SGMT Capital Research Inc. SYSTEMATIC GLOBAL MARKETS TREND

AUGUST, 2016

Getting out of the Hole in Jackson Investor Letter

The SGMT trading system had a gross return of -3.93% for Level II in the month of August, 2016 Source of Returns by Currency (August, 2016):

2016 Gross Returns by Month:

Level II Month Ccy Change SGMT Gross Return

Australian Dollar (AUD) -1.13% -0.73%

Canadian Dollar (CAD) -0.48% -0.42%

Swiss Franc (CHF) -1.53% -1.53%

Euro (EUR) -0.22% -0.07%

Great Britain Pound (GDB) -0.78% -0.36%

Japanese Yen (JPY) -1.37% -0.73%

Total Level II -3.93%

Jan Feb Mar Apr May Jun Jul Aug YTD

0.07% 12.80% 5.39% 5.38% -6.22% -1.54% 5.83% -3.93% 17.68%

August headlines opened with weak growth prospects; “The economy has grown at a 2.1% annual rate since the U.S. recovery began in mid-2009…” US treasuries at 3 year highs showed significant faith in the 1

rally, despite a US treasury announcement of a 30% increase in borrowing due to lower tax receipts and 2

corporate earnings heading into 5th quarter declines . The currency market was roiled by high volatilities 3

and many had losses deepened . The outsized US job report on August 5th swung the dollar to a high note 4

on FED rate hike hopes. Then the FED rate hike hopes faded on August 9th, and the US dollar almost 5

collapsed on August 16th. Only after some FED officials on the same day made speeches for a possible September rate hike was the dollar rescued. From the next day’s FED minutes, it was clear the July meeting lacked rate hike consensus, further damaging the committee’s credibility with markets. In seeking clarity from the FED, markets waited anxiously for Janet Yellen’s speech at the Jackson Hole FED conference on August 26: “Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months” .” As the text of Yellen’s speech released in the morning with her dovish and balanced 6

US economic status assessment, the markets got the clarity that the FED will move to lift rates in the near future without a time table. Accordingly, the dollar rallied in the immediate fifteen minutes, however, following that, the dollar index collapsed 1%. Then, in an afternoon interview with CNBC, FED Vice Chair Fischer came out with an aggressive hawkish stance pushing the dollar index sharply up for a more than 2% swing. In the following days after Yellen’s speech and Fischer’s interview, the markets were perplexed by the seemingly subtle differences in views with differences among the equity, bond and currency markets. Again, on August 30, Fischer doubled down on his hawkish tone in a Bloomberg interview, convincing markets of a hawkish FED and gearing up for Friday’s (September 2nd) job report—a potential nail in the coffin for a FED move.

SGMT’s strategy successfully followed markets before Yellen’s speech, with +1.6% up, but ended with a loss of 3.93% after the hawkish Fischer CNBC and Bloomberg interviews. The bond and equity markets were on the fence on how fast the FED rate hike would move and the currency market seemed to move quickly towards the faster pace of a FED rate hike. As of the August month end, SGMT’s model has not seen a substantial positioning change after Yellen’s speech and Fischer’s interviews.

Looking forward, the market’s immediate focus will be the September 2nd US job report; a positive report could be the nail in the coffin driving the FED to move now. As we discussed in July letter, the patches of information voids or dislocations may continue to show up in the markets after a FED move but will certainly diminish their impact as cooler risk assessments of global markets continue. On the other hand, both the global economic status and the markets still lack clear trends emerging from recent developments except another FED rate hike coming after a 9-month dormancy. SGMT will follow the jittering markets as they further develop in coming months and turbulences which have no clear global economic direction..

WSJ July 29: Seven Years Later, Recovery Remains the Weakest of the Post-World War II Era By Eric Morath1

Bloomberg August 1 reported by Wes Goodman and Garfield Reynolds: Hedge funds and other large speculators set the 2

biggest bet on benchmark Treasuries in more than three years, suggesting they’re confident a record-setting rally has further to run.

Bloomberg August 1 reported by Thomas Black and Brendan Case 3

Bloomberg August 2: Currency Traders Ensnared by Volatility See 2016 Losses Deepen by Lananh Nguyen4

Bloomberg August 9: Dollar Weakens as Muted Prospects for Fed Rate Hike Boost Gold by James Regan5

At "Designing Resilient Monetary Policy Frameworks for the Future," a symposium sponsored by the Federal Reserve 6

Bank of Kansas City, Jackson Hole, Wyoming, August 26, 2016

SGMT is a systematic FX trading strategy, so it might be useful to compare our returns to our peers and similar competitors. The BTOP index is an index of other foreign exchange managers as provided by BarclayHedge.com. The following table shows the SGMT Capital vertical comparison statistics to the BTOP index components sourced from barclayhedge.com.

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