Welcome to a new financial quarter.
As part of the usual review of last month and Q1 asset performance, it is worth nothing one surprising element of Q1 we showed over the weekend, namely that the VIX index had its lowest average quarter since Q4 2006.
According to Jim Reid, who is perplex by this collapse in equity vol, "data best predicts where equity vol will trade but we've been surprised that there hasn't been the odd spike up given the political uncertainties on both sides of the Atlantic. Data is winning out for now." We will have more to say on the technical aspects of why equity vol appears to have gone on a permanent sabbatical shortly, but for now, here is a recap of March and Q1 2017 performance:
The month of March has been another mixed to positive one for our sample of assets. While political developments and particularly those related to the Trump presidency have continued to drive the performance and sentiment of assets to some degree, global economic data continues to hold up well which in turn is helping to support a positive backdrop for most risk assets. In addition, the incredibly low level of volatility throughout markets has remained a major theme throughout the month. Indeed the VIX had its lowest average in Q1 since Q4 2006. In summary we have seen 20 of our 39 assets finish the month with a positive return in local currency terms but a greater number (26 out of 39) finish with a positive return in dollar terms, given the stronger euro (+1%), yen (+1%) and sterling (+1%) during March.
Looking closer at the performance in March first, there’s a fairly consistent theme which plays out across the top of our leaderboard and that is the strong performance for European equities, likely reflecting solid economic data and reduced political concerns, particularly in France. Indeed in dollar terms the IBEX (+10%), FTSE MIB (+9%), Portugal General (+8%) and European Banks (+7%) are our top 4 performers in March. Closely following these markets are the DAX (+5%) and Stoxx 600 (+4%), with EM assets not far behind with EM equities (+3%) and EM bonds (+2%) having a strong month also. This likely reflects broadly stable economic data in China and the emphasis of a gradual profile of tightening by the Fed and lower Treasury yields. In contrast, the S&P 500 ended the month flat in total return terms.
At the bottom of our leaderboard, despite a rebound into the end of the month, both WTI (-7%) and Brent (-6%) have suffered sharp declines perhaps from fading optimism around the effectiveness of the OPEC production cut deal. In fact commodities largely dominate the bottom of the leaderboard with Copper (-2%), Corn (-1%), Silver (0%), Wheat (0%) and Gold (0%) all flat to slightly down. It’s worth noting however that these moves follow what has generally been a strong start to the year for the commodity complex.
Meanwhile performance across fixed income assets has been much more muted in March. In sovereign bond markets both European bonds and Treasuries sit in the 0% to +1% range with yields still continuing to remain fairly range bound. With credit spreads already tight, total returns for credit markets were fairly subdued through March. European credit has outperformed the US though with Fin Sub and HY +1% to +2% and Fin Sen and IG Non-Fin up to +1% higher. In contrast US credit sits in the bottom half of our leaderboard with total returns in the 0% to -1% range. US HY has recently seen large outflows and renewed energy concerns given lower oil prices.
That takes us to performance for Q1 which was a positive one for the vast majority of our assets. Indeed in dollar terms 33 out of our 39 assets in our sample ended the quarter with a positive total return. While Silver (+15%) actually led the way the dominant theme was the strong performance for equities, particularly in the periphery, EM and Asia. Indeed the IBEX (+14%), EM Equities (+12%), Bovespa (+12%) and Hang Seng (+10%) were all up double digits in Q1. That’s not to say that it hasn’t been a strong quarter for DM equities. The Stoxx 600 (+8%) and S&P 500 (+6%) have both provided investors with healthy returns while it’s also worth highlighting the decent performance for European Banks (+8%) over this period. Credit returns have been a lot more muted. Still, returns across European and US indices have been +1% to +3% in total return terms, led by higher beta HY and Fin Sub. In contrast Treasuries and Bunds have returned less than +1%.