Flash Report – July 2023

As July is coming to a close (one trading day left as of pixel-time), we note that CTAs look to have had a small losing month (-0.5%). Managed Futures managers are likely to have printed a negative month, despite a fairly strong recovery into the end of the month, post the FOMC meeting.

Given the relatively small loss, there will be some dispersion around the mean, which will be attributed a high significance as some managers may have gained due to skill and others have lost due to bad luck. In a month like July, with significant reversals, most of the dispersion is likely explained by luck. Time horizon and prior fixed income exposure will likely also have driven the profit and loss. These are static design decisions and will affect the long-term performance but not drive any short-term skill-based results.

Our other strategy trackers look to have printed a positive month, driven by strong equity market developments. Equity Long/Short is motoring on and is the best strategy year-to-date. Equity markets are no longer expecting a hard landing and were lifted by the increased prospect that we are close to the end of the FED hiking cycle.

The most significant market developments in July 2023 and their impact on markets can be summarized as follows:

1. Potentially last rate hike: Interest rate futures indicated that the market largely priced in another rate hike by the Federal Open Market Committee (FOMC) at its July 25-26 meeting. This expectation reflected the ongoing tightening cycle and signaled the committee’s intent to address inflationary concerns. The anticipation of higher interest rates likely influenced investor sentiment and market pricing. The CME Fed Watch Tool indicates that the market is only pricing in a modest chance of another rate hike.
2. Market focus on FOMC decision and subsequent news conference: Market participants closely monitored the FOMC’s decision on interest rates, with the 25 basis-point hike widely expected. The focus then shifted to the subsequent news conference for any insights into the committee’s future monetary policy direction.
3. Range-bound U.S. dollar: Continued signs of a resilient U.S. economy supported the U.S. dollar, which had recently rebounded from a 15-month low. The prospect of further interest rate increases by the FOMC contributed to the dollar’s strength. A stronger dollar can affect various markets and sectors, such as commodities, emerging economies, and global trade, due to its impact on currency exchange rates. This drove a large number of price reveals throughout the month. In particular Oil markets staggered a strong comeback.
4. Impact on other currencies: The rate hike and dollar strength had implications for other currencies. For instance, the Australian dollar and Singapore dollar weakened, after what was perceived as the FOMC’s last rate hike.
5. Earnings reports and market stabilization: The earnings season began, with notable reports from companies like Microsoft. The VIX Index is now back in the low teens, and everything is calm again.

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