June 2021 comment

After a headfake in April, June brought with it our first noticeable monthly drop of the year with the NAV/share retracing little over 1%. An uneventful ECB meeting vacated the stage for a Federal Reserve gathering that was anything but run of the mill. The Fed produced a hawkish pivot both in terms of dot plot rate liftoff expectations and bringing forward the tapering discussion. All in all the move somewhat rejected the recent months’ signalling that the Fed would take a reactive approach towards inflation - aiming to run the economy hot at above average inflation – in favour of a more traditional proactive stance that sees the recent inflationary spike as above what was previously expected.

This surprising pivot wreaked havoc on the US rates curve, and most reflation trades that had been working well for us since November duly suffered. The market entered liquidation mode and the belly of the US curve sold off to the tune of 12bps. This materially affected our US steepening trade and a recent trend position on the Australian 3y that was swiftly stopped out with these moves. Accordingly, the US dollar rallied two big figures against the euro, hitting our shorts vs. INR, CNH, GBP and CAD especially hard. Not all USD shorts suffered, and we were able to?hamper some of these retracements with gains in BRL, MXN and RUB – which are currently supported by hawkish central bank stances – although these positive exceptions were insufficient to prevent currencies from being our biggest drag on monthly performance. Given stops and position reductions, our total USD short exposure is now less than halfway of where it stood on May 31st.

Agriculturals were surprisingly resilient and were only second to Energies – lead by UK Natural Gas long – as our monthly bright spot. Some long positions – such as Soy – were exited following the Fed surprise, although others such as Robusta Coffee quickly resumed their upward trends. Another USDA planting report continued to demonstrate that supply tightness is expected to continue to support prices.

Since the meeting an array of Fed officials have been diligent in communicating that the Fed does not intend a material shift. In our view, the issue is more one of keeping real yields at a stable level as inflation picks up and not necessarily an intention of effective tightening. We continue in the reflation camp, but nonetheless accept that the full support of the Fed in terms of ‘running hot’ has now faded hence will look to participate in this paradigm with a lower conviction level than before.