Citigold FINANCIAL MARKET ANALYSIS 1 August 2016 Mixed week of monetary policy decisions Last week, global markets grappled with an unchanged monetary policy decision from the US FOMC and a disappointing announcement from the Bank of Japan where it did not lower interest rates further or expand QE. Treasury yields and the US dollar both came under pressure as the FOMC decision was followed by much softer-than-expected US 2Q GDP growth. Oil prices also fell on higher than expected inventories and weighed on the Energy sector. However, EM currencies continued to strengthen thanks to the weaker USD. EM equities have also remained resilient This week's events worth noting include: the Bank of Japan s stimulus package, Reserve Bank of Australia s monetary policy decision, Eurozone retail sales and German factory orders. Citi analysts also expect the Bank of England to cut rates by more than 25bp. Performance Global stocks posted another weekly advance as the MSCI World rose 0.83%. US markets were mixed for the week, as the Dow Jones Industrial Average lost 0.75%, the S&P 500 ticked 0.07% lower, while the Nasdaq Composite advanced 1.22%. European equities as measured by the Stoxx Europe 600 Index rose 0.46% on the week, taking its monthly rise to 3.6%. Japanese stocks fell (Nikkei 225: -0.35% and Topix: -0.36%) on disappointing stimulus measures. Meanwhile, EM equities finished the week higher (MSCI EM: 0.48%), led by MSCI Asia ex-japan gaining 0.24%. In contrast, MSCI Emerging Europe and MSCI Latin America lost -1.08% and -0.04% respectively. Within Asia, Australia was the outperformer. The ASX 200 added 1.17% this week and is now 5.03% ahead for 2016. Asset Allocation Equities We believe dividends offer more favourable relative value in comparison to fixed income. Within equities, we are turning more constructive on emerging markets relative to developed markets. Credit Sharp declines in sovereign yields has been the primary driver of performance in investment grade (IG) corporate bonds. We remain overweight IG corporates and favour USD over euro issuers. Rates The low global interest rate environment should anchor the long-end for US Treasuries as foreign investors continue to bid up safe haven, higher yielding USD assets. Commodities We expect commodity prices to generally remain on their upward trajectory, even if there is considerable volatility along the way. Softer than expected US data Citi Economic Surprise Index CESIUSD Index CESIEUR Index CESICNY Index HY bonds and EM debts outperform Accumulated 3-month Bond Index Returns World Govt Bonds Index Global EMD Index HY Index Another weekly advance for equities Accumulated 3-month Equity Index Returns MSCI World MSCI EM MSCI Asia Week Ahead Key Data and Event 60 30 0 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -30-60 -1.0% -2.0% Date Country Data & Event Period Survey Prior Citi Fct 1-Aug EC Markit Eurozone Manufacturing PMI Jul F 51.9 51.9 51.9 2-Aug US Personal Income Jun 0.3% 0.2% 0.4% 2-Aug US Personal Spending Jun 0.3% 0.4% 0.4% 2-Aug HK Retail Sales Value YoY Jun -8.1% -8.4% -8.8% 3-Aug EC Markit Eurozone Services PMI Jul F 52.7 52.7 52.7 3-Aug EC Markit Eurozone Composite PMI Jul F 52.9 52.9 52.9 3-Aug EC Retail Sales MoM Jun 0.0% 0.4% 0.2% 3-Aug US ISM Non-Manf. Composite Jul 56.0 56.5 55.9 3-Aug TH BoT Benchmark Interest Rate 3-Aug 1.5% 1.5% 1.5% 5-Aug TA CPI YoY Jul 1.1% 0.9% 1.1% 5-Aug PH CPI YoY Jul 2.1% 1.9% 2.1% 5-Aug US Change in Nonfarm Payrolls Jul 175k 287k 170k 8% 6% 4% 2% 0% -2% -4% -6% -8% All forecasts INVESTMENT are expressions PRODUCTS: of opinion, NOT are A BANK not a guarantee DEPOSIT. of NOT future GOVERNMENT results, are subject INSURED. to change NO BANK without GUARANTEE. notice and may MAY not LOSE meet our VALUE. expectations due to a Page 1
Drivers and Risks by Market United States Driver: Last week, the FOMC kept interest rates unchanged but upgraded its economic assessment. Highlights include: (1) the US economy is back on track for moderate growth, powered by "strong" household spending; (2) labour market utilization continues to rise; but (3) market-based measures of inflation compensation "remain low." Risk: For a September rate hike to be realistic, we believe the Committee would require a very unlikely but significant jump in the inflation rate. For example, CPI inflation rising above 2.5% (yoy) for the August and September prints, with accompanying sharp and sustained increases in growth and employment. 2200 2100 2000 1900 1800 1700 1600 1500 End-2016 Target: 2150 S&P 500 Implication: To date, underlying wage pressures appear to be rising, but they have not translated to accelerating prices. PCE inflation remains well below the Fed's two percent target. We maintain our position that the earliest time for the next rate hike is December, as long as data remain "on track" and no "event risk" materializes. Europe Driver: In the UK, we expect the BoE s Inflation Report to reflect the sharp deterioration of the economic outlook, by cutting 2016 and 2017 GDP growth forecasts significantly from 2.0% and 2.3% (Citi s forecasts currently at 1.2% and 0.9%), respectively. The inflation forecast is likely to move higher following the sterling s depreciation but unlikely to trigger rate hikes. 430 410 390 370 350 End-2016 Target: 310 Risk: A growing number of survey indicators is suggesting recession risk for the UK economy in the wake of the EU referendum. Implication: Citi now expects the Bank of England deliver more than a 25bp rate cut at the 4 August meeting. We now expect asset purchases of 75bn over the coming 4 months. 330 310 290 DJ Stoxx TMI 270 Japan Driver: At its monetary policy meeting held on July 28-29, the Bank of Japan increased ETF purchases to 6trn from 3.3trn a year but did not lower interest rates or expand QE further. Risk: We see the risk of an equity market correction in response to yen strengthening. We maintain our forecast range for July September for the Nikkei of 14,750-17,250. Implication: Citi analysts expect the BoJ to implement fresh easing at its meeting in January 2017. By then, it should have become clear that the 2% inflation target is unlikely to be met within FY2017. We expect the policy rate to be cut to -0.3% (from currently). Emerging Markets Driver: A balanced July FOMC statement has helped reduce the fear of another rate hike in September. Upside surprises in economic data in the EM, stability in Chinese data and the renminbi, coupled with expectations of additional fiscal and monetary stimulus in Japan and the UK have helped keep investor sentiment buoyant. Risk: Key risks include growing global political uncertainty and still significant policy challenges. Implication: With aggregate investor positioning in EM still close to neutral, investors continue to raise EM allocations within their portfolios. Barring serious policy disappointment or material deterioration in economic data, there appears to still be room for the ongoing EM rally to extend further. End-2016 Target: 1350 1700 1600 1500 1400 1300 1200 1100 Japan Topix 1000 End-2016 Target: 530 600 550 500 450 400 350 MSCI Asia ex JP 300 Page 2
Currency Forecast Last price Forecasts Currency 29-Jul-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 G10-US Dollar Euro EURUSD 1.12 1.12 1.15 1.15 1.16 1.17 1.17 Japanese yen USDJPY 102 105 105 104 103 102 101 British Pound GBPUSD 1.32 1.27 1.28 1.28 1.29 1.30 1.30 Swiss Franc USDCHF 0.97 0.97 0.96 0.95 0.95 0.94 0.94 Australian Dollar AUDUSD 0.76 0.78 0.78 0.78 0.78 0.79 0.79 New Zealand NZDUSD 0.72 0.70 0.70 0.70 0.70 0.69 0.69 Canadian Dollar USDCAD 1.30 1.28 1.26 1.25 1.24 1.23 1.21 EM Asia Chinese Renminbi USDCNY 6.64 6.77 6.79 6.83 6.87 6.91 6.95 Hong Kong USDHKD 7.76 7.77 7.78 7.78 7.78 7.79 7.79 Indonesian Rupiah USDIDR 13,112 13,316 13,464 13,515 13,535 13,555 13,575 Indian Rupee USDINR 67.0 69.1 69.8 70.0 70.0 70.0 70.0 Korean Won USDKRW 1,120 1,168 1,178 1,168 1,152 1,136 1,120 Malaysian Ringgit USDMYR 4.07 4.11 4.10 4.05 3.99 3.93 3.87 Philippine Peso USDPHP 47.2 47.8 48.0 47.9 47.8 47.7 47.6 Singapore Dollar USDSGD 1.34 1.39 1.39 1.39 1.39 1.40 1.40 Thai Baht USDTHB 34.8 35.7 35.9 35.8 35.6 35.4 35.2 Taiwan Dollar USDTWD 32.0 32.4 32.5 32.6 32.7 32.8 32.9 EM Europe Russian Ruble USDRUB 65.9 61.0 60.2 60.1 60.3 60.6 60.8 South African Rand USDZAR 13.88 15.27 15.45 15.55 15.61 15.67 15.73 EM Latam Brazilian Real USDBRL 3.25 3.38 3.48 3.55 3.61 3.67 3.73 Mexican Peso USDMXN 18.8 18.9 19.0 18.9 18.8 18.7 18.6 Source: Citi Research and Bloomberg as of 29 July 2016 \\ Weekly Market Performance (25-29 July 2016) -5.9% 0.0% -0.2% -0.3% -0.3% -0.4% -0.4% -0.8% -1.1% -1.1% 2.2% 0.8% 0.5% 0.5% 0.3% 0.2% -8% -6% -4% -2% 0% 2% 4% Gold MSCI AC World Citi World Broad Inv Grade Europe Stoxx Europe 600 Korea KOSPI MSCI AsiaXJapan MSCI Latin America US S&P 500 UK FTSE 100 Citi Global Emerging Mkt Sovereigns Taiwan TAIEX HK Hang Seng Japan TPX Index Citi High Yield China HSCEI MSCI Emerging Europe China Shanghai Composite Market Performance (Year-To-Date) (As of 29 July 2016) Oil Short Rates and 10-Year Yield Forecasts 30.7% 27.3% MSCI Latin America Gold Last price 29-Jul-16 3Q16 4Q16 1Q17 2Q17 3Q17 Short Rates (End of Period) US 0.50 0.50 0.75 0.75 1.00 1.00 Japan -0.10-0.30-0.30-0.30-0.30-0.50 Euro Area 0.00-0.10-0.20-0.25-0.25-0.25 10-Year Yield (Period Average) US 1.45 1.60 1.60 1.65 1.65 1.65 Japan -0.18-0.25-0.25-0.25-0.20-0.20 Euro Area -0.12-0.10-0.15-0.20-0.20-0.15 12.4% 12.4% 12.3% 12.3% 7.8% 7.7% 6.4% 6.3% 5.4% 4.2% 2.8% Citi High Yield Citi Global Emerging Mkt Sovereigns MSCI Emerging Europe Oil Taiwan TAIEX UK FTSE 100 Citi World Broad Inv Grade US S&P 500 MSCI AsiaXJapan MSCI AC World Korea KOSPI HK Hang Seng Source: Citi Research and Bloomberg as of 29 July 2016-6.5% -7.3% Europe Stoxx Europe 600 China HSCEI -14.5% Japan TPX Index -15.8% China Shanghai Composite -40% -20% 0% 20% 40% Page 3
World Market At Glance US / Global Last price 52-Week 52-Week 29-Jul-16 High Low 1 week 1 month 1 year Year-to-date Year-to-date (USD) MSCI World 416.09 427.93 351.25 0.83% 5.45% -2.24% 4.19% 4.19% Dow Jones Industrial Average 18432.24 18622.01 15370.33-0.75% 4.17% 3.84% 5.78% 5.78% S&P 500 2173.60 2177.09 1810.10-0.07% 4.97% 3.08% 6.34% 6.34% NASDAQ 5162.13 5176.77 4209.76 1.22% 8.01% 0.99% 3.09% 3.09% Europe MSCI Europe 398.17 459.91 353.59 2.12% 5.09% -12.19% -3.11% -3.11% Stoxx Europe 600 341.89 404.05 302.59 0.46% 4.72% -13.23% -6.54% -4.04% FTSE100 6724.43 6780.05 5499.51-0.09% 5.73% 1.41% 7.72% -3.29% CAC40 4439.81 5217.80 3892.46 1.34% 5.83% -11.51% -4.25% -1.69% DAX 10337.50 11669.86 8699.29 1.87% 7.54% -7.80% -3.77% -1.61% Japan NIKKEI225 16569.27 20946.93 14864.01-0.35% 6.44% -18.39% -12.95% 2.58% Topix 1322.74 1702.83 1192.80-0.36% 6.02% -19.05% -14.51% 0.74% Emerging Markets MSCI Emerging Market 873.47 903.25 686.74 0.48% 6.28% -2.96% 9.99% 9.99% MSCI Latin America 2391.35 2408.54 1550.47-0.04% 7.08% 4.08% 30.69% 30.69% MSCI Emerging Europe 123.97 133.76 91.09-1.08% 0.92% -4.55% 12.34% 12.34% Brazil Bovespa 57308.21 57473.83 37046.07 0.54% 12.36% 14.06% 32.20% 61.25% Russia RTS 927.57 975.21 607.14-0.90% -0.41% 7.13% 22.53% 22.53% Asia MSCI Asia ex-japan 526.90 548.62 434.84 0.24% 6.28% -3.90% 5.39% 5.39% Australia S&P/ASX 200 5562.36 5727.70 4706.70 1.17% 8.17% -1.10% 5.03% 9.31% China HSCEI (H-shares) 8958.97 11580.05 7498.81-0.81% 4.52% -20.53% -7.27% -7.37% China Shanghai Composite 2979.34 4006.34 2638.30-1.11% 1.63% -21.37% -15.82% -17.74% Hong Kong Hang Seng 21891.37 24924.07 18278.80-0.33% 7.12% -11.08% -0.11% -0.22% India Sensex30 28051.86 28417.59 22494.61 0.89% 4.90% 1.77% 7.41% 6.50% Indonesia JCI 5215.99 5339.24 4033.59 0.36% 4.74% 10.48% 13.56% 20.38% Malaysia KLCI 1653.26 1744.19 1503.68-0.25% 0.67% -2.69% -2.32% 3.97% Korea KOSPI 2016.19 2064.72 1800.75 0.29% 3.06% -1.05% 2.80% 8.78% Philippines PSE 7963.11 8118.44 6084.28-0.78% 2.11% 6.42% 14.54% 14.23% Singapore STI 2868.69 3217.86 2528.44-2.60% 2.72% -12.65% -0.49% 4.99% Taiwan TAIEX 8984.41 9085.91 7203.07-0.32% 4.63% 4.92% 7.75% 11.40% Thailand SET 1524.07 1533.75 1220.96 0.99% 5.64% 7.52% 18.33% 22.66% Commodity Historical Returns (%) Oil 41.60 51.67 26.05-5.86% -16.60% -14.74% 12.31% 12.31% Gold spot 1351.00 1375.45 1046.43 2.16% 2.42% 23.18% 27.28% 27.28% Page 4
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