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Tracking a differ of ETF's adds perception at the market tendencies for the final month. Just focusing on equity, fastened income, commodity, and actual property affords a nice image of the market landscape. Investors had been in risk-on mode for the month even although the market benchmark S&P 500 or Barclays Aggregate indices didn't transfer much. The actual motion was within the credit score and commodity sectors. Moving from big cap to smaller cap or worth confirmed terrific boom in relative returns. Returns outdoor the US had been also terrific gainers albeit a nice element of the extra achieve was within the foreign money move. While the lengthy bond underperformed, there had been terrific features within the excessive yield and corporate bond sectors. These features from contracting credit score spreads happened in spite of extra downgrades within the power sector. Sentiment in credit became brighter with the stable features in commodities. Real property didn't s...

The month doesn't actually soar till the employment numbers are announced. The April activity features have been decrease than anticipated and displaying a down trend. For a information established careful Fed, there isn't any proof to enhance the case for a fee increase. In fact, the numbers for a few mean that unconventional financial coverage isn't working. We do now not trust in that severe view; however, at this level within the trade cycle, financial coverage might now not be sufficient to maintain growth. Unfortunately, there isn't any assist at the fiscal side, so investors ought to steadiness warning towards a global the place central banks proceed to generate low cost money. We might all the time maintain within the again of our minds the adage, "Don't struggle the Fed", but weak boom requires consideration of extra conservative portfolio structures.   

ETF flows supply useful news at the place investors are making their bets. These stream numbers are extra essential than quantity traded as it focuses at the internet greenback turn into an asset class. This cash needs to be positioned to work by shopping for the underlying investments typically represented by an index. These absolute flows are important, however the percent switch tells us the actual web effect of cash into those asset classes. The inflows into investment grade bonds beneath A, and excessive yield have been very vast after the fairness decline previous within the year. The attain for yield was again in pressure albeit the final week there has been a web outflow from the excessive yield sector. As essential simply due to the fact the yield seek has been the stream into commodities, but this stream has no longer been concentrated on oil finances as a lot as treasured metals. The march to decrease damaging yields has renewed pastime in gold. 

The major theme for the second quarter will once again be focused on the Fed and rate increases. A market-dependent  Fed creates a feedback loop between market prices and Fed action. It seems the Fed is closely watching market behavior and will err on the side of caution if there is any sell-off or price disruption in markets. The market-dependent Fed has supported emerging markets and a risk-on equity environment. The markets have to read the thoughts of this dovish Fed and determine when the next rate increase based on any market feedback.  

Themes, issues, and opportunities often do not change from week to week, but it is important to still identify what should be the key drivers in the mind of traders and portfolio managers. These themes are often not associated with the announcements for the week but represent the bias or filter through which new information will pass through.  While we have mentioned four, the RO/RO trading environment may be the most important. Volatility has fallen from the highs earlier in the year with the VIX below 20%, but that does not change the fact that an unexpected announcement or an odd policy announcement will cause a switch to risk aversion. The switches will often be short-term but violent which leads to both trading loses and opportunities. 

One month makes a big difference. We have gone from a hugely negative equity environment, oil crash fears, a credit downturn, and Fed policy mistakes to strong equites, an oil rally, and less credit risk. The economic environment has not changed radically, but when risk appetite changes the asset markets around the world change.  Can this last? This will be the number one question for March. We think there are still major headwinds to stop a sustained rally, but data change and markets change. Nevertheless, there needs to be confirming economic information to sustain the current rally. 

The global themes have changed radically in the last month. At the beginning of January, the market was thinking about four moves from the Fed in 2016, higher growth, and global monetary divergence. Now, the markets have growing fear of a recession albeit about 20%, a Fed that may be done in 2016, and monetary convergence as all central banks become QE-followers. The most likely reality for 2016 will be somewhere in between these extremes, but the fear of deflation, recessions, and adverse credit and capital flow is real and points to a more volatile year. We think the RO/RO environment seen between QE transition periods is a a good starting point for any strategy discussion.

The main theme last month was whether the Fed was going to raise rates. It did the job. It also presented the SEP "dot plots" for the new year which suggested that four Fed increases would occur in 2016. The story is not switched to not when will the Fed start normalization but how will it occur. The "data dependent" Fed focus will mean a higher sensitivity to economic data and higher market volatility.  Larry Summers began the year with a strong editorial on secular stagnation. The slow growth in the US and the rest of the world should cause all investors to take a closer look at his arguments. A world of global secular stagnation is very real. If rates are going to move higher, then the reach for yield may be over. It is more likely investors will be stretching for safety. We are more likely to be in a RO/RO environment like the period between QE's. A world without QE is not the same as a world with it.  I hate to be a pessimist but fading consensus and being ...

The month really began with the ECB announcement of lower rates and QE extension and will end with the FOMC meeting. Of course there will be almost two weeks left to the end of the year but with holidays coming, there will not be any new information that will drive the markets. Firms will start cleaning the books and preparing for 2016 where the major macro theme will be the Great Divergence in monetary policy between the Fed and ECB and to a lesser extent other central banks. This is a crowded trade but will still be the macro focus for most of the year.

The Great Divergence in monetary policy Perhaps the Great Divergence in monetary policy between the Fed and ECB is not a great as expected given the weaker than expected policy change by the ECB, yet 2016 will continue to be the story between the Fed raising rates and the ECB pushing interest rates further into negative territory. Right before the ECB announcements the interest rate differential between Germany and the US was at the widest level since the introduction of the Euro. Yields in the EU jumped up and the Euro had one of the biggest positive days since its inception on the announcement only to see ECB president Draghi suggest that there is "no limit" to what the ECB will do to help the economy. The high volume of activity coupled with the price moves tells us that that many are trading this differential closely. Some of the most liquid markets in the world may still face cascades when these crowded trades are surprised.  Assume that the Fed raises rate...

The economies of scale and money management Management costs and size  Economies of scale become even more important when there is a down year with less manager return dispersion. When there is a down year for many hedge fund styles and managers like what we are likely to see in 2015, the power inherent in economies of scale become even more acute. When performance is down, there will no incentive fees to lean on to help pay the bills. This issue is especially the case for smaller managers. Small firms cannot use the incentive fees to recoup their start-up costs and management fees are just too low. Down years also lead to more manager switching, so marginally sized managers who lose assets will be harmed more. If there is little dispersion in returns, investors will use other criteria for determining investment decisions. Size will matter more in these cases. What you gain with economies of scale in up years, you lose in down years. Fixed costs are harder to cover. The industry ha...