Brevan Howard Global commentary for the month of May 2016.
Brevan Howard Global Global Limited (“BHG”) is a closed-ended investment company, registered and incorporated in Guernsey on 25 February 2008 (Registration Number: 48555).
Prior to 1 September 2014, BHG invested all its assets (net of short-term working capital) in Brevan Howard Global Opportunities Master Fund Limited (“BHGO”). With effect from 1 September 2014, BHG changed its investment policy to invest all its assets (net of short-term working capital) in Brevan Howard Multi-Strategy Master Fund Limited (“BHMS” or the “Fund”) a company also managed by Brevan Howard Capital Management.
Brevan Howard Global was admitted to the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange on 29 May 2008.
Brevan Howard Global Monthly Commentary
The NAV per share of BHG’s USD shares appreciated by an estimated 0.24% and the NAV per share of BHG’s GBP shares appreciated by an estimated 0.20% in May 2016.
Brevan Howard Master Fund Limited (“BHMF”)
The NAV per share of BHMF Class Z USD shares depreciated by an estimated 0.09% in May. Losses in interest rate trading from long positions in Japanese volatility as well as from long US directional positioning were partially offset by gains from directional trading in Europe as well as European swap spread and peripheral bond trading. FX gains from tactical and volatility trading in sterling were offset from losses in Emerging market currency trading. Trading across other currency pairs contributed small gains.
Brevan Howard Asia Master Fund Limited (“BHA”)
The NAV per share of BHA Ordinary USD shares depreciated by an estimated 0.16% in May. Modest losses came from long gamma positions in US interest rates as well as from US curve trading. Further minor losses came from curve trading in Korean rates. FX and equity trading generated small gains and losses respectively with little by way of themes.
BH-DG Systematic Trading Master Fund Limited (“BHDGST”)
The NAV per share of BHDGST Class Z USD shares depreciated by an estimated 3.99% in May. In May, gains were recorded in the bond and agricultural sectors. BHDGST realised its most significant losses in currencies which accounted for 87.5% of the total loss on the month. In bonds, the model generally increased its long positions on European and Australian sovereign debt futures. In short term interest rates, the model increased its shorts in Canadian banker’s acceptance futures and increased its longs in short sterling futures. In index futures, long positions in European index futures were increased while the highest frequency of directional changes happened in Asia. In FX, the model reduced its long stance on the Japanese yen, cutting its long versus the dollar and increasing a short versus the Australian dollar. With EURUSD, the model cut its long throughout the month and flipped to a small short in the final week. With the exception of a short in natural gas futures, longs in energies were increased. In agricultural futures, the model flipped a long in soybean oil to a short, reduced a long in soybeans and increased a long in soybean meal futures. In metals, the strategy substantially reduced its long in gold futures.
Direct Investment Portfolio (“DIP”)
The Direct Investment Portfolio (“DIP”) appreciated by an estimated 1.25% in May. The DIP generated most profits in credit and interest rates trading. In credit both the corporate & MBS books contributed to the gains. In interest rates, short exposure to USD interest rates when rates sold off mid-month generated the bulk of the gains. FX trading generated additional small gains from short exposures to GBP, ZAR & EUR against the USD. Long exposure to oil produced small gains, whereas equity trading was flat.
Manager’s Market Review and Outlook
The information in this section has been provided to Brevan Howard Global by Brevan Howard Capital Management.
Growth improved in May while the labour market slowed, reversing the pattern seen since the start of the year. Real GDP growth is tracking above 2% (annualized rate) in the current quarter, a noticeable albeit unspectacular improvement on the soft patch seen in the last two quarters. The improvement has been driven by consumer spending and housing, two areas of strength in the economy. However, business investment and net exports continue to be areas of weakness.
Job gains disappointed in May, currently at their weakest pace since 2010, and the participation rate dropped abruptly for the second month in a row. The drop in the participation rate left the unemployment rate at a cycle low of 4.7%. However, broader measures of labor market slack were unchanged. Wage gains remain moderate, suggesting that there is still at least some slack even at such a low unemployment rate. The news could be read in two different ways. As the economy comes into full employment, job gains are supposed to slow. However, the slowdown in the last two months has been sharp and widespread, so the question is whether the labor market is facing downside risks. After all, business sentiment and capex have been poor for some time and the worry is that hiring is beginning to wane at the same time.
Inflation is low. After seeing a pick-up in core inflation at the start of the year, recent prints have solidified the run rate at 1.6% over the last year. If import and energy prices stabilise, then the prospects appear favourable for a steady improvement in core inflation in the second half of the year. However, such an outcome is highly dependent on the exchange value of the US Dollar. In May, the US Dollar appreciated more than 3% on a broad trade-weighted basis. Such appreciations put downward pressure on import prices and make it difficult to generate higher core inflation.
The developments in inflation expectations are cause for concern. Survey measures of long-term inflation expectations from the University of Michigan and the New York Federal Reserve Bank have been trending down. Indeed, the Michigan survey has been at a record low or made a new record low in four of the six months since lift-off. Similarly, inflation compensation in financial markets has been trending down. According to Fed calculations, the so-called 5-year/5-year forward breakeven inflation rate (“BEI”) is 25 basis points below where it stood at lift-off. The 5-year/5-year BEI had been following the path of crude oil prices for much of the year. However, in May crude prices rose to local highs while the 5-year/5-year BEI rolled over in sympathy with the appreciation in the US Dollar. In her most recent speech, Chair Yellen highlighted these negative developments saying, “The indicators have moved enough to get my close attention.” That’s a warning shot that these expectations have to improve for her to have confidence that inflation will move back to two percent.
At the recent FOMC meeting, the UK referendum on EU membership dominated discussions. If that uncertainty is resolved in favour of the status quo, then the upcoming Fed policy decisions will revert to being data dependent. If the UK