DR.CHENJIAZI ZHONG

On U.S.

U.S. jobless claims declined 10,000 week over week to 245,000. With U.S. credit-scoring easing, and the credit damage from the U.S. downturn passing, U.S. consumption remains strong. Nowadays, trying to sell things in stores at full price is tough; consumers are buying more experiences over goods, more online vs in stores, and are using technology to comparison shop. The “death of retail” story is now quite well known.

In terms of U.S. stocks, the NYSE Airline Index broke out of a six-month consolidation with notable strength from UAL, AAL, and DAL. Energy stocks remain weak, with the weakness of oil continues to weigh on the sector which is again seeing new lows expand. Capital markets names are firming, with the Capital Markets Index hit a multi-month high on June 7 and among the Banks, Citigroup was a notable outperformer. The Chinese ADRs continue to act well; after a brief pause, the China ADRs are again resuming higher.

On U.K.

The Services PMI declined to 53.8 in May. Business-to-business sales have been filling the consumer void, but producers delayed their decisions in May ahead of the June 8th general election. Additionally, with a period of above-target inflation upon us and official interest rates already near the zero lower bound, the flatness of the U.K. yield curve does seem somewhat anomalous. With interest rates on intermediate U.S. bonds a full 1.15 percentage points higher, there appears to be a bigger inflation hedge in the U.S. bond market than in the UK. The direction of medium-term inflation risks remains an open question.

On EU

The ECB remained accommodative. Retail sales in the euro area continued to trend upwards in April. Retail sales signal consumer spending and thus, GDP are off to a good start in the second quarter. According to the expenditure breakdown, households and capital formation contributed the most.

On Japan

The Services PMI expanded further to 53.0. Panelists reported the largest increase in new business and the highest optimism level in four years, thanks to weaker yen and foreign demand. Encouraging sign for a better second-quarter GDP print. Core wages continue to be sluggish and weak relative to the 1990s, but are better than the past decade.

Japanese shares recently broke out to nearly two-year highs and in U.S. dollar terms performance is also notable at roughly 17-year highs. Importantly, internals are firm with the TOPIX making new highs and small-caps outperforming. The continued leadership from the Electric Appliances, such as Sony, Canon, etc., and the Chemicals groups are noteworthy, as they are among the most correlated to broader market returns. In U.S. dollar terms, Japan continues to make a trend change higher after a multi-decade bear market.

On China

FX reserves increased for the third month in a row to $3,053 billion. Capital outflow restrictions and Yuan strength are proving effective at lifting reserve levels.

Thought: Selecting the Optimal Investment Universe in Managed Futures

The depth and breadth of the investment universe are critical elements in building a robust managed futures strategy. An investor should add assets to the portfolio that exhibit low correlations to existing assets, and, if the trading costs are relatively higher, the bar for diversification must be higher as well.

In commodities, global benchmark contracts trade with significantly higher volumes than more specialized contracts. The two contracts have very different fundamental drivers and low historical correlations, and thus there is diversification when trading both markets.

In practice, if a large fund tried to trade hogs in the same volume that it traded oil, transaction costs would swamp the diversification benefits. To control for this, most managers will put a cap on the size of a position they can have in smaller markets.

This is a sensible way to manage the trade-off between diversification and transaction costs. Yet it means that looking only at the number of markets in which a manager trades is misleading without knowing how big a share of their portfolio these smaller markets can be. If the position of lean hogs can be only a fraction of the size of the oil position, then its portfolio impact will be small. In practice, the AUM of a manager’s trend-following strategy can be a more important driver of risk-adjusted returns than the number of markets.