October has poor seasonality, none worse than in an Election year. After a strong q3, especially for equal weighted SPW (a proxy for active managers), we see caution prevailing in q4, with profits being taken and cash waiting to react rather than trying predict. We don't believe either the US or China are going for a big monetary stimulus and see the latter in particular as allowing creative destruction of the speculative property developers while setting up for a Capital Market with Chinese characteristics. Retail may get excited about China short term, but the long term asset allocation story is the one to buy on the dips. Meanwhile, diversification and the Dollar are a key focus, especially with the BRICS+ summit this month raising the prospects of a new trading currency - the UNIT

After the volatility in July and August, some traders had their worst summer in years, being forced out at the bottom or in at the top, ,while those who went to the beach may have returned to find their portfolios little different than they left them. Under the surface however, things are changing, politics in the US are developing fast while the anti Globalist populism in Europe has got stronger in the face of attempts to suppress it. The Fed has acknowledged that the time has come for lower rates, which is switching attention to the prospect of a weaker US$ and the idea that the monopoly profits that underpin the S&P earnings may come under treat from both regulators and global competition is starting to shift the focus from momentum and memes onto cash flow, yields and diversification.

The US Political drama arrived months early, forcing markets to adjust for the 'known unknowns' of Trump and the previously 'unknown unknowns of Harris' - in effect a deleveraging has taken place. In doing so it has exposed the Yen carry trade which is likely to continue to complicate markets during August. Medium term, Silicon Valley is picking sides and lining up behind its preferred candidate, highlighting the importance to tech earnings of a US discretionary spending Budget the size of the UK Economy, while longer term the threat of currency realignments, including a weaker $ and perhaps an end to the HK peg, remain.

The scorecard for the first half puts Equities, commodities and Gold in the top half of the table, with cash and fixed income in the lower half. This is consistent with the steady but uninspiring macro backdrop and positioning ahead of a tricky H2 from a political perspective. The anomaly of the Market Cap weighted SPX out-performing the equal weighted SPW by over 10% points tells us both that the SPX is no longer telling us anything about the US economy and that this excess return is for taking (considerable) concentration risk. Meanwhile, with Bond analysts 'pivoting from the Pivot' the fixed income markets have calmed down a little and leaving The Donald' rather thna 'The Fed' as likely the biggest policy influence on Markets over the next 12 months. In particular, we would look out for a 'Trump Plaza Acord" early next year, 40 years after the last one- something the FX markets aren't talking about, but the asset allocators seem to be (at least subconsciously) pricing in.

Markets are range trading, with traders reducing exposure ahead of a likely volatile summer. Currency markets in particular are looking for catalysts for directional moves to come from politics, with Europe, the UK and the US all having Elections in the coming months. The biggest tail risk we see is from a New White House revisiting the Plaza accord or 1985 and actively talking down the Dollar. Interestingly, while the currency traders are not about talking this at the moment, some of the obvious tail risk hedges - diversification away from $ assets, EM, Gold, Commodities - are already starting to perform.