At Mount Lucas we run both discretionary macro and systematic Managed Futures strategies.

• While macro outlooks are useful for understanding Managed Futures returns, they aren’t very predictive (the “following” part of trend following). However, rule of thumb, they tend to do well when volatility increases in macro markets.
• Managed Futures picks up a risk premium from hedgers on both sides of the markets, that risk premium shifts with uncertainty.
• We have a new administration coming in shortly that sees volatility as a feature for negotiating leverage and has big macro policy goals.
• These policy goals run directly through the macro instruments we trade – bond yields, currencies and commodity markets.
• Investors need exposure to these macro markets to help diversify traditional investments.

Where do we see sources of volatility relative to the markets we trade?

Bonds and FX

• Several central bank meetings this week and next, Fed, BoC, ECB and BofE. Seeing some continuations of cuts in Canada and Europe as the economies are weaker.
• The Fed meeting was largely noneventful, a lot of talk about watching incoming data in order to assess the state of the economy and future path of rates.
• It looks to us as if the bar to further reduce rates over the coming year or so in the US is not that high given how we see inflation moving.
• If the US sees more cuts priced in over the next few quarters, it may be hard for the USD to stay as strong as it has been.
• For developed currencies, the USD has been strong over the past few years, as US exceptionalism in growth has led to higher rates than others, in part as other countries experience the impact of higher rates quicker due to the differing mortgage market structures, as overseas economies tend to have more floating rate mortgages. There is clearly some increased amount of animal spirits in the US as the new administration comes in with big plans, although it looks like some of the goals are running counter to each other, which may lead to volatility along the way.

Commodities

• Gold reaching all-time highs. Has been in a strong uptrend for the past few years. The drivers for the rally seem to be intact still, demand from other countries as a store of value outside of the reach of US sanctions. If the USD does weaken or rates come down a lot, it would likely see further upside.
• Natural gas has been volatile, it shifted sharply upwards recently as a blast of cold weather spread across the country. As the cold wave subsides, and temperatures return to normal, natural gas prices are declining due to decreased demand. We’re entering the typical seasonal trough during springtime, a period when gas storage builds up again.
• Copper has been moribund for a while and seems to take its cues from measures of Chinese activity, which we are starting to see pickup as a result of the stimulus packages last year. How the incoming administration deals with tariffs, global trade and negotiations will be fascinating to watch for that market.