A research report by Jens Nordvig and his colleagues at Nomura shows that external (current account) surpluses have been a poor indicator of currency performance over the past 20 years. External deficits are often the consequence of growth outperformance, decreasing country risk premiums and capital inflows, and hence may be associated with currency strength rather than currency weakness.
Risk premia strategies can be defined as diversifiable investment styles with fundamental value and positive historic returns. Their main types are (i) absolute value and carry, (ii) momentum, and (iii) relative value. A Societe Generale research report argues that value generation of these styles may be more reliable than that of asset classes and more suitable for combination into diversified portfolios.
Two recent papers help understanding the information value of the implied volatility index for the S&P 500 stock index (VIX). An ECB paper de-composes VIX into measures of equity market uncertainty and risk aversion, e.g. the quantity and price of risk. Risk aversion in particular has been both a driver of monetary policy and an object of its effect. Meanwhile, a Fed paper emphasizes that the implied volatility of VIX (“vol of vol”) is a useful measure of tail risk prices and a predictor of tail risk hedges’ returns.
Risk parity portfolios allocate equal risk budgets to different assets or asset classes, most frequently equities and bonds. Over the past 30 years these strategies have outperformed traditional portfolios and become vastly popular. But a recent Commerzbank paper shows that outperformance does not hold for a very long (80 year) horizon, neither in terms of absolute returns, nor Sharpe ratios. In particular risk parity seems to be performing poorly in an environment of rising bond yields. And levered risk parity portfolios (“long-long trades”) are subject to considerable tail risk.
A new New York Fed paper shows that financial intermediary leverage is one of the best performing explanatory factors for future credit and equity returns. High leverage growth compresses risk premia and reduces future excess returns.
Leveraged Exchange Traded Funds have become a significant factor in the U.S. equity market. According to a new Federal Reserve discussion paper their mechanical rebalancing rules can reinforce or even escalate large directional moves in the stock market, both through their own transactions and other market participants’ front running.
An empirical paper by Prokopczuk and Symeonidis investigates the drivers of commodity price volatility over the past 50 years. On the economic side inflation changes had been critical until price growth compressed over the past decade. Also economic recessions have been conducive to larger (industrial) commodity fluctuations. From the 2000s the importance of financial risk variables has gained weight, an apparent tribute to the “financialisation” of commodities trading.
In a short note Macquarie’s commodity research reviews price distortions and prospective changes related to the warehouse system of the London Metals Exchange (LME). Since 2008 LME warehouses have effectively withdrawn over 4 million tons of aluminium from the physical markets, producing a record premium for physical delivery versus exchange spot prices. Premiums have also climbed for other metals. A future increase in mandatory load-out rates could compress premiums but also adds to uncertainty about the resulting adjustment in exchange prices.
U.S. weekly jobless claims are a key early indicator for the U.S. economy and global financial markets. A new Kansas City Fed paper suggests that to use these data efficiently one should first estimate a time varying benchmark for the “neutral level” of claims. Claims above (below) the benchmark would indicate deterioration (improvement) of the U.S. labor market.
Cross-asset correlation has remained high in recent years, despite the post-crisis decrease in volatility. Typically, correlation surges during financial crises, when macro risk factors dominate across markets. However, J.P. Morgan’s Marko Kolanovic and Bram Kaplan show that there has also been a secular increase in cross-asset correlation since 1990, due probably to globalization of markets, risk management and alpha generation techniques.
Macrosynergy is a London based macroeconomic research and technology company whose founders have developed and employed macro quantamental investment strategies in liquid, tradable asset classes, across many markets and for a variety of different factors to generate competitive, uncorrelated investment returns for institutional investors for two decades. Our quantitative-fundamental (quantamental) computing system tracks a broad range of real-time macroeconomic trends in developed and emerging countries, transforming them into macro systematic quantamental investment strategies. In June 2020 Macrosynergy and J.P. Morgan started a collaboration to scale the quantamental system and to popularize tradable economics across financial markets.
