Bursting out of the May doldrums, equity markets went on a manic tear and hit a high note at mid-month, bolstered by excellent economic results out of the United States. After mid-month, the positive vibes were displaced when the trade war rhetoric turned to some actionable reality. The US imposed steel and aluminum tariffs on China as well as traditional western allies. Equities voiced displeasure by an immediate reversal of trend and remained in various strident degrees of freefall mode for the rest of the month. On these occasions, defensive stock sectors like Utilities and REITs outperform industrials and financials; however, the program trades the futures contracts on overall market indices and not specific stocks, so the program employs other defensive strategies in an effort to preserve some of the gains previously garnered.
Eta Carinae allocates an equally provisioned “risk budget” to the equity markets of North America (NA), Europe (EU) and Asia-Pacific (APAC). Eta Carinae held long positioning in all geographic regions heading into June. The program’s trading models include mean-reversion, break-out and long-term trend following methodology. For this month, mean reversion models provided positive contributions; break-out systems were profitable the first week, neutral in the middle weeks and closed out the last week of the month returning some of the hard-earned profits from Week One; meanwhile, trend following models, as one might predict, did well in the first half only to give it all back during the reversal. The program did net a +0.57% return for June.
North America: +0.40% (Gross)
An incredibly robust jobs report showing unemployment at its lowest level (3.8%) in more than a decade injected optimism and pushed the trade war concerns out of the headlines…albeit until about the 15th of June. The Federal Reserve had good reason to feel self-satisfied. It finally achieved its (6-year!) mission of a 2% inflation target, plus all this great news did nothing to alter plans for two additional rate hikes in 2018. Of course, once the tariffs were announced, equities’ northern ascent made a sharp right turn southward closing out at-to levels slightly below where it started the month as shown in the E Mini S&P 500 Index chart.
Europe: -0.61% (Gross)
While the European Union’s economic picture was not quite rosy enough to consider rate hikes anytime soon (target is summer 2019), conditions were “well enough” for the European Central Bank to continue with its plans to wind down the asset purchase program. The Euro STOXX 50 Index illustrates that the sell off in the latter half of the month resulted in the market hitting its lowest levels since about mid-April. The chart also illustrates the tougher trading conditions/opportunities in the EU with a bumpier ride up in the first half of the month coupled with a steeper drop (vs the NA and APAC examples) after mid-month.
Meanwhile, over in Asia, the main news was out of China where the Chinese Central Bank (Peoples Bank of China) assumed a dovish stance in response to a strengthening US dollar, the falling equity markets and preparation for the potentially looming trade war. APAC was the program’s best performing sector, in part because the slope of the downward move as illustrated by the SGX Nikkei 225 chart (versus similar moves in NA and EU) allowed some of Eta Carinae’s trend reversal defense systems to more effectively trigger, thereby retaining some of the gains from the first half month of trading.