EU Geopolitical risks - different from Anglo geopolitical risk

There has been a boom in indices that measure risk by analyzing news story words, yet not all news is created equal. There can be big regional differences, and recent research shows that geopolitical risk measures in one region may not align with or accurately reflect those in another. The recent research paper, Geopolitical Risk in the Euro Area: Measurement and Transmission, shows that there are differences between EU and Anglo geopolitical risk. Clearly, some events are more important to Europeans. We can see this in the residuals from a simple regression. The more recent history shows a strong divergence in risk. There are also clear spikes in the daily data that indicate European risks differ.

The risk differences have clear macroeconomic effects. European geopolitical risks show a stronger influence on industrial production and inflation.

Causal inference and critical statistical thinking

Causal inference is one of the most important topics in finance today. There is a difference between what correlates with or is associated with X and Y and saying that X causes Y. We can thank the work of Judea Pearl for truly focusing our attention on causality rather than correlation. 

You should not ask what tends to happen to Y when X is high. Of course, you can ask, but that only refers to the association. The real question for causality is, "What will happen to Y if we set X to a specific vlaue and all other factros are held constant?". To answer that question, we have to consider the relationship between X and Y, and also ask what other factors may influence Y, such as variable Z. Does Z cause X, which then affects Y? Does Z affect Y directly? This type of thinking is not about fitting a set of past data into a relational model, but about asking the primary question of whether there is a reasonable link between these variables. 

Before you run a statistical test, think about causal relationships and how they may be linked together. What type of relationship are you trying to find? 

Hedge fund strategy rebound

 

There has been a strong rebound in hedge fund strategy performance in April after poor March returns. All the HedgeIndex Main strategy returns were positive for the month, with especially strong performance in emerging markets, global macro, and long/short equity. Of course, the overall equity market showed strong April gains, so the market exposure for these strategies provided a tailwind, and positions placed at the end of the market were able to take advantage of the stock market improvement despite the continued uncertainty associated with the Iran War.

Commodites versus stocks - Go with the real economy?

 

The power of supply shocks and the real economy can be seen when we compare the BCOM with the NASDAQ and SPX. Since the beginning of the year, there has been a strong acceleration of commodity prices. This momentum was even before the Iran conflict. A combination of strong demand and a supply shock has been driving the commodity market, even amid all the buzz about AI. Of course, AI is driven by electricity (energy) and infrastructure (metals).