenging trading conditions a strong local currency does little to boost exports. By keeping interest rates low a central ban can set a preemptive measure against potential trading tariffs. Is it a coincidence that both the euro and yuan have weakened against the US dollar since the beginning of the trade tensions?