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Closing Stock Market SummaryThe stock market sold off on Friday after President Trump ordered companies to find an alternative to China in response to Beijing announcing retaliatory tariffs against the U.S. The S&P 500 (-2.6%) and Dow Jones Industrial Average (-2.4%) lost around 2.5%, while the Nasdaq Composite (-3.0%) and Russell 2000 (-3.1%) lost at least 3.0%.
The day started with investors looking forward to Fed Chair Powell's speech from Jackson Hole, Wyoming. Attention quickly shifted to trade, however, after China announced tariffs on $75 billion of goods imported from the U.S on Sept. 1 and Dec. 15, which are the same dates the U.S. has planned for its tariffs on China. The tariff rate will range from 5-10%, including a separate 5-25% on autos and auto parts starting Dec. 15.
Modest selling ensued, but stocks quickly recouped losses after Mr. Powell reiterated comments that upheld the market's view for further economic stimulus. The day had barely begun, though, and President Trump took to Twitter to lash out against both the Fed Chair and China. Stocks fell noticeably on the president's declaration that companies find alternatives to China.
A steady broad-based retreat transpired during the day amid worries that escalated trade tensions will exacerbate slowing global growth and, by extension, corporate earnings. All 11 S&P 500 sectors finished in negative territory, which saw the energy (-3.4%) and information technology (-3.3%) sectors losing over 3%. The utilities sector (-1.1%) declined the least.
Shares of Apple (AAPL 202.64, -9.82) fell 4.6% and other trade-sensitive areas like the Philadelphia Semiconductor Index (-4.4%) and Dow Jones Transportation Average (-3.3%) also posted steep losses. Shares of Foot Locker (FL 34.00, -7.93, -18.9%) plunged nearly 20% after the company missed top and bottom-line estimates.
Amid the uncertainty and growth concerns, investors flocked to safe-haven assets like gold ($1537.25/oz, +$28.75, +1.9%), the Japanese yen, and U.S. Treasuries. In addition, expectations for further downside in equities contributed to a 17.8% spike in the CBOE Volatility Index (19.65, +2.97).
The 2-yr yield dropped seven basis points to 1.53%, and the 10-yr yield dropped eight basis points to 1.53%. The U.S. Dollar Index fell 0.5% to 97.73. WTI crude fell 2.0%, or $1.12, to $54.16/bbl.
President Trump also indicated he would officially respond to Beijing's actions in the afternoon. No response was announced by session's close, which may have contributed to some reservations to step into the action during the day.
Friday's economic data was limited to New Home Sales for July:
- New home sales declined 12.8% m/m to a seasonally adjusted annual rate of 635,000 (consensus 645,000) from an upwardly revised 728,000 (from 646,000) in June. New home sales were up 4.3% yr/yr.
- The key takeaway from the report is that there was a big upward revision for June, yet there was no follow-through in July despite low mortgage rates and lower median sales prices. Sales were down big in three of the four regions and the total number of new homes sold was still below the originally reported 646,000 increase for June.
Looking ahead, investors will receive Durable Goods Orders for July on Monday.
- Nasdaq Composite +16.8% YTD
- S&P 500 +13.6% YTD
- Dow Jones Industrial Average +9.9% YTD
- Russell 2000 +8.2% YTD
Investors pull money from hedge funds at fastest pace since 2016
Rebound in returns this year has not stopped clients punishing managers for weak 2018
Investors pulled around $56bn from hedge funds in the first seven months of this year, the worst start for fundraising since 2016 despite the best stretch of performance in a decade for the struggling industry.
Only 37 per cent of hedge funds have had net inflows so far this year, according to data from eVestment published on Thursday. Redemptions totalled $8.4bn in July alone, though the rebound in returns meant the industry’s total assets under management ticked up to $3.3tn.
Redemptions, which are often allowed monthly or quarterly from hedge funds, were spurred by low returns in the last quarter of 2018 when funds were caught off-guard by market turmoil.
Investors are “souring on disappointing returns or returns that don’t meet expectations for the cost they’re paying,” said Peter Laurelli, the head of research at eVestment.
As investors pull back from hedge funds, the beneficiaries are often private equity and private debt funds, which are sitting on record levels of unspent cash.
Redemptions were highest in hedge funds that bet on stocks, which lost $25.5bn to outflows in the year to July. Those funds are the best-performing major strategy this year. The HFR index of equity hedge funds was up 9.8 per cent at the end of July, but that was still less than half the 20 per cent rise in the S&P 500 over the same period.
Macro and managed futures funds also suffered more than $10bn each in redemptions. Event-driven funds, which include distressed, restructuring and special situations strategies, had inflows of $10.3bn, but even there investors were choosy: more funds had outflows than had inflows.
In terms of investment performance, hedge funds have had their best start to the year since 2009. HFR’s all-strategies index was up 8 per cent at the end of July. Returns have been boosted by surging stock and bond markets, while macro funds — which make big geographical and asset class bets — did well on trades around lower US interest rates and the escalating trade war between the US and China.
“It is the best returns the industry has broadly seen in almost 10 years, but it is still below an equal-weighted equity and bond benchmark, so I don’t know that the assumption should be there will be a general turnaround to the industry,” said Mr Laurelli. “We’ve seen a lot of high-profile fund closures over the past couple years, and I can’t see any reason why that wouldn’t continue.”
There were clear signs in the eVestment data that investors were reacting to last year’s weak performance in their allocations, rather than planning for which strategies might do well in the coming months.
Funds that managed more than $1bn and had negative performance last year were hit by $95bn in redemptions, while those that returned more than 5 per cent in 2018 saw inflows of $51bn.
H2O reveals scale of Windhorst writedowns in new report
Clients withdraw €8bn from fund manager after FT stories
H2O Asset Management has revealed for the first time just how radically it marked down its holdings of illiquid bonds connected to Lars Windhorst, after the Financial Times drew attention to its heavy exposure to the controversial German financier.
The London-based fund manager saw clients withdraw €8bn from its funds after the FT revealed the scale of its holdings of bonds related to the entrepreneur in June. Mr Windhorst has a history of legal troubles and financing from H2O previously helped him settle litigation linked to the former Russian energy minister.
After selling a €300m portion of its more than €1bn exposure to Windhorst-linked bonds in the week that the outflows began, H2O told investors that it had revalued the rest of these thinly-traded positions at “a very significant discount” to their previous marks.
In a semi-annual report from the asset manager’s flagship Multibonds fund, published on Wednesday, H2O disclosed just how steep the revaluations were. The asset manager had previously marked its holdings of bonds from lingerie maker La Perla above their face value, for example. By June 28, the debt position was revalued at just a quarter of par value.
H2O and its parent company Natixis, the French bank, had previously singled out the investment in La Perla’s bonds to defend its portfolio of investments linked to Mr Windhorst. H2O cited a trip made by a staff member to La Perla’s headquarters in Bologna, as evidence of the due diligence it carried out before making an investment.
“Given the severity of the markdowns taken on Windhorst exposures, the veracity of the original and subsequent marks likely remains a key outstanding issue,” said Matthew Clark, an equity analyst at Mediobanca, who has an “underperform” rating on the shares of Natixis.
H2O declined to comment.
Morningstar, the influential fund rating firm, questioned the “robustness” of H2O’s valuations of its Windhorst-linked bonds in June, in a critical report on what it saw as the fund’s “loose risk controls”. H2O’s chief executive Bruno Crastes described that report as a “significant vote of confidence”, noting that Morningstar had suspended its coverage a week earlier.
H2O’s new filing does not contain an opinion from KPMG, the fund’s auditor, which is required only for its funds’ annual reports. PwC, which previously audited some of H2O’s other funds, raised concerns around the valuations of its Windhorst-linked position in 2016, including an audit qualification relating to its holding in the financier’s Sapinda Invest bonds.
Multibonds is one of six H2O funds that the FT flagged as having substantial exposure to bonds linked to Mr Windhorst. The funds report at different times, so it is not yet possible to gain a full picture of how the firm’s overall exposure has shifted.
Multibonds had the most concentrated bets on Mr Windhorst’s businesses, with more than 15 per cent of its holdings at the end of 2018 linked to the German financier. This dropped to around 5 per cent after the revaluations in June.
The new filing has also revealed a fresh investment H2O made in a Windhorst-linked instrument at the end of June. The report lists a €100m investment in the bonds of Tennor Finance, a key financing vehicle for Mr Windhorst, which issued €1.5bn of debt at face value on June 17. H2O marked the bonds at just 23 cents on the euro by the end of the month.
Mr Windhorst pitched the deal as an opportunity to buy bonds backed by the value of his investment company Tennor’s stakes in other businesses, according to people familiar with the matter.
Mr Clark said that the revelation of the fresh investment was “remarkable”, adding that it was “not immediately clear” why H2O did not include the bond in a list of exposures linked to the German financier it disclosed on June 20.
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