June's Winners And Losers

Think gold and silver were the worst performing financial asset in June? Think again: that dubious distinction falls to the Bovespa, the Shanghai Composite and the Greek stock market index, all of which tumbled more than the precious metal complex did in the past month. Yet what an odd month for hard assets - on one hand WTI, Corn and Brent were the best performing assets, while gold, silver, copper and wheat tumbled. A function of the China's growth renormalization? Or an end to "flight of safety" - we will know quite soon.

One thing is certain: as already noted, the number of gross shorts in gold is now at an all time high. And just as gold was one of the two worst performing assets of the first half (with silver), all that would require the unwind of this move, now that gold and gold miners are the most universally hated assets by the "expert" community, will be a short-covering catalyst, whatever that may be: perhaps some announcement by the PBOC updating the world on its gold holdings following 4 years of crushing silence...

More from DB:

The first half of 2013 will be remembered as a fascinating half with DM equity markets generally outperforming but fixed income markets suffering across the board. June itself was a pretty poor month for markets with virtually all financial assets finishing the month lower. Indeed as we show in Figure 1, all except Oil posted negative returns last month. We also saw EM (debt and equities) correct further as the asset class continues to reprice itself on the back of a higher US government yield, fundamental worries and with it outflows. Relative to EM debt, DM credit has held up relatively well in a rising yield environment even though we saw credit excess returns moderately in the red in June. Oil aside the commodity complex endured a challenging time in June with precious metals falling sharply on the back of Fed taper talks and perhaps concerns with regards to Chinese growth. We’ll explore all this in a little bit more detail below but for those who want to get straight into the numbers, our oft-used
performance charts and tables for June, 1H and YTD are updated in the PDF.

First taking a closer look at equity returns, the Nikkei (-0.6%) and the S&P 500 (-1.3%) were the better performers in June even though both ended the month lower. Whilst it was the worst performance for the S&P 500 in 8 months, the losses pale in comparison with the sell-off in EM equities. Indeed Chinese equities were hit hard in June as a spike in interbank rates raises questions around a potential credit/liquidity tightening and the broader implications for growth. The Shanghai Composite (-12.4%) recorded its biggest monthly drop since August 2009 as the market traded lower in 14 out of the 17 sessions in June (shortened month due to a 3-day Dragon Boat holiday). In other parts of EM, Brazil’s Bovespa index was also down by a comparable 11.3% in June on a TR basis and is now down 22% since the start of the year. Turning to Europe, the Stoxx600, DAX, FTSE were down -5.0%, -4.7%, and -5.2%, respectively. These were big moves but still better than a -15.6% and -10.8% decline in Greece and Italy, respectively. So whilst equities were lower across the board in June, the resilience in DM has been a fairly consistent theme this year with the Nikkei, S&P 500 and Stoxx600 still up about +33%, +14%, and +5% YTD respectively in local currency terms.

Moving on to fixed income, total returns for US Treasuries were -1.4% in June bringing its YTD losses to -2.4% as the Fed showed no desire to soften tapering expectations. As we’ve mentioned a few times, US government debt has tended to set the price of debt globally so a rise in UST yields is also increasing risk premia in other markets with EM debt bearing the brunt of this. EM bonds were down around -3.8% in June after having lost -5% in May, a magnitude that the market hasn’t witnessed since Sept 2011. EM bonds total returns are now around 5% down for the year. The impact was also felt by European core rates markets although to a lesser extent with Bunds and Gilts down -1.0% and -2.4% in June.

The rise in core rates also had a negative impact on DM corporate credit. Whilst moderately negative excess returns also contributed to the negative total returns, DM credit performance has been relatively resilient versus their EM peers. YTD total returns for US IG and HY corporates are currently -3.6% and +1.0%, respectively.

Finally taking a quick look at commodities and currencies, Brent (+2.0%) and WTI (+5.0%) were the key performers in June amid a 2.2% decline in the CRB index. Precious metals suffered the most as QE unwind expectations continued to build. Gold and Silver were down around 11-12% in June, bringing their YTD returns to - 26% and -35%, respectively. In FX, USD was relatively stable against the Sterling and Euro but appreciated over 4% against the Aussie as the latter suffers from a weakening macro backdrop in China.

So a tough June and one that shows how liquidity has been for markets this year. Whether the Fed can hold firm and taper and whether China continues to be more disciplined with its banks will likely be the key stories and asset performance drivers of H2.