One of the most consistent relationships in markets is that between US rates and USD/JPY. With Yen rates not budging, the rates differential that commonly explains currency movements is purely a function of what US rates are doing.
This week however was different.
First we had a sharp decline in US rates which currencies ignored because it appeared to be flow rather than news related.
Then on Thursday, Dec 7th, USD/JPY dived as the BoJ head Ueda sparked speculation that they will raise rates this month.
This was a short term win for the Yen, but the Nikkei didn't like the news, presumably thinking that it is a strategic mistake.
Japanese equities therefore were the laggard on the week, in local currency terms at least. In Dollar terms however, the big laggard once again was Chinese equities, while India again was the leader.
The speed of the decline in Chinese equities should be causing panic. INDA has outperformed FXI by over 15% in just the last two weeks.
Moreover, the rally in building materials reversed this week.
One possibility we are pondering is whether progress in restarting construction is being slowed by political pressure in China to address the youth unemployment crisis. Construction projects won't directly provide jobs for young college graduates, who typically work in the service sector.
Youth unemployment in India is probably still higher than in China, but after rising for many years, it has started to trend lower thanks most likely to foreign investment.
Unemployment among teenagers in the US also reversed its increasing trend with the report today. Overall the report did little to move the market however, with solid job growth being balanced by stronger than expected wage gains. This left rates little changed on the week.
There was however some movement in the curve, with the 30y rate rallying 2bps while the 5 year point sold off 2bps on the week. This was beneficial to the dollar, but sent gold lower. It did nothing to impede the advance of Bitcoin however.
The Unbound Absolute Return portfolio saw no changes in positioning this week.
While Chinese stocks underperformed overall, our position in BYD managed a small bounce. Up 2% after having been down 10% does nothing to reverse the trend, but at least it wasn't down 10% again.
Lower oil prices helped our position in JETS to outperform again. The news that ALK is buying HA may also have helped sentiment.
For the the week the portfolio was up 24bps relative to cash.
The Unbound Global Asset Allocation Portfolio was positioned underweight US and international equities and US rates.
International equities underperformed in Dollar terms, but this was all a currency effect.
There was little movement in either equities or rates on the week, so the portfolio was little changed, ending up down just 4bps relative to its benchmark.
Our tactical equity portfolio was shortindustrials against materials.
We thought that the rally in materials would continue as China tries to restart construction projects.
This failed to happen, so XLB was a laggard.
As a result we ended the week down 14bps relative to SPY.
Current Active Portfolio
YTD vs Benchmark
IR since inception
Unbound Absolute Return
Unbound Global Asset Allocation
60% ACWI, 40% AGG
-10% IVW, -10% IVE, 10% -10% ACWX, -10% AGG
-10.2% XLI, 8% XLB
An archive of our prior weeks is available here.
In John's short term portfolio (Daily discussion on forum) we bought RIG on Monday and stopped out on Thursday.
Closed trades year-to-date = 27
Closed trades that made money = 5
Closed trades that lost money = 14
Closed trades that broke even = 8
An archive of our closed trades is available here.