weekly market view Earnings, seasonality fuel October rally Editorial

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1 weekly market view This reflects the views of the Wealth Management Group macro strategy 30 October 2015 Editorial Earnings, seasonality fuel October rally October is on course to rank as the best month for global equities in four years. US stocks broke through a key resistance level, helped by earnings surprises. Seasonal tailwinds are likely to sustain the global rally in risk assets. The USD is close to key technical resistance after a strong rebound. The Fed has left open the possibility of a December rate hike, while the ECB is preparing to boost stimulus in December. Both factors are USD-supportive. This evolving landscape supports our bullish view on global equities. The Q3 earnings surprises are particularly positive for the US technology sector and High Yield (HY) bonds. Global equities get a shot from US earnings. Global stocks are on course to end October with the best monthly gains since Major markets (the US, Europe, Japan and Asia) have gained more than 8 since the end of September. The S&P500 index broke through a key resistance level of 2,040, fuelled by positive earnings surprises from the technology and healthcare sectors. Of the 250 companies in the S&P500 that have reported Q3 earnings, 72 have exceeded profit expectations (vs. 63 in the last 20 years). The Euro Stoxx 50 and Japan s Topix indices are close to breaking higher as well. The Fed, ECB boost risk appetite and the USD. The Fed, in its October meeting, appeared to downplay earlier concerns about risks to US growth from overseas. Instead, it signalled the possibility of a rate hike in December. The comments are likely to support risk appetite, as well as the USD, which is now close to a key resistance level after a strong rebound. Other central banks have also helped fuel the October rally in risks assets the ECB signalled further policy easing in December while China cut its benchmark rate for the sixth time since November 2014 and reduced banks reserve requirements. The policy moves lend support to our bullish outlook for global equities, especially in the Euro area and Japan (FXhedged), and the US banking sector (where profit margins are likely to get a boost from rising interest rates). Seasonality remains a tailwind for equities in Q4. Over the past 30 years, equities have delivered positive Q4 returns in three out of four years. The seasonal effect turns more compelling during years of midyear equity weakness (such as this year when global equities have declined more than 5 since 1 May). S&P500 data over the last 50 years show that the November-April period has delivered a positive return two out of every three years when returns in May-October were negative. The index has returned an average of 7 in the November- April period following weakness in the previous six months. US energy sector earnings surprise positive for HY bonds. Yields on the bonds have dropped below 7.5 from above 8 levels over the past month. This corresponds with the broad-based revival in risk appetite. Although US energy sector earnings fell sharply in Q3 on lower oil prices, almost 80 of the energy companies that have reported so far have exceeded profit estimates. The positive earnings surprises are likely to allay what we believe are unduly excessive concerns about prospective defaults in the energy sector and provide a tailwind to the bonds. Contents Earnings, seasonality fuel October rally 1 Market performance summary 2 What does this mean for investors? 3 Technical Analysis 4 Economic & Market Calendar 6 Disclosure Appendix 7 Q4 is traditionally a strong quarter for equities Average USD returns since 1995 (m/m) May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr MSCI AxJ MSCI World MSCI US Asset classes or strategies where we would add exposure today Diversified income assets Global high-quality equities Euro area equities (currency-hedged) Japan equities (currency-hedged) Indian equities Global banks US High Yield bonds Emerging Market Investment Grade Sovereign Bonds (USDdenominated) Senior loans Selling equity volatility to generate income Steve Brice Chief Investment Strategist Clive McDonnell Head, Equity Strategy Manpreet Gill Head, FICC Strategy Adi Monappa, CFA Head, Asset Allocation & Portfolio Construction Arun Kelshiker, CFA Exec. Director, Asset Allocation & Portfolio Construction Audrey Goh, CFA Director, Asset Allocation & Portfolio Construction Victor Teo, CFA Strategist Tariq Ali, CFA Strategist Abhilash Narayan Strategist This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank. Important disclosures can be found in the Disclosures Appendix. 1

2 Year to Date Market performance summary* Equity Country & Region 1 Week Global Equities Global High Divi Yield Equities Developed Markets (DM) Emerging Markets (EM) US Western Europe (Local) Western Europe (USD) Japan (Local) Japan (USD) Australia Asia ex-japan Africa Eastern Europe Latam Middle East China India South Korea Taiwan Equity Sector Consumer Discretionary Consumer Staples Energy Financial Healthcare Industrial IT Materials Telecom Utilities Global Property Equity/REITs Bonds Sovereign Global IG Sovereign Global HY Sovereign EM IG Sovereign US Sovereign EU Sovereign Asia EM Local Currency Bonds Credit Global IG Corporates Global High Yield Corporates US High Yield Europe High Yield Asia High Yield Corporates Commodity Diversified Commodity Agriculture Energy Industrial Metal Precious Metal Crude Oil Gold FX (against USD) Asia ex-japan AUD EUR GBP JPY SGD Alternatives Composite (All strategies) Arbitrage Event Driven Equity Long/Short Macro CTAs *Performance in USD terms unless otherwise stated, YTD period from 31 December 2014 to 29 October 2015, 1 week period: 22 Oct to 29 Oct 2015 Sources: MSCI, JP Morgan, Barclays Capital, Citigroup, Dow Jones, HFRX, FTSE, Bloomberg, Standard Chartered This reflects the views of the Wealth Management Group 2

3 What does this mean for investors? Global equities rose, led by Japan, US and Europe, as positive earnings surprises in the US and supportive central bank comments lifted risk appetite. The USD rose and government bonds fell as the Fed signalled a possible rate hike in December. Equities: US earnings surprises fuel rebound US technology earnings shine. Almost 80 of technology sector companies that have reported Q3 earnings so far have surpassed profit estimates. The sector has also reported healthy earnings and revenue growth. The strong earnings support our bullish view on US technology stocks. US financial sector gets a boost from Fed, earnings. The Fed, in its October meeting, kept open the option to start raising rates in December. Higher interest rates are usually supportive for US banks as they help boost lending margins. Although the US financial sector has so far delivered 11 profit growth in Q3, with 60 of companies exceeding forecasts, significant gains have come from cost cuts as revenue remained little changed. Supportive central banks provide equity boost in Europe and Japan. The ECB signalled more policy easing in December, weakening the EUR and fuelling a rebound in Euro area equities. The BoJ left its monetary easing policy unchanged, but may have to ease further if inflation stays low. The Euro Stoxx 50 and Nikkei Indices have both climbed 10 in October and are 1.4 and 2.5 away from their next resistance levels. Asian stocks outperform other Emerging Markets (EM). The MSCI Asia ex-japan has climbed 12 from its August low, outperforming Latin America and Eastern Europe. China s rate cut, the sixth since November, and lower bank reserve requirements have helped revive sentiment. We continue to seek exposure to China stocks through Hong Kong-listed H-shares. Bonds: US energy sector earnings boost High Yield bonds US High Yield (HY) bonds likely to extend gains. The yield on the bonds has fallen below 7.5 from above 8 on a revival in risk appetite. The yields currently factor in energy sector default rates in excess of 10, which we believe is excessive (they are currently around 5). The better-than-expected energy sector earnings and still-low default rates elsewhere are likely to allay concerns, providing an opportunity to secure attractive yields. Remain cautious on CNY bonds. China local currency bonds have been boosted by an inflow of funds exiting the equity markets. However, the risk of rising defaults, especially in the industrial and materials sectors, keep us cautious. Markets are also awaiting the details of China s next five-year plan (finalised this week) which will set the medium-term growth trajectory. FX: USD boosted by Fed rate hike, ECB easing expectations Widening rate differentials bullish for the USD. The two-year US Treasury yield jumped almost 7bps to 0.7 after the Fed left open the possibility of raising rates in December. Meanwhile, two-year yields on German Bunds fell deeper into the negative after the ECB signalled further policy easing in December. We remain bullish on the USD on widening rate differentials. AUD, NZD likely to weaken further on rate cut expectations. Australia s weaker-than-expected inflation has raised the chances of a RBA rate cut next week. The RBNZ also signalled further rate cuts are likely. We remain bearish on the AUD and NZD. Commodities: Gold falls from key resistance Reduce exposure. Gold fell for the second week. The rebound in the USD and risk sentiment is likely to extend gold s decline. Benchmark (USD) performance w/w* Cash Equities Bonds Commodities USD Asian FX *Week of 22 October 2015 to 29 October 2015 Source: MSCI, JP Morgan, DJ-UBS, Citigroup, Bloomberg, Standard Chartered (Indices used are JP Morgan Cash, MSCI AC World TR, Citi World Big, DJ-UBS Commodity, DXY and ADXY) Major equity markets are close to key resistance levels; a break higher is a strong signal for markets Support and resistance levels of key equity markets Secondary Primary Primary Secondary Asset class support support Spot Resistance resistance S&P EuroStoxx Nikkei MSCI Asia ex-japan HSCEI Shanghai Composite Sensex The yield on US HY bonds have declined from a threeyear high of above 8 on energy sector earnings surprises and return of risk appetite Yield on US HY corporate bonds () 5.5 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Aug-15 Source: Barclays, Bloomberg, Standard Chartered Widening rate differentials are positive for the USD EUR/USD; rate differential between German and US twoyear government bonds () Aug Sep Oct Oct German-US 2y interest rate differential EUR/USD EUR/USD (RHS) This reflects the views of the Wealth Management Group 3

4 Technical Analysis S&P 500 Moderately bullish Over the past few weeks, the index cleared a couple of important hurdles between 1,980 and 2,080. This indicates the start of a fresh intermediate uptrend. The index is on course for its fifth consecutive weekly gain, which shows a shift in sentiment. Furthermore, a breakout above the falling resistance trendline on the weekly RSI indicator is another bullish sign. However, given the magnitude of the immediate rally from the lows of 1,180, we cannot rule out a minor pullback to retest the support of 2,040. Support 1,980 Resistance 2,175 MSCI AC Asia ex-japan (USD) Moderately bearish The index has recovered more modestly from its lows compared with other Developed Markets (DM) but continues to hover below some crucial hurdles above 535/555. There appears to be some room still left for the rebound to completely retrace. Alternatively, a break below 515 would signal a reversal. We expect selling to gradually emerge on any further upmove and see limited upside in the near term. Support 500 Resistance 555 Euro Stoxx 600 Bullish The index recovered significantly above the previous key resistance of 366 since it broke out of a potential bullish pattern. We expect the recovery to continue as long as a corrective dip does not take it below 366. The next resistance to watch is at 390 before which some profit taking can emerge. Support 350 Resistance 390 2,200 2,150 2,100 2,050 2,000 1,950 1,900 1, ,800 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct S&P dma 100 dma 200 dma Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13 Aug-13 Mar Oct-14 May-15 MSCI Asia ex-japan 50 dma 100 dma 200 dma Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Stoxx Euro dma 100 dma 200 dma This reflects the views of the Wealth Management Group 4

5 Gold Neutral Gold has made a gradual recovery from the lows, which coincided with the lower end of the broader falling trend channel in July. It currently trades close to the downward sloping 200DMA line (1,171), which suggests the broader trend continues to remain bearish. However, given the positively biased RSI indicator, there is scope for further upward retracement before the trend reverses. Alternately, a decisive breach below the nearest 1,150 trendline support would signal a reversal. Support 1,140 Resistance 1,210 US 10-year Treasury yields Neutral US 10-year Treasury yields have been hovering just above the psychological 2 mark and below key moving averages (50- and 200DMA) but have not been able to make much of a recovery as yet. The momentum RSI indicator has been flattening out, showing tentative signs of a recovery. Hence, we expect yields to stay rangebound between 1.95 and 2.3 in the near term. Support 1.95 Resistance 2.3 Brent Crude Oil Neutral Brent crude appears to have slipped into a sideways range of since last month. Momentum signals also remain lacklustre. There is scope for a minor recovery if it continues to defend the 46 mark in the near term. Support 42 Resistance 53 USD/Oz USD 1,400 1,350 1,300 1,250 1,200 1,150 1,100 1, ,000 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep Gold 50 dma 100 dma 200 dma Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep US 10YR 50 dma 100 dma 200 dma Sep-14 Nov-14 Feb-15 May-15 Aug-15 Oct-15 Brent oil 50 dma 100 dma 200 dma This reflects the views of the Wealth Management Group 5

6 MON TUE WED THUR FRI/SAT Economic & Market Calendar Next Week: Nov 02 - Nov 06 This Week: Oct 26 - Oct 30 Event Period Expected Prior Event Period Actual Prior AU TD Securities Inflation y/y Oct 1.90 GE IFO Business Climate Oct JN Nikkei Japan PMI Mfg Oct F 52.5 GE IFO Current Assessment Oct SK Nikkei South Korea PMI Mfg Oct 49.2 GE IFO Expectations Oct CH Caixin China PMI Mfg Oct US New Home Sales Sep 468K 529K ID CPI y/y Oct 6.83 IN Nikkei India PMI Mfg Oct 51.2 JN Vehicle Sales y/y Oct AU Commodity y/y Oct EC Markit Eurozone Manufacturing PMI Oct F 52 UK Markit UK PMI Manufacturing SA Oct 51.5 US ISM Manufacturing Oct SK CPI y/y Oct SK Consumer Confidence Oct AU RBA Cash Rate Target 3-Nov CH Industrial Profits y/y Sep EC M3 Money Supply y/y Sep UK GDP q/q 3Q A US Durable Goods Orders Sep US Cap Goods Orders Nondef Ex Air Sep US Cap Goods Ship Nondef Ex Air Sep US S&P/CS Composite-20 y/y Aug US Consumer Confidence Oct JN Consumer Confidence Oct 40.6 JN Retail Trade y/y Sep JN Monetary Base y/y Oct JN Retail Sales m/m Sep AU Retail Sales m/m Sep 0.40 AU CPI y/y 3Q JN Nikkei Japan PMI Services Oct 51.4 CH Westpac-MNI Consumer Sentiment Oct JN Nikkei Japan PMI Composite Oct 51.2 GE GfK Consumer Confidence Nov CH Caixin China PMI Composite Oct 48 CH Caixin China PMI Services Oct 50.5 IN Nikkei India PMI Services Oct 51.3 IN Nikkei India PMI Composite Oct 51.5 GE Markit/BME Germany Composite PMI Oct F 54.5 EC Markit Eurozone Services PMI Oct F 54.2 EC Markit Eurozone Composite PMI Oct F 54 UK Markit/CIPS UK Services PMI Oct 53.3 UK Markit/CIPS UK Composite PMI Oct 53.3 EC PPI y/y Sep US ADP Employment Change Oct 175k 200k US Trade Balance Sep -$47.00b -$48.33b US ISM Non-Manf. Composite Oct RU Markit Russia PMI Composite Oct 50.9 US FOMC Rate Decision (Upper Bound) 28-Oct GE Factory Orders WDA y/y Sep 1.90 JN Industrial Production m/m Sep P EC ECB Publishes Economic Bulletin AU Export price index q/q 3Q EC Markit Eurozone Retail PMI Oct 51.9 UK Nationwide House Px NSA y/y Oct GE Markit Germany Retail PMI Oct 54 GE Unemployment Claims Rate SA Oct EC Retail Sales y/y Sep 2.30 UK M4 Money Supply y/y Sep EC EC Economic Forecasts EC Economic Confidence Oct BZ Markit Brazil PMI Composite Oct 42.7 EC Business Climate Indicator Oct UK Bank of England Bank Rate 5-Nov EC Industrial Confidence Oct UK Bank of England Inflation Report EC Services Confidence Oct US Nonfarm Productivity 3Q P EC Consumer Confidence Oct F US Unit Labor Costs 3Q P US GDP Annualized q/q 3Q A CA Ivey Purchasing Managers SA Oct 53.7 US Personal Consumption 3Q A US Core PCE q/q 3Q A GE CPI EU Harmonized y/y Oct P GE Industrial Production WDA y/y Sep 2.30 JN BOJ Annual Rise in Monetary Base 30-Oct 80t 80t UK Industrial Production y/y Sep 1.90 MX Overnight Rate 29-Oct UK Trade Balance Sep SK Business Survey Manufacturing Nov BZ IBGE Inflation IPCA y/y Oct 9.49 SK Business Survey Non-Manufacturing Nov CA Net Change in Employment Oct 12.1k SK Industrial Production y/y Sep US Change in Nonfarm Payrolls Oct 176k 142k JN Overall Household Spending y/y Sep US Unemployment Rate Oct JN Natl CPI y/y Sep US Average Hourly Earnings y/y Oct 2.20 JN Natl CPI Ex Food, Energy y/y Sep US Average Weekly Hours All Employees Oct UK GfK Consumer Confidence Oct 2 3 US Underemployment Rate Oct AU Private Sector Credit y/y Sep US Labor Force Participation Rate Oct JN Housing Starts y/y Sep 8.80 UK NIESR GDP Estimate Oct 0.50 EC Unemployment Rate Sep EC CPI Estimate y/y Oct EC CPI Core y/y Oct A 0.90 RU Key Rate 30-Oct CA GDP y/y Aug 0.80 US Employment Cost 3Q 0.20 US Personal Income Sep 0.30 US Real Personal Spending Sep 0.40 US PCE Deflator y/y Sep 0.30 US PCE Core y/y Sep 1.30 US Chicago Purchasing Manager Oct 48.7 US U. of Mich. Sentiment Oct F 92.1 US U. of Mich. Current Conditions Oct F US U. of Mich. Expectations Oct F 82.7 US U. of Mich. 1 Yr Inflation Oct F 2.70 Previous data are for the preceding period unless otherwise indicated Previous data are for the preceding period unless otherwise indicated Data are change on previous period unless otherwise indicated Data are change on previous period unless otherwise indicated P - preliminary data, F - final data, sa - seasonally adjusted P - preliminary data, F - final data, sa - seasonally adjusted y/y - year on year, m/m - month-on-month y/y - year on year, m/m - month-on-month This reflects the views of the Wealth Management Group 6

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