Last month we mentioned equities are trying to climb the wall of worry and breakout; by the end of October all major equity indices did just that: broke out and sustained new 52 Week highs, with SPX making all-time highs above the 3000 handle. We clocked in a gain of 0.61% buoyed by these rallies. The USD currency index also weakened and retreated from its highs, we consider this an indirect easing of global financial conditions. A weaker USD is suitable for emerging markets too. This USD retreat could be linked to last months’ US repo rate spike, which in turn was addressed by the US FED providing liquidity to markets. Looking ahead, a “Risk On” asset rally could ensue with comparatively higher momentum strength in non-US equity indices this time around. MSCI Asia Pac and Europe indices have outperformed SPX significantly over the past three months. We have added positions to EU, Japan and Australia ETFs as new holdings while SPX and NQ positions are maintained. However, one needs to be a bit cautious since the latest earnings reports haven’t shown substantial growth. On the other hand, US fixed income assets have lost steam and are now moving sideways. Our overweight positions in these ETFs – both treasuries and corporate bonds – have been scaled back. Gold is still strong momentum-wise; we maintain our place in the shiny yellow metal. On the geopolitical front, first, we have progressed in terms of US-China trade talks (although not solved completely). Secondly, Brexit has morphed into yet another election, which might have a positive outcome for the UK economy this time around. Does it seem like the year-end will bring cheer for risk assets?

Oct 2019 Momentum and Volatility scores for the Passive Allocator Universe


MSCI Asia Pacific vs S&P500 index returns. Source: Bloomberg Professional

Past two months have seen EM indices’ return lead their US counterpart. An accommodative FED, BOJ and ECB, as usual, are providing a tailwind to risk assets. Many major equity indices are gathering positive momentum; let’s see if it’s the beginning of a sustained uptrend or a massive false breakout. Why are we concerned if this is a fake breakout? One cannot ignore the less than stellar earnings being reported this time around. It’s probably the late phase of our global business cycle, even though the EU and US didn’t have any blowout growth numbers leading up to present. Certain economic indicators like (still) inverted parts of the US yield curve & declining manufacturing data point to a possible recession in the US next year, which would cause pain across all global equity markets as always.

Bloomberg US Financial Conditions Index

Financial Conditions in the US eased up in October after briefly dipping below 0 earlier. This, coupled with a decline in the USD currency rate, is supportive for outperformance by EMs and other Non-US assets. Even the FED’s recent neutral stance seems like rates uncertainty will remain low for the near future, all possibly leading the USD to move sideways and risk assets to be supported.

iShares 7-10 Year Treasury Bond ETF daily chart. Source: Bloomberg Professional

Fixed-income ETFs have been rallying all year but the past month has seen them stall. Positive momentum has reduced with prices now consolidating sideways. As mentioned above, the FED too didn’t guide on likely direction of its next interest rate move. Seems like the market in its infinite wisdom predicted this neutral outcome and started behaving in accordance? However, interest rates are still low across the developed world with no substantial inflation showing up yet. Are we once again in ‘Goldielocks’ mode for risk assets?

Happy investing
PA Fund team