Europe’s second largest hedge fund operator, Brevan Howard’s flagship hedge fund, the Master Fund, gained 1.81 percent (2% rounded up) in October, compared to 0.58% for September. Total year to date returns for all hedge funds is 2.87%. The firm currently has approximately $37 billion of assets under management (AUM).
The Master Fund generated gains in all asset classes. However, the majority of the gains were from interest rates trading, mainly from curve-steepening positions in the US dollar and the Euro. Additionally, the hedge fund produced gains on directional positions in European government bonds. Smaller gains were registered in tactical macro trading, asset backed securities, and credit positions.
Alan Howard, the CEO, offered his regularly monthly commentary. Howard, who was more bullish in the beginning of the year, is slightly more bearish now.
Howard states that Ben Bernanke’s QEIII could end up being over $1 Trillion total. The Fed, with QEIII and close to zero interest rates, seems to be using the Taylor Rule. Unfortunately, the bad news is that the economy needs help.
Howard notes that orders for core capital goods are declining on a year-on-year basis, and have fallen 5% below the level of shipments of core capital goods. Previously, when orders have run that far below shipments, it has been a signal of a recession in investment.
His view is that US growth and employment will expand at a sub-par pace through the end of the year.
Eurozone incoming data continues to show no signs of an easing of the underlying conditions, despite a rebound, likely temporarily, of industrial production in August. The unemployment rate is now rising in all countries, including Germany, and in France, the number of jobless people passed three million. Simultaneously, inflation rates and taxes are rising.
The ECB’s announcement of the Outright Monetary Transactions (“OMT”) bond purchase program, and its potentially unlimited size, lacks details and the conditionality has yet to be agreed, before the program can be activated. Currently, the Spanish government shows no urgency to apply for the program.
The Spanish and French governments published their 2013 budgets, showing very different approaches to the same goal of narrowing the public deficit and reaching agreed EU fiscal targets. In Spain, the conservative government’s budget focuses on additional spending cuts, mainly on welfare programs, while in France, the socialist government has put emphasis on raising additional revenue, by increasing income and corporate tax rates.
The finance ministers of Finland, Germany, and the Netherlands issued a joint statement, in which they repeated their earlier position that they do not see past government capital injections to ailing banks as eligible to be transferred to the ESM firewall mechanism. This position, should it prevail, would complicate the adjustment efforts of Spain and Ireland.
Underlying growth in the UK is estimated at around zero. Any talk of “emerging from recession” or “green shoots” is misguided: the UK was never really in a significant double dip recession, and there are no meaningful green shoots. The bigger picture is that UK growth lies somewhere between the US (growth slightly below trend) and the eurozone (recession).
With tight fiscal policy, ongoing domestic deleveraging headwinds, and an EMU recession continuing to hinder UK recovery prospects, weak growth and monetary stimulus look set to continue.
The Japanese economy is anticipated to record a contraction in growth for the third quarter. This outcome is supported by hard data, currently available, showing a further steep drop in industrial production, during August which again undershot expectations (dropping 1.3% month on month versus a consensus forecast fall of 0.5%), and car registrations.
While the Bank of Japan’s easing seems inadequate to weaken the yen, uncertainty on the economic outlook arises from the political landscape and the timing of the next election.
A positive sign was in finished goods inventories, which fell to levels approaching the 2005-2011 average, suggesting that the de-stocking process could be drawing to an end, thus exerting less of a drag on industrial production going forward. On the non-manufacturing side, while the official PMI fell by 2.6 points to 53.7, the lowest level since March 2011, the Services PMI compiled by Markit showed a bounce.
On the policy front, the People’s Bank of China (“PBOC”) injected net Rmb365bn liquidity into the banking system through large issuances of reverse repo, ahead of the National Day holiday, 1-7 October. Reverse repos have become a significant tool to fine tune liquidity. This liquidity injection is equivalent to a 50bp reserve requirement ratio cut. The third quarter statement by the PBOC monetary policy committee reiterated a prudent approach to monetary policy.