CTA Trading Strategies – November 2017

As we head towards the end of 2017 the financial markets maintained their stream of positive returns during November. Combined with low levels of volatility, investor confident remained positive as the financial data lifted indices globally. There was however a short-lived period at the start of the month in which markets stagnated. However, by the end of the month the market extended its rally against a back-drop of of solid macro economic data. The swinging momentum impacted CTA trading strategies on the downside when seeking financial trends.

As for the political scene, November saw the return to uncertainty. Initially, in Germany there were discussions to paving the way forward with a coalition government. In Italy the campaigning for next years general election revealed a fragmented situation with growing interest for anti-establishment views. The referendum in Catalonia drew light upon the turmoil created in Spain. As we closed the month all eyes layed on the Brexit negotiation and its impact on the eurozone. Consequently, it is increasing evident that these Brexit negotiations are only getting more difficult.

European Upside Risk

It is clear that for the moment Europe is booming. The benefits of this was reflected in the trend signals of the CTA trading strategies. This trend of uninterrupted growth will most likely continue in the near term, however along with increasing inflation. An unfortunate consequence of increasing energy prices. However, questions still remain on the sustainability on the ECB stimulus program. Why does the ECB continue to promote growth when the group nations economies appear robust?

Meanwhile across the channel the UK economy continues to flounder. The financial data released from the UK however, was largely on track with expectations. Only post-Brexit considerations add to market concerns. Depending how the UK leaves the European Union, growth and inflation target could be significantly impacted. However, whatever happens the BoE is forecast to keep interest rates on hold until after Brexit.

Views from Central Banks

The US Federal Reserve (Fed) was the first central bank to raise interest rates in this cycle. The next step was to start reducing its balance sheet that was over inflated by the QE programs. The Bank of England has also started to be more aggressive and reactionary to the current economic climate. Early in November the BoE finally delivered the first interest rate rise for ten years. The European Central Bank has also reduced the rate of its QE from €60 billion to €30bn per month. However, the easing program was extended to September 2018 despite signs of a stronger economic base.

All of this represents a potential headwind for financial assets. It is indisputable that QE has helped to raise the price of assets, a strong contributor to long periods of market growth. However, a sudden removal of this liquidity support will diminish some of the strengths behind the bond and equity markets. That is not to say that a financial crisis or bear market is imminent. Removing or reducing economic stimulus will not necessarily lead to an economic downturn. However, it does create financial uncertainty.