The DB Platinum TT International Fund benefited on its short of the euro and pound during the month of February. However, the fund’s long position on gold and 1-year overnight indexed swap rates on the Australian dollar mostly offset those benefits.
The fund gained 0.28% during the month of February, while its year to date gain is 4.65%, according to TT International’s February financial update, a copy of which was shared with ValueWalk.
TT International: Strength in European markets
During the month of February, a number of positives boosted European equities as investors breathed a sigh of relief. Greece managed to extend its bailout loans, and worries about Greece defaulting on its debt and exiting the euro were put to rest.
Meanwhile the tension in Ukraine began to ease despite a troubled beginning to the ceasefire agreement, although not until after the rebels advanced and took more territory. The good news though is that the rebels and Kiev are both starting to pull back their heavy weapons.
TT International also noted that fourth quarter growth in the Eurozone was slightly better than expected, especially in Germany where demand picked up. Also surveys for sentiment and industrial indicators kept improving as the ZEW Indicator of Economic Sentiment hit a one-year high.
The delicate U.S. economy
The fund also noted in its February update that the gross domestic product growth rate in the U.S. slowed as inflation measures declined in the first two months of the year. However, the jobs market continued to rise, and wages were rising at the fastest rate they have in eight years.
The Federal Reserve is understandably treating the U.S. economy with kid gloves during this delicate time. Debate about raising interest rates continues, and Fed chairperson Janet Yellen told Congress that changing their guidance wouldn’t lock them into a timetable for raising rates.
She continued to maintain that the decision to hike rates will still depend on major data points. As a result, expectations of a rate increase were delayed, pushing the S&P to a record high.
TT International: Slow growth in Asia
China surprised global markets by cutting the reserve requirement ratio during February. The result was concerns that the Chinese market was slowing down further, and early equity gains could not be sustained throughout the month.
However, TT added that speculations about other policies supported the market and resulted in the resumption of the uptrend. The yuan hit its lowest value since October 2012, and China’s central bank pushed the currency lower to control outflows of capital, according to TT.
Japan’s economy did not grow as well as expected during the fourth quarter, although nominal gross domestic product was higher than real gross domestic product, marking the first time this has happened since 1997. Japan’s central bank kept the stimulus flowing but did report increases in exports and production. Tokyo urged corporations to raise wages as they see their profits increase. The value of the yen remained mostly range-bound.
Crude oil rebounds, currencies quiet down
Oil prices also rebounded in February in connection with the strike at oil producers in the U.S. TT noted that the Brent benchmark soared to more than $62 per barrel and Kuwait’s oil minister expects to see oil prices rise in the second half of this year.
The currency markets began to settle in February after the big moves noted in January as the value of foreign currencies versus the U.S. dollar plunged. TT said it was more focused on consolidating the profits it earned in January from currencies instead of “adding markedly to risk.”
TT International’s big winners
During the month of February, the firm looked to protect January’s strong gains, particularly those in the macro book. In foreign exchange, TT locked in most of January’s profits and slashed almost all of its positions and was relatively inactive in this segment during February. It did keep a “small core” short on the euro against the U.S. dollar. The firm also kept its short of the British pound versus the U.S. dollar. Both currency shorts were profitable but resulted in a flat contribution from foreign exchange overall.
TT reported a win in its directional long position in Eurostoxx futures due to the rally across European equities markets. The fund’s short positions and index hedges mostly offset gains from its long positions in European equities.
The strongest long contributor was the Industrials sector, with Airbus and Rheinmetall leading the way. In second place was the Consumer Discretionary segment, led by FIAT and Peugeot. Materials, Healthcare, and Utilities and Telcos were all positives. TT also benefited from longs in banks thanks to a sector-wide rally, particularly in Credit Agricole and UBS. The overall Financials sector, however, had a negative impact on the fund, resulting in a squeeze of its shorts.
TT International’s big losers
TT’s fixed income book performed negatively, particularly the fund’s one-year overnight indexed swaps on the Australian dollar. The position turned to the negative after Australia’s central bank surprised global markets by cutting interest rates in February. After that announcement, TT International closed the position.
Another big losing position for TT’s DB Platinum fund was its gold long. The fund built up that position in January after the Swiss National Bank removed the cap on the Swiss franc. When the U.S. posted strong employment data early in the month, gold investors started taking profits when the precious metal moved suddenly higher. The firm exited its gold position when the metal “was pushed back into the doldrums along with other commodities” when global tensions started to ease.
Looking ahead
TT said they’ll be keeping a close eye on the trajectory of interest rates in the U.S. and comments made by Fed members. The firm believes there will be continued downward pressure on interest rates due to the balance sheet programs currently being run by the U.S. central bank. TT estimates that the programs are pulling down 10-year Treasury yields by approximately 110 basis points.
Currently there is a significant gap between what the markets expect and what the Fed expects, according to The Wall Street Journal, meaning the markets should be wary of what will come next.
TT also points out that the Fed is noticeably silent on the topic of the skyrocketing value of the U.S. dollar. The fund suggests that the central bank may simply be “content for the tightening of U.S. financial conditions which is often dominated by rising interest rates, this time to be achieved by an appreciation of the currency.”
TT International: Still positive on Europe
TT also predicts that the U.S. stock market will begin to decline, suggesting that it probably can’t keep outperforming because of the combination of high valuations and ownership with lower growth in earnings and the beginning of interest rate hikes. The firm suggests that the best-case scenario is for the U.S. markets to move sideways, which would allow Japan and Europe to keep growing.
The fund remains “constructive” on European equities due to this backdrop, noting the increase in the European macro surprise index and the launch of quantitative easing programs by the European central bank. The earnings of European companies are beginning to prove, and fund flows into European stocks are on the rise as well.
TT International: The biggest risks
TT would prefer though if the European equity market would move sideways “for a while” because the market has rallied to the point of becoming overbought. The fund also sees a rotation risk right now but notes that it’s difficult to completely hedge against these risks.
The fund sees the largest macro risk as being U.S. interest rates. As wage inflation in the U.S. starts to speed up, the Fed will be anxiously looking for the right time to raise rates. The odds of a rate increase are rising, and bond yields are starting to move out, causing concerns for the second quarter.
Where TT International stands now
The fund said that right now, it holds a “small net long exposure” in European equities and has “modestly” reduced the gross. It has upped its net exposure in Energy, Financials, Industrials, Materials and IT, mostly by removing short positions. TT International’s DB Platinum fund has also taken a short Eurostoxx futures position.
In Energy, the fund slashed shorts and went long in Saipem. The largest increase in net was in the Financials segment, in which it also slashed its shorts position. TT also added longs in Evonik and Glencore in Materials and Inmarsat in Telcos.
In currencies, the fund started again building a bigger short position in the euro versus the U.S. dollar.
