In Brief

• Investing with a long-time horizon and through a diversified portfolio are the best ways to batten down the hatches against volatility and avoid emotional investing errors.
• How should investors dampen portfolio volatility in the later stages of the business cycle?
• In the bond market, an inverted yield curve has often predicted a recession in developed economies, but what does the recent inversion of the yield curve in China say about the country’s economic outlook?
• China’s stimulus-led rebound has had widespread benefits but has made the risks from a tightening in credit in the country a global concern.

Is China’s Yield Curve Signaling a Further Economic Slowdown?

Since 2005, the yield on the 10-year Chinese government bond (CGB) has exceeded the one-year CGB yield by an average of 100 bps. An upward-sloping yield curve of this sort is normal in the $3.5 trillion CGB market and as in most countries, reflects expectations for future policy rates, a term premium and healthy market supply-demand dynamics. But on June 7, the 10-year CGB yield sank below the one-year yield. This yield curve inversion has occurred only once before, in June 2013, amid a severe liquidity crunch in the interbank market. What is causing the current yield-curve inversion?

• The People’s Bank of China (PBOC) has tightened monetary policy since the fourth quarter of 2016 to curb an asset bubble, mitigating financial leverage and supporting the yuan. Since the end of the third quarter of 2016, the 10-year CGB yield has risen 85 bps to 3.59%, and the one-year yield has risen 145 bps to 3.62%.
• The PBOC hiked the seven-day reverse repo rate twice – by a total of 20 bps, from 2.25% to 2.45% since the fourth quarter of last year. The PBOC’s liquidity-draining operation lowered the system’s excess reserve ratio from 2.4% at the end of 2016 to only 1.3% by the first quarter of this year, the second-lowest on record.
• Wholesale funding, which accounts for a quarter of banks’ liabilities, has tightened sharply, and benchmark three-month negotiable certificate of deposit (NCD) rates have surged 220 bps to 5.1% since PBOC tightening began late last year. NCDs are the main interbank money market instruments and account for 3% of banks’ liabilities, thus setting most banks’ marginal funding costs.
• There has been renewed regulatory pressure on banks to unwind their leveraged bond portfolios both on and off their balance sheets, which partly explains the severity of the sell-off.

The PBOC has clearly tightened monetary conditions, pressuring banks to curb corporate and mortgage lending while passing through higher lending rates to borrowers. Chinese growth, particularly nominal growth, clearly peaked. Historically, a flattening and inverted yield curve has indicated weakening industrial production with a lag of five months. China’s reflation momentum is also turning. The surge in producer prices from upstream commodities faded during the second quarter, and tight liquidity is expected to weaken construction demand and create some destocking pressure, particularly in commodities such as iron ore. On the margin, China’s monetary tightening and financial deleveraging will be a headwind to a rebound in global manufacturing and reflation in commodities.

Focus on the Destination: Investors with a Long Time Horizon Experience Less Volatile Returns

While volatility can cause major deviations in the near term for equity markets, investors should focus on their destination. Examining rolling returns for equities, while historic annual returns have varied from -38% to +47% in a single year, rolling annualized returns, over a 20-year period, have been positive for the past 60 years. Unfortunately, short-term investors are much more likely to realize the waves of volatility that occur over the one-year investment horizon. Investors with long-term goals, who are able to shift their focus to the long-term return potential of equity investments, have the luxury of realizing infrequent negative equity market returns.

We live in a headline-driven world, where media often impacts equity prices in the near term. But an investment portfolio should not be a dinghy tossed and turned by market churn; it is possible to gain portfolio stability through diversification. While equities tend to perform better with economic growth and moderate levels of inflation, rate-sensitive fixed income is important to portfolios when economic growth falters. Although most investors have a positive outlook on U.S. equities in the coming year, other developed market equities can give both exposures to risk factors outside the U.S. economy and to faster-growing emerging market economies that may help boost portfolio returns. Small cap stocks provide a pro-cyclical tilt to a portfolio compared to large cap stocks, though they can also be more sensitive to growth scares. While a combination of various asset classes should improve portfolio returns, diversification is most valuable for keeping a portfolio on an even keel.

In Brief

• A rebound in U.S. economic data strengthened the Fed’s case for a rate hike in June; the Fed outlined a plan to reduce the balance sheet.
• European growth surprised to the upside; data indicated that the eurozone’s recovery may be gaining momentum.
• The UK election resulted in a hung parliament, creating uncertainty about the path ahead for Brexit negations.
• Emerging market equities, bonds and currencies delivered strong performance in May, adding to their stellar start to the year.
• China’s sovereign debt was downgraded by Moody’s Investors Service for the first time since 1989, due to the country’s rising liabilities and slowing growth.

A healthy U.S. employment report bolstered the Fed’s comments in May that the weakness seen in the first quarter was likely transitory. The economy added 211,000 jobs in April and the unemployment rate fell to 4.4%, alleviating some fears over the anemic 79,000 increase in jobs in March. Retail sales also rebounded, rising 0.4% and outpacing the prior 0.1% gain, as strength in the labor market and a 2.5% increase in hourly wages supported consumption. Against this backdrop, the Fed’s meeting minutes revealed that another rate hike could be appropriate soon, and outlined a plan to reduce the balance sheet by slowly and predictably ending reinvestments of maturing securities.

While the political turmoil contributed to a brief period of elevated market volatility, most risk assets recovered to end May higher. Investor unease over geopolitical events was apparent in May, particularly the controversies surrounding the administrations in the U.S. and Brazil. The seemingly inexorable trend higher in risk markets prevailed as equities globally gained and credit spreads tightened. The VIX also reflected the short-lived nature of the downturn in markets during May as it reached both its highest intraday level in 2017 and its lowest level since 1993.

The drivers of the recent equity market gains have changed from those that initially pushed equity markets higher following the U.S. election, while the “reflation trade” immediately following President Trump’s election focused on financial and energy companies, which have struggled more recently. The gains in May were driven by technology companies with strong earnings growth, as well as more rate-sensitive sectors like utilities as interest rates have fallen.

The expansions in Europe are robust, with all key segments of the economies participating in the upswing. The European economy grew at an annualized pace of 1.8% in the first quarter. The European Central Bank removed a reference in its statement to a potential rate cut but maintained its dovish policy stance. It lifted its growth forecasts but trimmed its inflation outlook.

Overall market reaction in the U.K. was muted. The British pound weakened and UK domestic stocks fell. Oil prices touched one-month lows on a surprise rise in U.S. crude stockpiles. Undeterred by weak oil, weekly flows into emerging market debt and equity funds logged their longest positive run since 2013.

The MSCI EM Equity Index returned 16.6% through the end of May, nearly double the return of the S&P 500 over the same period, while emerging markets local debt and currencies delivered returns in the high single-digits. With developed market rates trending lower and concerns over protectionism waning, investors have re-focused on improving emerging markets fundamentals, and investment flows have followed. Despite a fresh political scandal in Brazil, investors remain drawn to attractive yields in the sector as inflation abates and countries such as Russia and Brazil emerge from recession.

Moody’s Investors Service downgraded China’s sovereign debt for the first time since 1989, citing rising liabilities and slowing growth. China’s downgrade to A1 from Aa3 by Moody’s Investors Service on May 24 was not too surprising since both Moody’s and Standard & Poor’s had warned in March 2016 that they were reviewing China’s ratings. The market impact of the downgrade is also limited: China has not issued sovereign external debt for more than a decade, and local currency bonds are not included in the widely tracked global indexes yet, so there was no index-related selling. Chinese policymakers may now feel a sense of urgency to intensify regulation of the huge shadow banking system, maintain a hawkish monetary policy stance and somehow restore fiscal discipline. Although positive from a structural standpoint, such a policy shift could put more pressure on Chinese growth, financial markets and commodities prices in the coming year.

New Bond Issuance: The Active Management Advantage

When new bonds come to market, the alpha potential available to active managers is significant.

1. New bond issues are a more frequent and much bigger share of the market. Over the past three years, newly issued bonds represented more than 20% of the capitalization of the U.S. corporate bond market. In contrast, equity IPOs were less than 1% of U.S. equity market capitalization during the period. This is logical because whereas common equity is typically a perpetual security, bonds have finite maturities.
2. New bond issuance represents a consistent source of alpha potential. Active bond managers typically buy new issues when they come to market, often a week or more before the securities enter the index at the start of the month. This matters because new bonds tend to come to market at a slight discount to outstanding issues, hence the alpha potential active managers can access.
3. While passive managers sometimes wait to buy: They risk tracking error if prices move before the bonds join the index; managers also may face limits in how much off-index exposure they can hold. After all, the goal of passive managers is not to beat the index but to replicate and match its performance.
4. Active managers can pick and choose. Even though most new bonds come to market with a concession, active managers do not necessarily buy them. Passive managers, by contrast, have an incentive to buy all bonds that enter the index, regardless of price.

Further, size matters. Bigger managers often have an advantage in accessing new bonds, especially for larger deals. With billions of dollars of bonds to sell, investment banks create distribution syndicates. Individuals running syndicate desks may rely on a smaller pool of large investors to obtain lead orders and ensure there is ample interest to proceed quickly with the new issue, before borrowing rates rise. The 10 largest buyers received about 45% of the offering, with the top five buying about a third.

Other Thoughts

• Broad-based, trend-like growth and favorable financial conditions combine to create a supportive backdrop for risky assets. With the U.S. economy progressing into late cycle, recent divergence between bond yields and equity markets raised some concerns, but that rates should resume their upward path in the second half of 2017.
• U.S. credit is unlikely to outperform stocks, while it should still beat government bonds.
• A diversified regional equity exposure is best suited to benefit from the pickup in global growth. At the margin, investors may favor Japanese, European and emerging market equities and keep a modest exposure to the U.S., with the UK the least preferred region.
• Core European bonds look set to lead global yields higher over the latter part of the year, so investors should remain modestly underweight global duration, while the improving growth trends outside the U.S. markedly reduce the risk of a renewed, damaging surge in the U.S. dollar.

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.

On Oil: Prices Jump to Three-Week High on Talk of Extending Production Cuts

Oil prices jumped to a three-week high on May 15. U.S. crude futures rose to $48.85 a barrel on the New York Mercantile Exchange and Brent rose to $51.82 a barrel on ICE Futures Europe. The move capped a four-day streak of gains for oil prices, lifting both benchmarks to their highest levels since late April. In a joint statement, Saudi Energy Minister Khalid al-Falih and Russian Energy Minister Alexander Novak said a pact by the Organization of the Petroleum Exporting Countries and external producers, including Russia, to cut output by some 1.8 million barrels a day should be extended to the end of March 2018.

On U.S. Dollar: The U.S. Dollar remains soft with both EUR and GBP rallying

The USD has been a soft undertone as it struggled to rekindle the sort of form that saw it rally broadly, and strongly, in the immediate aftermath of the US presidential election in 2016. The Trump administration’s early policy setbacks, which investors fear will slow the broader drive for tax reform, deregulation and fiscal stimulus, account for some of the USD’s underwhelming performance in April. Geopolitical concerns, such as Asia, and political developments in Europe have also undercut the USD more recently. Finally, the U.S. economy appears to have stumbled out of the starting blocks this year again, which weakened the market’s confidence in the Federal Reserve’s ability to tighten monetary policy over the balance of the year.

On U.S. Markets: Stocks and Bond Appear to Be Telling Different Stories about the U.S. Economy

Stock and bond markets appear to be telling different stories about the U.S. economy, with stock prices climbing and bonds holding relatively steady. While strength from Technology remains notable, performance is not at a historical extreme. While the Nasdaq 100 has certainly been a standout performer, it has been significantly more stretched before.

Yields remain near 2.30%, the bond proxies and defensive groups continue to underperform. In addition to geopolitical risks in Syria and North Korea, several other factors continue to argue for a low-yield environment that is broadly range bound, including that inflation fears are contained, U.S. and Chinese economic data are showing signs of weakness, and the European Central Bank and Bank of Japan remain accommodative.

Bank of Canada on Hold, Assessing Uncertainties in Nation’s Economy

The April Bank of Canada (BOC) monetary policy statement was mildly hawkish: It acknowledged the recent stronger growth and better-than-expected economic data, yet revised down the forecast for the potential GDP growth rate. U.S. policy, especially trade, is by far the greatest source of uncertainty to Canada’s outlook. Any movement toward U.S. protectionism would have a major negative impact on the Canadian economy. Recognizing this risk, the BOC mentions U.S. trade policy often in the latest Monetary Policy Report.

The reliance on U.S. policy highlights one of the weak points in the Canadian economy: its persistently underwhelming exports, especially in non-commodity sectors. A key question for policymakers is whether this weakness is structural or cyclical. The BOC needs more time and data to make that assessment.

The housing market is clearly a concern for the BOC. Its 2017 forecast revised down housing’s contribution to GDP growth, demonstrating caution on the Toronto housing market as its boom continued in the first quarter of this year. The surge in home prices presents real risks to the macro economy, and residential investment and consumption as a percentage of GDP is very high by historical standards. As people “consume” a lot of housing and go deeper into debt doing so, they effectively borrow that consumption from the future. This means we can’t rely on Canadian consumers to be the main drivers of real GDP growth the way they have in the past – a vulnerability the BOC has consciously incorporated in its growth forecast.

A Couple Thoughts

With equities delivering strong returns since the post-crisis bottom in 2009, simple exposure to equity beta, or the market’s return, has been enough for many investors to achieve their return targets. While in the coming years, with equity returns likely to be significantly lower compared to recent levels.

A recent study by Morningstar revealed that only 14% of U.S. large cap managers outperformed their passive counterparts over 10 years, and only about 30% of managers outperformed in the perceived less efficient areas of small cap, international and emerging markets. Low returns, scarcity of alpha and the tendency to chase performance. With all of these challenges, how does an equity investor achieve higher returns going forward?

Part of the answer lies in portfolio structuring: that is, reallocating away from traditional passive and active strategies and toward structural or systematic approaches that may offer more reliable sources of returns. To be sure, investing in nontraditional equity strategies requires education and the ability to navigate an evolving landscape. But the potential rewards – achieving higher returns in an environment where beta alone may no longer be enough could be meaningful. Rethinking traditional approaches and moving toward strategies that benefit from systematic and structural sources of returns may help investors to achieve the excess returns they seek.

China: Commodities Slump Weighs on Stocks, PMIs Losing Momentum

A slump in Chinese metals prices and weakness in crude oil sent equity markets across the region lower. Oil price tumbled 3% from Thursday’s settlement in New York while trading sentiment was already weak amid fears that Beijing’s crackdown on speculation and borrowing could hurt metals demand. The Hang Seng subindex that tracks Chinese shares also widened losses. Meanwhile, investor worries of China’s regulatory crackdown on speculative trading sent commodity futures prices sharply down for a second straight session.

China’s private sector mfg PMI fell to 50.2 in April due to cost saving layoffs, slower output and new orders, and lower confidence. The Service PMI slipped as well, but indicated Services are doing better than Mfg. China has been a factor in the nominal global reacceleration. But as policymakers tighten, China’s growth should slow. A handoff to U.S. fiscal stimulus is crucial. Right now, solid corporate earnings are helping prolong investors’ patience.

Japan: More Evidence of An Upturn

The Services PMI softened in April, but remained in expansionary territory. Input prices and business confidence cooled slightly while new orders, output, hiring, and backlogs of work rose marginally. The robustness of the fourth quarter and the first quarter appears to be moderating in the second quarter, but respectable growth will likely continue.

Auto sales had another good month in April. According to the BoJ minutes from March’s meeting, the central bank thinks private consumption has been resilient thanks to the sturdy labor market. This is evident for durable goods purchases, but less so for overall retail sales.

U.S: 16 Non-Manufacturing Industries Reporting Growth in April

In April, upward pricing pressure in the industries strengthened as the Non-Manufacturing Prices Index (57.6, +4.1) accelerated, making prices greater than the 2016 average of 52.7. However, inflation only becomes worrisome when the Index prints above 60 for more than a quarter. The 16 non-manufacturing industries reporting growth in April, listed in order, were: Wholesale Trade, Utilities, Arts, Entertainment & Recreation, Mining, Retail Trade, Construction, Professional, Scientific & Technical Services, Information, Management of Companies & Support Services, Public Administration, Health Care & Social Assistance, Real Estate, Rental & Leasing, Other Services, Finance & Insurance, Accommodation & Food Services, and Transportation & Warehousing. The only industry reporting contraction in April was Agriculture, Forestry, Fishing & Hunting.

House Panel Approves Plan to Undo Parts of Dodd-Frank Financial Law

The House Financial Services Committee launched a Republican-supported rollback of Obama-era financial regulations, voting 34-26 along party lines May 4 for a plan to undo significant parts of the 2010 Dodd-Frank law. The committee vote sent the Financial Choice Act to the full House. Here are key details of the bill:

• It would require a failing firm to go through bankruptcy proceedings instead of a process through Dodd-Frank in which regulators liquidate the firm outside of bankruptcy, called the Orderly Liquidation Authority.
• Healthy banks would get significant regulatory relief from restrictions on capital and dividend payouts so long as the bank maintains an average leverage ratio of at least 10%.
• It would modify capital rules to give banks more flexibility in how they guard against “operational risks” like big-ticket legal liabilities.
• The CFPB would be stripped of its powers to supervise firms and pursue certain fair-lending violations that are “unfair, deceptive or abusive acts or practices,” known as Udaap. The CFPB could enforce other consumer financial protection laws.
• All companies would be allowed to communicate confidentially with the Securities and Exchange Commission about potential initial public offerings and withhold company communications with regulators from investors.
• It would prohibit the SEC from completing a rule aimed at giving activist investors more firepower to defeat company board candidates.
• It would give outsiders more input on the SEC’s enforcement priorities and strategies by requiring the agency to create an advisory committee to “offer recommended reforms.”

Thoughts

Still, given the accuracy of the first round opinion polls, Macron will likely win the presidency. But concerns about populism are likely to return, especially with the upcoming (probably 2018) Italian election. Against this backdrop, Brexit negotiations have also turned more antagonistic.

The ADP report showed private payrolls expanded by +177k jobs in the U.S. in April. The FOMC reiterated in its statement that the committee is looking past the noise in 1Q. It is likely that the Fed will raise rates in June. While the U.S. mfg PMI is peaking, svc growth remains solid, and inventory rebuilding should help growth going forward.

Global stock markets rallied after a centrist candidate won the first round of France’s presidential election. French stocks and the euro both gained after Emmanuel Macron, above, and Marine Le Pen advanced in the French Presidential election. Other risky assets, such as emerging-markets currencies and junk bonds, also rallied. The U.K. economy is showing some signs that the Brexit drag is still ahead of us, and the snap election is scheduled for June 8th. However, general risk from Europe has faded with Macron in the lead in the French election. The global story generally remains one of a synchronized recovery. With inflation rising modestly as oil prices stabilized relative to the low of $26 in 2016, and China growth has reaccelerated. Nominal growth, which is supporting corporate earnings, remains the bridge in 2017 to get to U.S. fiscal stimulus. There remain some risks, but the synchronized nature of global growth, combined with still-easy policy in many areas is helping risk assets look past many of these items. The CBOE Volatility Index, or VIX, a measure of anticipated stock-market volatility sometimes called the “fear gauge,” dropped 26%—its largest one-day fall since 2011. Bank shares rallied around the world.

Nasdaq Composite Tops 6000 for First Time

The Nasdaq Composite raced past 6000, the latest sign that technology companies have become a driving force in the recent stock-market rally. The index hit the milestone 17 years after it reached 5000 during the dot-com era, in a broad rally April 20 that was turbocharged by earnings from bellwether companies, those market leaders in the respective sectors. Surging technology shares have helped the index outperform its peers so far this year. The top five contributors to the Nasdaq’s 2017 gains, Apple Inc., Facebook Inc., Amazon.com Inc., Microsoft Corp., and Alphabet Inc.

French Vote Fuels Hopes for Growth

Mr. Macron won the first round with 24% of the vote, ahead of Ms. Le Pen with 21.3%. The ascension of centrist Emmanuel Macron as the heavy favorite in France’s presidential race spurred investors to set aside the political worries that have long plagued European markets and to make new bets on economic growth. Mr. Macron is now seen as the leader in May 7’s runoff against second-place finisher Marine Le Pen, whose pledge to dismantle the euro had damped prices of euro assets and the common currency itself. The former investment banker’s good showing sent stocks and the euro sharply higher while triggering a sharp selloff in German government bonds, which investors had bought as a haven from populist politicians such as Ms. Le Pen.

Thought: Managed Futures Strategy in an Uncertain World

Managed futures strategies, also known as trend-following or momentum strategies, seek to generate attractive returns by capturing price trends across major asset classes, have been around since the 1980s. Historically, investors have been drawn to these strategies mainly for their diversification benefits and their potential for equity-like returns. Because of their low-to-negative correlation with many risk assets, managed futures funds may help to lower overall portfolio volatility and contain drawdowns. Ideally, managed future funds should demonstrate their best performance during equity sell-offs, when investors need returns the most. In choppier markets without clear trends, performance may be down or muted.

With low annual returns expected for mainstream stocks and bonds over the next decade, and asset prices in both the equity and bond markets near all-time highs, investors are looking to alternative strategies for return and diversification potential. As such, investors have been allocating to managed futures strategies, which offer the potential for both. Trend-following, the primary approach used in managed futures strategies, has generally delivered strong returns over multiple decades.

Managed futures strategies are all designed differently so there is considerable disparity among these funds. Trend horizons, portfolio construction and risk management criteria are three main factors that determine the nature of a managed futures fund. As impactful as managed futures strategies can be, their impact on the overall portfolio depends on the size of the allocation. Many investors incorporate managed futures into their overall alternatives allocation, which can often range from 10% to 30% depending on the investment objectives and the role of managed futures in the portfolio.

Global Markets Pressured: Gold, Yen, Bonds Gain as Investors Step Up Safety Plays

Equity markets stayed under pressure on Friday, while the yen and oil prices rose sharply, after the U.S. launched cruise missiles at a Syrian air base in response to a recent chemical attack. The announcement of this first U.S. military operation to deliberately target the regime of President Bashar al-Assad came midmorning for many Asian-Pacific markets, and pushed investors into haven assets like the yen, which jumped about 0.6% against the U.S. dollar in the moments after the news. Still, safe-haven assets remain in favor, with the yield on the benchmark 10-year U.S. Treasury falling to 2.3122%, from 2.3430% late Thursday. London spot gold prices were recently 1% higher.

Oil prices also surged, as concerns about supply disruptions from the military offensive in the region registered with investors. Brent crude, the global oil benchmark, was recently up 1.7% at $55.79 a barrel. In stocks, Australia’s S&P/ASX 200 was last down 0.2%, while in Hong Kong, the Hang Seng Index was off 0.5% and the FTSE Straits Times Index in Singapore fell 0.6%. Chinese gold miners listed in Hong Kong were up sharply in the morning session, as investors hedged their bets in the wake of Syria attack. In Japan, the Nikkei Stock Average recovered from slight losses following news of the attack, and was last up 0.4% following Thursday’s marked decline.

U.S. Consumer Confidence Soars as Corporate Profits Recession Ends

U.S. corporate profits jumped 22.3% in the fourth quarter of 2016 compared with the same period in 2015, which was the largest year-over-year gain for the measure since the first quarter of 2012. For all of 2016, profits rose 4.3% from the prior year, the strongest calendar-year profits growth since 2012. In addition, U.S. consumer spending in the fourth quarter was stronger than expected, offset in part by downward revisions for business investment, net exports and spending by state and local governments, according to the United States Department of Commerce.

U.K. Consumer Sentiment: Investors Wait Brexit Gets Away

The GfK NOP consumer confidence indicator was minus 6 points in March, unchanged from February’s figure. The index remains entrenched in negative territory, where it has been since April of last year, highlighting that consumers are still broadly pessimistic. March’s figure reflects an improvement in consumers’ personal financial situations over the last twelve months and an increased likelihood of making major purchases. Consumers’ sentiment regarding their personal financial situation over the next twelve months, the general economic situation over the last twelve months and the general economic situation over the next twelve months remained unchanged compared to the prior month. Consumers’ general pessimism comes amid a backdrop of rising inflation, mediocre wage growth and high levels of political uncertainty generated by the recent triggering of Article 50.

Germany: Consumers in Germany Remain in Spending Mode

German economy looks in good shape, with growth rising and inflation subsiding. The latest data showing GDP grew 0.4% in the fourth quarter of 2016 and 1.9% as compared with the prior year period, which was the strongest in five years. Unemployment in Germany fell to its lowest level since reunification in March and could fall lower. Total unemployment in Europe’s largest economy dropped to 2.662 million from 2.762 million in February.

China: PMI in March Below Expected

The Caixin Manufacturing PMI in China fell to 51.2 in March of 2017 from 51.7 in February and below market consensus of 51.5. While output and new orders eased amid softening business confidence, new export orders rose the least in three months and staffing levels continued on a downward trend. Meanwhile, backlogs of work increased further. Stocks of purchases declined slightly while inventories of finished goods fell the most in ten months. Input prices and output prices remained high, although they have dropped for three straight months.

Why the Refinancing Slowdown Matters for the Fed

The Federal Reserve has been buying up fewer mortgage bonds in recent months thanks to a flameout of the American refinancing boom, one factor that economists say is likely to help shape Fed officials’ thinking as they consider shrinking their giant bond portfolio. Because the Fed is buying up less of the mortgage bonds currently in the market, in many ways monetary policy is already tightening on its own. The Fed could view it as a step toward shrinking its $4.5 trillion balance sheet, as it considers whether to begin selling some securities later in 2017 after years of stimulative bond buying. At their policy meeting in March, Fed officials agreed that they would probably start shrinking their portfolio later in the year but did not decide on key details of how to do it.