Pre-open Update – Global Market Disconnect
Monday, March 3rd
Near Term Positioning:
We suggest selling short European and U.S. equity futures among other risk assets as the muted (less than 1%) pre-open decline in several developed market futures will be short lived.
Our opinion is predicated on the following Political, Military and Market factors:
Political and Military:
The existence of Russia’s large and strategic Black Sea Fleet (BSF) nested within an unstable Ukraine suggests an escalation in and not resolution of the Russian/ Ukrainian military actions.
More telling about the potential scope and depth of any global sell-off is Russia’s decision to increase its benchmark rate 150BPs which underscores their concern about foreign outflows.
A Global Macro Shock spurring Central banks to act in defense of their currency usually augments market volatility. Russia’s rate action may pressure other developing economies to raise rates to be attractive. Additionally, global market instability will increase if Developing Market Central Banks swap the carrot of rate increases for the stick of capital controls to staunch foreign outflows. For these reasons among others, we believe there remains near-term downside to global risk assets – even in the safe haven of the US.
Longer Term Outlook
We remain committed to a low leveraged, long biased portfolio with an outsized allocation US-based equity and credit. Greater detail can be found in our 2014 Investment Outlook summarized in the February 13th blog. Today’s volatility underscores the utility of our suggested portfolio construction as macro forces reduce the ability of active managers to monetize today’s market volatility.