The first half of the year may have been forgettable for a majority of the smart money and hedge funds, with nearly 80% once again underperformingttheir benchmarks due to months of P&L crushing short squeezes, but it was a buoyant time for equity markets and virtually all asset classes, for one simple reason: a record central bank liquidity injection of over $1.5 trillion YTD. Of course, that central banks had to flood markets with so much liquidity as the global economy is allegedly recovering is the main reason why nobody actually believes in said "recovery", and neither do the central bankers.
They did succeed however in generating outsized returns for the first 6 months of 2017, and as Deutsche Bank's Jim Reid writes, the first half of 2017 has been an overall positive half year for our sample of assets. Reid continues below:
Indeed with measures of volatility for a number of asset classes at historically low levels, 32 out of 39 assets in our sample have delivered a positive total return while 35 assets have done similar in USD terms. In summary, equity markets have led the way with 9 out of the top 10 positions in our leaderboard. The peripherals stand out the most with the Greek Athex (+40%), IBEX (+24%) and Portugal General (+22%) all delivering decent double digit returns. European Banks (+20%) have extended a rally which started this time a year ago following a torrid start to 2016. EM equities (+19%), Stoxx 600 (+17%) and the S&P 500 (+9%) have also seen a more than solid start to the year. For bonds, in USD terms returns sit in the +2% to +9% range with the peripherals outperforming.
It’s worth noting that given the Euro has rallied some +9% this year, in local currency terms European Bond markets are actually mostly flat to modestly down for the year. Meanwhile for credit, returns for European indices are +9% to +13% in USD terms (and 0% to +4% in local currency terms) while returns for US credit are +3% to +6%. Finally, similar to the below for June and Q2, Oil stands out for the biggest underperformer in H1 with Brent and WTI down -17% and -14% respectively with the market still questioning the effectiveness of the major producer supply curb.
In terms of the month of June itself, it has been a mixed one for our sample of assets. Markets have had a few themes to contend with. The first is the underperformance of Sterling assets in the wake of a surprise UK election result. The second was the sharp decline in the price of Oil and the third was the big spike in volatility – particularly for rates - in the last week of the month following a chorus of hawkish central bank speak. The end result was this for our sample: 20 of our 39 assets ended the month with a positive total return in local currency terms and 24 in USD hedged returns. It is however worth noting that the range of returns was relatively small. Indeed in USD terms, 29 of our 39 assets ended the month with a total return in the +2% to -2% range.
Looking at the movers and shakers this month, there isn’t much of a theme to note at the top of leaderboard. In fact it’s a fairly diverse mix with the top 5 performers this month being Wheat (+19%), Greek equities (+8%), Copper (+5%), Shanghai Comp (+4%) and European Banks (+3%) in USD terms. For equities, it was a fairly mixed month with some volatility into month end helping to create some divergence. The Micex (-3%) and Bovepsa (-2%) were the notable underperformers reflecting lower Oil and political turmoil, respectively. The FTSE 100 returned -1% (and -3% in local terms) while the Stoxx 600 was also -1%. The S&P 500 finished up less than +1% while EM equities were +1%.
For bond markets returns were subdued but in the case of Europe, mostly positive despite the big rates re-pricing in the last week. BTPs (+2%), Spanish Bonds (+2%) and Bunds (+1%) all finished with low single digit returns while Treasuries ended the month flat. Much like equities, Gilts (-1% in USD and -2% local) saw negative total returns over the month on political concerns and higher inflation. There were similar returns for credit markets suggesting little evidence of much spread tightening over the month. Generally speaking EUR credit outperformed US when looking at USD hedged returns. EU HY, EU Fin Sub, EU Fin Sen and EU IG Non-Fin all returned between +1% and +2% while equivalent US indices finished in a 0% to +1% range.
At the bottom of the leaderboard the most notable standout was the -5% declines for WTI and Brent Oil. That includes a late bounce in the last week or so. Prior to that, Oil had been down as much as -12% at one stage during the month. Elsewhere Silver (-4%) also had a bit of a month to forget as did Gold (-2%).