As we enter the second quarter of 2019 the market dynamics have again shifted away from the previous periods. To make an assessment on whether the current environment of reduced volatility will continue, earlier quarters should be reviewed. During the 4th quarter of 2018 the financial markets experienced a sharp downturn. This was a consequence of investors taking flight to safety as risk assets trended lower. Fortunately for our Multi Strategy FX Product the economic downturn was isolated to mostly December as the year drew to a close. Asset returns reflected the growth patterns in global economic growth, as geo-political tensions remained evident. China displayed signs of stabilizing business activity, which reduced tensions that arose from the trade tariff policies.
The New Year then opened with more optimism, and exhibited a clear reversal from the previous quarter. Furthermore, the financial markets favoured the shift away from the monetary tightening policies which central banks had used earlier. As a result of the change in the bias from monetary tightening, risk assets posted substantial gains during the 1st quarter. This trading environment translated positively towards our Multi Strategy FX Product despite a lowering in market volatility. Shifts in market trading patterns were centered on key releases. This was evident as we traveled further along a maturing business cycle. It is clear if the global rally from the previous quarter is merely a reaction to the shift in monetary policy. Therefore the lowered volatility from April may only be an isolated event.
Changing Trading Environment
There are multiple factors that contribute towards a changing trading environment. These factors can be divided into two categories; the knowns and unknowns. The global economy is transitioning from above-trending conditions, along a maturing business cycle. This is a known factor that expansion may be continuing but also stabilising. On the whole the market environment is still supportive of risky assets.
This now leads us into the other category which needs to be watched and governed closely. An uncertain Brexit process along with turbulent trading policies needs to find a conclusion. These unknown factors are contributing towards market risk, even though trading opportunities are still available. Global uncertainty remain elevated with geo-political risks, monetary and fiscal policies, along with volatile commodity prices.
Structural trading risks are now more evident in today’s trading environment. This is the evolution of algorithmic trading. Speed has replaced capital in the modern trading environment. This domination has now spread across multiple asset classes. The result is vast pools of liquidity during periods of market stability, and vacuums during crisis periods. This liquidity shift has a varying impact on our Multi Strategy FX product performance.