Five market axioms that can no longer be relied upon; Hedge funds are losing to private equity in a tug-of-war over investors’ portfolios, and experts say it’s only going to get worse

Nov 14, 2019

Lead Stories

Five market axioms that can no longer be relied upon
Mohamed El-Erian – Financial Times
Investors will have to grapple with once-unthinkable economic and market trends as they set about fine-tuning their portfolios next year. Where they end up will depend on five factors that are growing less stable by the day.
Market sentiment has improved in recent weeks as trade tensions between China and the US have de-escalated, while the US labour market has again outperformed expectations — and there are short-term signs of some bottoming out of Europe’s economic cycle. With that, US stock indices have reached new highs while both bonds and currency markets have been relatively calm.
Whether this performance will hold beyond the short term requires the revival of five assumptions that underpin most longstanding investment approaches.

Hedge funds are losing to private equity in a tug-of-war over investors’ portfolios, and experts say it’s only going to get worse
Bradley Sacks – Business Insider
Hedge funds are in danger of playing second fiddle to private equity in their biggest investors’ portfolios.
A study from EY released Wednesday surveyed 62 institutional investors with $1.8 trillion in combined assets and found they were replacing their hedge funds — and didn’t plan on stopping soon.

Pound Volatility Jumps Most Since Brexit Vote on Election Risk
Charlotte Ryan – Bloomberg
Pound traders are bracing for swings of as much of 3% on the result of December’s election that will set the course of Brexit.
A gauge of volatility in the currency over the next month, which now covers trading on the day after the Dec. 12 vote, has awoken from a recent slumber to climb the most since the 2016 Brexit referendum. That implies the currency could either rally to about $1.32 or slide to $1.25, according to pricing in options markets.

In swaps we trust? Disappearing dollars drive currency trading dependence
Olga Cotaga – Reuters
As dollars dry up, global finance is growing increasingly dependent on opaque currency trading to keep cash flowing.
Banks and other short-term dollar borrowers are becoming ever more reliant on the $3.2 trillion-a-day foreign exchange swap market, data shows, leaving them dangerously exposed should U.S. lenders stop feeding the system, even if only temporarily.

Japan’s Economy Hits the Skids—and Things Are Likely to Get Worse
Megumi Fujikawa – WSJ
Japan’s economy grew at the slowest pace in a year as the U.S.-China trade dispute and Tokyo’s frictions with South Korea weighed on exports.
Japan, the world’s third-largest economy after the U.S. and China, expanded at an annualized rate of 0.2% during the July-September quarter, following a 1.8% expansion in the previous quarter. It was the fourth straight quarter of growth but the slowest pace in a year.

FX swaps step from market obscurity to global stage
Olga Cotaga – Reuters
Foreign exchange swap volumes have risen in the past three years to account for nearly half of the entire FX market, Bank for International Settlements (BIS) data shows.
As FX swaps have emerged from the dark corners of the derivatives world, they are attracting wider investor interest.
Some now fear that swaps could be a catalyst for market disruption, possibly as soon as the end of 2019, if U.S. banks cut back lending to meet cash reserve rules.

When the Dow Closed at 27691.4854488934—Just Like the Day Before
Akane Otani and Karen Langley – WSJ
Stocks go up. Stocks go down. On Tuesday, the Dow Jones Industrial Average went absolutely nowhere—a mystery that finance geeks, journalists and analysts have spent the ensuing time trying to unravel.
The indicator ended the session at 27691.4854488934, exactly where it finished Monday.

****JB: I know this means absolutely nothing and is just a coincidence but still, it seems pretty amazing to me. The chances have to be astronomical against this happening.

Exchanges and Clearing

CFTC Commissioner Behnam Announces Members of the Market Risk Advisory Committee’s New Climate-Related Market Risk Subcommittee
U. S. Commodity Futures Trading Commission Commissioner Rostin Behnam today announced the members of the new Climate-Related Market Risk Subcommittee (Climate Subcommittee) of the CFTC’s Market Risk Advisory Committee (MRAC). Commissioner Behnam is the sponsor of the MRAC. Bob Litterman, founding partner and Risk Committee Chairman of Kepos Capital, will chair the 35-member Climate Subcommittee. The Climate Subcommittee is comprised of experts from financial markets, the banking and insurance sectors, as well as the agricultural and energy markets, data and intelligence service providers, the environmental and sustainability public interest sector, and academic disciplines singularly focused on climate change, adaptation, public policy, and finance.

*****See the OCC’s statement on this news from Craig Donohue and John Davidson here.~MR

CME Group to Launch Block Cheese Futures and Options
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today announced that it will launch Block Cheese futures and options in January 2020, pending regulatory review.

****JB: Someone’s gotta do it.


CLS launches FX forward volume dataset
Haley McDowell – The Trade
Foreign exchange settlement provider CLS has confirmed plans to launch a new product to its executed trade data suite, known as FX Forward Volume.
FX Forward Volume aims to provide an aggregated view of the forward market for confirming pricing models for forwards and swaps. CLS said that it is the first data product for the FX forward market, with its existing datasets focused on the FX spot market. The dataset will provide insight on the FX forward market for 33 major currency pairs.


Rates Volatility Lacks Optimism on Global Reflation Trade
Tanvir Sandhu – Bloomberg
U.S. volatility markets are showing a lack of confidence in the global bond reflation trade.
After a huge rally over the first eight months of the year gave way to a sell-off on trade optimism, bond markets are yet to see a decisive turning point in the economic data. Recent moves are being driven by sentiment rather than a definitive trend in fundamentals.
The signals from options pricing highlight the lack of conviction on whether yields will break out in either direction, pointing to broader ranges being maintained for now.

Arbitrage Trade in Alibaba’s HK, US Shares Eyed by Hedge Funds
Fox Hu and Carol Zhong – Bloomberg
An expected price gap between Alibaba Group Holding Ltd.’s Hong Kong and U.S. shares is fueling a colossal arbitrage trade.
In a Hong Kong sale of more than $10 billion, the Chinese e-commerce giant may offer a 5% discount to its New York-listed shares, according to media reports. Alibaba is scheduled to set a price on Nov. 20 and start Hong Kong trading on Nov. 26.


Nasdaq Launches OptionsPlay to Educate Investors on Options Trading
GlobeNewswire (press release)
Nasdaq (NDAQ) today announced its launch of an option education program based on actionable trading ideas and content to the Nordic investment community, in partnership with OptionsPlay. OptionsPlay provides analytics that enable users of varying experience levels to visualize options data and generate trading opportunities in different market conditions. It has been adapted by Nasdaq to reflect the Nordic trading landscape, and is now available free of charge to all private investors, who will be able to access extensive educational materials and strategic insights into the options market.


Wisdom From A Dozen Transformative Leaders In 2019
Robert Reiss – Forbes
Thinking back to over 100 CEOs I’ve interviewed over the past year, and then having my editorial board select 12 Transformative Leaders for 2019, it is clear that diversity & inclusion is a predominant issue being tackled with fresh perspective. I also heard CEOs emphasizing the need for companies to help employees adapt new skills for new technologies. Still others offered reminders of timeless practices that help all CEOs succeed.

****JB: John Davidson, CEO of the OCC, is mentioned noting, “…33% of the officers at OCC are women, far above the average in financial services. ‘I still want to increase that. We need to make ways that women, and men for that matter, can leave the workforce for a point in time … and bring them seamlessly back into the workforce without making them start over again from a career perspective.'” John Lothian News has always been a champion of greater diversity in the finance industry. This is great to see.

Commission-Free Trading Puts Payment for Order Flow Under the Microscope
Julie Evans – TABB Forum
Recent moves to commission-free investments by heavy-hitting retail brokers, including Fidelity and Charles Schwab, have payment for order flow under the microscope more than ever, and people are questioning how the two will affect one another. With the loss of commission, will brokers attempt to make up for those lost funds through increased payment for order flow? The answer is murky at best.

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