Top Strategist: Macro Is Running The Show And You “Should Not Be Surprised”

Recall the Heisenberg raison d’être:

Perhaps more than any other time in the last six decades, the fate of markets is inextricably intertwined with the ebb and flow of geopolitics. From the ECB’s attempts to use the central bank’s balance sheet to influence political outcomes across the eurozone to Saudi Arabia’s efforts to transform the kingdom’s influence over crude prices into an instrument of foreign policy, it’s become increasingly clear that one simply cannot fully comprehend market movements without a thorough understanding of concurrent political outcomes.

I wrote that last summer.

The point: investing is macro and macro is geopolitics. If you don’t get that, you’re going to be perpetually behind the curve going forward.

Indeed, we got the Brexit vote (and the attendant market turmoil) just three months after I penned the passage excerpted above. A few months after that, we got Trump.

Immediately after Americans elected their new president, stock/bond return correlations flipped negative and the USD began to move in lockstep with yields and equities. The reflation trade was on and has since become the most talked about trend across global markets. All because of politics.

The notion that geopolitics and macro are likely to be the key drivers of market outcomes going forward received a ringing endorsement this week from none other than Marko Kolanovic, the Street’s most celebrated quant. Below, find an excerpt from his latest note which I think serves to underscore the points made above.

Via JPMorgan’s Marko Kolanovic

Various quantitative and qualitative metrics indicate that markets have become more macro driven and react faster to the new information. A qualitative example below shows the reaction time for recent major events (August ’15 selloff, Brexit, US Election, Italy Referendum) that has compressed from weeks to hours.


Quantitatively, we are noticing a higher density of market turning points. The average variability of asset trends (averaged across major asset classes) shows turning points occurring at the fastest pace in recent history (~30 years). Given the engagement of central banks with markets and geopolitical developments, it should not be a surprise that markets are more macro driven. Additionally, information is created and consumed at a much faster pace than e.g. a decade ago (think of twitter, smartphones, etc.). An emerging class of fully automated quant strategies is also likely speeding up the market reaction — these strategies process and trade on new information (e.g. feeds from tweets, press releases, etc.) in real time. Increased popularity of trend following strategies is also likely to contribute to shorter and faster trends, as strategies react quicker and lead to potential over/undershooting of fundamentally justified levels.




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