After flying high for nigh on three years and equity markets regularly breaching new all-time highs, the world came back to earth with a bump in the fourth quarter. This reality check was both global and local as trade tensions and political power shifts in the US prompted a macro hiccup, and Brexit concerns prompted significant news-driven volatility in the UK. Such issues led to material value changes, including the S&P 500 falling by 20%, oil prices falling 50% and a steepening in 10yr vs 30yr gilt yields. A confluence of events such as these can be hard to predict, and indeed fixed income investors, banks and hedge funds had a tough quarter with the aggregate hedge fund index down 7%.
President Trump retaliated against the mid-term setback where the Democratic party retook control of the House of Representatives by stepping up the rhetoric against China, the Fed and any members of his administration who put a toe out of line. Data releases had a softer tone in the US prompting discussion of an end to rate hikes for the near term, with some economists suggesting rate cuts may be on the horizon for the US. Europe’s sentiment and data publications remained weak. Prime Minister May managed to secure a Brexit deal in mid-November: however, this was far from being a panacea and immediately all hell broke loose with a spate of ministerial resignations – the most damning of which being Dominic Raab; the minister in charge of negotiating the Brexit deal! The lack of consensus over Brexit was brought kicking and screaming into the foreground and (eventually) provoked a no-confidence vote in Theresa May, which she won but hardly decisively and even that failed to resolve anything. Fundamentally, all that has been clarified is that there is no consensus for any way forward and no clarity on what will happen, even at this late date.
Total interest rate liability hedging activity was approximately £31.7bn in the fourth quarter, a 9% rise. Inflation hedging activity however decreased quarter-on-quarter by 9% to around £22.1bn. Buy-out activity remained a major factor over the quarter, and again pension fund activity was tilted towards leveraged gilt hedging strategies rather than swaps. Where swaps were used, the proportion linked to SONIA rather than LIBOR continued to grow, as the various exhortations from the Financial Conduct Authority (FCA) and Monetary Policy Committee (MPC) filtered through organisations.