French political uncertainty not priced effectively

The cost of being wrong with political uncertainty is significant and the impact will be felt across many markets. The yellow jacket "uprising" has already shifted French economic policy and will also affect the direction of government. We may not be extremists but the fundamental pact between the governed and government is broken which is not good for any investments. 

The five-year CDS spreads are not reflecting the upheaval in France. Bond spreads have widened but don't seem to reflect the seriousness of the politics. Stock indices do not show any abnormal returns. The economic policy uncertainty index does not reflect these risks although there needs to be a new update.

There can be overreaction to rioting news, but the seriousness of these risks do not seem to be reflected in prices. Given close bond and stock substitutes in Europe, a conservative approach of avoiding France seems warranted.

Mixed trend signals between equity indices and bonds

The trend environment has changed over the last month. Bonds continue a strong up trend around the globe although equity indices have moved off lows and have started to trip buy trend signals. This pattern of buy signals for both stocks and bonds is not what is usually expected. 

Rates markets are now suggesting that central banks may not be as tight with funds. Eurodollar futures are starting to move higher based on greater disagreement on Fed action. Currencies are still showing weakness although the global macro story of strong US growth, Fed tightening, and flight to quality seems to have weakened. Gold is moving higher although the precious complex is not moving in tandem. The weakness in base metals has also fallen and now shows more mixed signals. Energy prices are still trending lower although there is greater uncertainty on further trend continuation. Natural gas prices have moved higher. Grain markets are moving higher albeit these commodity market prices are generally still flat. Broader commodities show more mixed signals.

Liquidity starts to decline quickly as we move closer to the holiday season and after the Fed meeting. The general pattern is that markets become more range-bound for the last two weeks of the year. 

Managed futures funds not able to find trends

This was a negative month for managed futures funds as measured by peer indices for a simple reason, range bound behavior in equities and a reversal in bonds. Equity indices have started to trend higher, but longer-term trend followers were not able to effectively exploit these moves in the second half of the month. Global bonds have trended higher for most of the month but smaller position sizes based on higher volatility limited gains. Oil prices offered strong gains, but the size of positions may not have large enough to make an overall impact on fund returns. Commodity trades are generally a small portion of total risk exposure for large funds.

Managed futures funds are unlikely to see a significant change in performance for the year in the next month albeit there are some stronger potential trends.

November performance - Bonds say environment is negative, equities don't agree

Last month nothing worked with all asset classes generating negative returns. October saw a shift in market sentiment toward risk-off behavior. Investors started to take loses and adjust to more defensive portfolios. Momentum was clearly negative early in November, but monthly returns are sending different signals with both US and global equities higher. Nevertheless, it is too early to make any statement that risk-taking is back on. Equity markets have come off lows but are not showing any trends. Credit ETFs declined sharply relative to Treasuries and long duration bonds gained on new fears of economic slowdown. Commodities declined on a sharp fall in energy prices.

Our measures of risk appetite show we are in a period of transition and not a true risk-off environment. Economic fundamental data show some growth weakness after three strong quarters, but there is limited evidence for a bear market. Recession probabilities are still low. Risk-taking in EM has shown to be profitable. The market correction may have been overdone, but a more defensive focus is still warranted given the mixed environment.