Blame the Computers for Last Week’s Market Wipeout

So says JP Morgan’s trading honcho, Marko Kolanovic, who thinks more than half the moves were due to algos.

The algorithms did it. That’s the verdict of JP Morgan’s top trading strategist when describing last week’s volatility, with last Wednesday’s breathtaking 3% plummet in the S&P 500 as the centerpiece.

It all seemed to confirm August’s reputation as the worst month for equities. “More than half of equity moves were driven by systematic rather than fundamental trading,” wrote Marko Kolanovic, the bank’s global head of macro quantitative and derivatives strategy, in a research note.

But never fear, he said: Equity inflows should keep the market going higher. After Wednesday’s bath, the market trended upward through Monday, then dipped anew on Tuesday, off 0.79%, as the market digested news that the trade war’s end is not in sight.

The market took a dive at mid-week, its worst day of 2019, in reaction to eerie music from the bond market. The yield curve inverted for the two-year and 10-year Treasury bonds. There’s been an inversion—which customarily signals a recession—regarding the three-month T-bill and the10-year for three months, but this one was seen as more serious, even if it only lasted for a short time.

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“Despite fundamental risks, recent equity and bond moves were mostly technically-driven,” Kolanovic declared in a note to clients. “More than half of equity moves were driven by systematic rather than fundamental trading.”

By his estimate, the big downdraft’s primary fuel was $75 billion in computer-driven selling. Banks’ hedging and index options delta, where the underlying stocks also dragged down the options pricing, were two of the most salient forces, he indicated.

Nonetheless, Kolanovic said he saw as much as a 2% boost next week, to round out the month.


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CPP Fund Returns 1.1% in Q1 of Fiscal 2020

Canadian pension giant earned three- and five-year annualized returns of 10.5%.

The investment portfolio of the C$400.6 billion ($300.9 billion) Canada Pension Plan Investment Board (CPPIB) reported a mere 1.1% return net of costs for the first quarter of fiscal 2020 ended June 30, but had 10.5% annualized returns for the past five and 10 years.

The quarterly gain added C$8.6 billion to the fund’s asset value, which consisted of C$4.1 billion in net income after all CPPIB costs, and C$4.5 billion in net contributions.

“CPPIB’s investment programs performed well in the first quarter, achieving solid net income in local-dollar terms,” Mark Machin, CEO of CPPIB, said in a statement. “At the same time, the strengthening of the Canadian dollar against all major currencies in June dampened our returns overall, as the market responded to lower interest rate expectations in the US and Europe.”

The fund’s Total Portfolio Management department was the top performer, said CPPIB, which was attributed in part to gains in fixed income investments. Private equity and active equities also delivered positive results, which was bolstered by the improved sentiment in global equity markets.

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The fund said that every three years, the Office of the Chief Actuary of Canada conducts an independent review of the sustainability of the CPP covering the next 75 years. In the most recent triennial review, CPPIB said the chief actuary reaffirmed that as of the end of 2015, the base CPP remains sustainable at the current contribution rate of 9.9% for the next three quarters of a century.

The chief actuary’s projections are based on the assumption that the base CPP investments will earn an average annual rate of return of 3.9% above the rate of inflation, after all investment costs and operating expenses through the year 2090.  

Among the first quarter investments, CPPIB agreed to acquire UK-based family entertainment company Merlin Entertainments for 455 pence ($5.50) per share in cash. It also closed a deal to invest £95 million ($114.8 million) in Visma, a provider of business management software and services in the Nordic and Benelux regions. The investment brought the fund’s total investment in the company to £200 million, which translates to a 4.7% ownership stake.

The CPPIB also signed a memorandum of understanding with Piramal Enterprises to co-sponsor a renewables investment trust that will acquire operating renewable assets in India. It said it will hold a majority stake, with an initial target investment of approximately C$300 million, with Piramal and other long-term investors holding the remaining interest.

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