North American equity markets exited their May melancholia with a bang in early June thanks to a robust US unemployment report. A 3.8% unemployment level had not been registered since the early 2000’s and, even better, all industry sectors experienced growth. Such heady numbers also resulted in a US bond market price sell-off as the news did nothing to discourage the Fed’s rate hike schedule. By midmonth, the giddiness had subsided as markets were heavily influenced by trade protectionist rhetoric hampering our positioning in the Copper, Gold, Equity and Interest Rate markets. Another market mover was the highly anticipated Vienna gathering of OPEC. There was strong opposition by some of its members heading into the meeting in terms of yielding to demands to increase production, but when all was said and done the outcome was to increase supply. Or was it? The resulting market reaction would have been puzzling with oil prices spiking sharply higher the remainder of the month, but for the fact that the production announcement was filled with ambiguity as to which country(ies) would be increasing production, as well as with the OPEC ministers’ public pronouncements of concern about potential shortages closer to year end.
The Polaris program was down 70 bps (-0.70% net) in June. In terms of the model basket performance, long-term trend models provided the best results, the break-out systems broke even but what really was impactful was the poor performance of the short-term mean reversion strategies which are supposed to buffer Polaris’ overall trend-following lean when there is a trend reversal. The reason these systems didn’t help this month was that many markets had one strong trend the first half and another equal but opposite robust trend in the second half of the month. The signal to noise ratios (SNRs) were falling in the Currency and Equity sectors; rising and then falling in the Interest Rate sector and rising in the Commodity sector.
Commodities: -0.80% (gross)
As mentioned in the introduction, Copper and Gold trading were the main detractors to performance. Polaris held long positions in both markets when trade war concerns between the US and China took over the headlines post US unemployment news heavily impacting bullish trends in both markets. Gold prices experienced a precipitous one-day drop followed by a steady decline whereas Copper NYMEX prices simply kept dropping, from a high of approximately $3.31 in early June to the mid $2.80 range by month-end. What was all the more frustrating was that the program reduced its long oil positioning due to the choppy conditions and moderate sell-off in the first half of the month and was unable to capitalize when oil prices did spike in the latter half of June. Although SNR did trend higher throughout June which typically bodes well for performance, it was not the case this month.
Currencies: +0.31% (gross)
In spite of the yoyoing moves in US Dollar (USD), the program’s short positioning managed to notch positive results. The great jobs report caused a dollar rally early on, but here again, trade war concerns were the prime factor influencing the dollar’s mainly weakening relationship to other currencies after mid-month.
Equities: +0.18% (gross)
The Equity charts of North America (NA), Europe (EU) and Asia-Pacific (APAC) all had very similar trajectories – rallying the first half of the month and selling off thereafter and each region’s final P&L was determined by how much profit we could garner from the first half rally. NA had garnered the most profit (+1.30% gross) before the drop and concluded June still up a respectable +0.57% (gross). EU had less upside the first half of the month and a bigger drop from the highs returning -0.45% (gross). APAC ended the month essentially flat.
Interest Rates: -0.39% (gross)
The Interest Rate markets had inverse trajectories to Equity markets in that a first half sell off (courtesy of strong jobs data) was followed by a second half rally (flight to quality over trade war rhetoric). What was particularly hard hit was the short positioning in the intermediate-term Interest Rate instruments which were responsible for essentially all of the losses.