Aug-09. Feb-09. Oct-15. Apr-16. Apr-15

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1 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Richard Farr Jim McGovern U.S. Trading European Trading Chief Market Strategist Market Strategist Tourmaline Partners Tourmaline Europe (484) (484) (203) CHINA DATA CONFIRM FURTHER SLOWING June 13, 2016 China continues to suffer from capital flight and has been depleting its foreign currency reserves while other Asian countries have been accumulating foreign currency. - George Soros, Founder of Soros Fund Management LLC, 6/9/16 FAST FACTS ABOUT TODAY S ECONOMIC DATA: China Fixed Asset Investment hits slowest pace since May China Retail Sales slow as well. China Industrial Production steady at +6.0% Y/Y. We pull the plug on our long EU Banks view, ahead of BREXIT vote. CHINA FIXED ASSET INVESTMENT SLOWED IN MAY: The National Bureau of Statistics of China released their reports on Industrial Production, Fixed Asset Investment, and Retail Sales and the results showed that activity in China improved in May. China Industrial Production increased +0.45% M/M and +6.0% Y/Y (also +6.0% prior) and output is up +5.9% cumulatively Y/Y. China Retail Sales increased +0.76% M/M but slowed to +10.0% Y/Y (versus +10.1% prior). Thus far in 2016, Retail Sales are up +10.2% cumulatively Y/Y. Meanwhile, China Fixed Asset Investment increased +0.49% M/M but slowed to +9.6% cumulatively YTD (versus +10.5% prior). This is the slowest pace since May 2000! 24.0 CHINA RETAIL SALES (Y/Y) Source: China National Bureau of Stats, Bloomberg 20.0 CHINA INDUSTRIAL PRODUCTION (Y/Y) Source: China National Bureau of Statistics, Bloomberg AMERICAS: FOR INSTITUTIONAL INVESTOR USE ONLY. PLEASE DO NOT FORWARD. SEE DISCLOSURE APPENDIX FOR IMPORTANT DISCLOSURES.

2 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 U.S. GDP: Our GDP model has slowed slightly on the back of last month s week jobs report; however, the model still benefits from low interest rates and still-low energy prices. Our 2016 U.S. Real GDP forecast is 1.8%. Our forecast assumes the US dollar will continue to strengthen, adding additional headwinds for corporate profits and U.S. exports. However, so far in 2016 the dollar has weakened, which should provide additional support to GDP. 6% 5% 4% 3% 2% 1% 0% -1% Y/Y in Real GDP vs. Our Model Sources: Bureau of Economic Analysis, Merion Capital Group -2% -3% -4% Y/Y Predicted Y/Y -5% U.S. Federal Reserve: Given our belief that the U.S. economy continues to improve, we believe the Fed will raise rates 1-2 times in 2016, although the likelihood of a June hike has fallen significantly (basically 0% at this point). We see a yearend Fed Funds target of 0.75%. U.S. Treasuries: We continue to believe that the 10-year yield will have difficulty rising given low inflation and low rates around the world. Over the course of the year, we expect a subtle increase in the 10-year yield toward 2.25%, but we see little ability for rates to rise much higher given weak growth, low inflation, and bad demographics around the world. We remain in a low nominal growth environment and rates will not move materially higher until growth recovers. U.S. Equities and Earnings: With the S&P 500 trading near our upwardly-revised 2016 Yearend target (2100), we have shifted our focus away from U.S. equities and towards emerging markets (India for now, and warming up to Russia too). For us to become more constructive on the U.S., we will need to see greater growth, or better valuations at this point. We continue to favor the Financials and Energy sectors, as well as the Homebuilding sub-sector, and are offsetting that against underweight views in Consumer Staples and Utilities (as mentioned above). Brazil: Dilma Rousseff may be out, but Brazil s economic data remain abysmal. GDP fell -5.4% in Q1, the unemployment rate is on the rise, and inflation appears to have reaccelerated in May. Not to mention, the Zika virus may postpone the Olympics, which may not be a bad idea given how bad ticket sales have been. Although we recently shifted towards Emerging Markets, Brazil won t be one of those markets. We have 2

3 no view on Brazil at this time as the situation has gotten beyond the scope of macro investing; however, with the Bovespa up so much this year, we d be more inclined to be sellers at this point. Canada: Canada grew +2.4% in Q1, and unemployment and inflation have been steady for nearly a year. Until a material deterioration occurs in Canada, stimulus spending measures will likely fall on deaf ears. We remain neutral on Canada at this time. Mexico: Recent economic data suggest that Mexico s economy remains healthy. Industrial Production and Unemployment have improved, CPI has been gradually rising, and Retail Sales have accelerated (despite the slip in Consumer Confidence). However, Mexican equities are at some of the richest valuations amongst all other major developed markets and we believe downside risk is elevated given possible U.S. Fed rate hikes (the Bank of Mexico would likely follow suit to maintain close FX relationship). We remain neutral on Mexican equities at this time. EUROPE/RUSSIA: European Union: As money printing, asset purchases, and zero rates have failed to ignite the Eurozone, (not to mention the risk of the BREXIT vote), we have decided today to close out our long EU Banks view. We remain negative on the Euro currency. European Central Banks: The ECB is doing exactly what we thought they would do by favoring asset purchases over negative rates. Additionally, TLTRO II will help Europe to refi its debts and therefore blow the asset bubble ever bigger. The ECB s dovish actions will continue to influence other central banks throughout Europe and negative interest rates will continue to proliferate the continent. Russia/Eastern Europe: Russian equities are the cheapest in the industrialized world, and we are awaiting economic improvement in order to upgrade our view. The Bank of Russia returned to a rate cut stance last week, which could further economic improvements. We continue to believe that the Russian Ruble should get a meaningful bid, particularly versus the Euro, if oil prices continue to rise. As for Eastern Europe, we continue to believe risks remain for broader Europe. Eastern European nations continue to see sharp increases in Debt/GDP levels over the past year, most notably Cyprus (+25% to 110%), Croatia (+7% to 62%), and Slovenia (+14% to 63%). United Kingdom: Recent polls suggest that the leave campaign is gaining momentum as the BREXIT vote approaches. As such, this macro risk must be taken into consideration. Meanwhile, inflation remains steady at 1.3% Y/Y, and economic data in the U.K. remain mixed but positive. We believe the Bank of England will remain hesitant to raise rates too soon, particularly given BREXIT risk. With the Bank of England on hold, we recently removed our long-standing positive view on GBP. It no longer appears that the BOE will be following the U.S. Fed too quickly in raising rates. ASIA / PACIFIC: Australia: Australia s real GDP has been accelerating since Q (now +3.1% Y/Y, was +2.1% Y/Y) and not many saw that possibility given China risks and a frothy housing market. Meanwhile, inflation continues to moderate, providing justification to the Bank of Australia s interest rate cuts. If China were to turn a corner, Australia could have meaningful economic and market upside. We remain neutral on Australia at this time, but we are watching China closely for signs to get bullish on Australia. China: We remain neutral on China markets until we can assess the impact of recent reforms and stimulus, given our concerns that unemployment will likely rise in China. Although China has committed 3

4 to further deficit spending; we remain significantly concerned about froth in China s housing sector and industrial overcapacity. We are monitoring the situation and expect China s economic data to weaken further. India: It took longer than we would have expected, but the Indian economy now appears to be turning a corner. India is a major beneficiary of lower oil prices, and we are beginning to see meaningful improvements in Indian economic data. Industrial Production has turned up, Consumer Spending appears to be rebounding, Commercial Credit growth has been improving since late Q4, and both the Markit manufacturing and services indices turned higher in March. All-the-while, inflation seems to have cooled (although April inflation data did turn higher again) and India s central bank is cutting rates. With India s economy improving, and with inflation subsiding, we recently upgraded our view on the NIFTY Index. Japan: Recent economic data have confirmed a moderation in Japan s economy and a return to deflation, and therefore the BOJ has introduced negative interest rates. So far, the introduction of negative rates hasn t done anything to boost Japan s data, in fact, it may have made it worse by raising questions about the health of the banking sector. Although the BOJ is doing all it can to try to inflate their way out of their debt problem, we still believe bad demographics will be an overriding theme in Japan for many years to come. We currently have a neutral view on Japan. MACRO TRADING IDEAS: Active Macro Trading Ideas Position Start Date Start Price Current Price Annualized Long Energy 01/27/ % 57.9% Long Financials 02/10/ % 44.1% Long Homebuilders 02/25/ % -5.8% Short Consumer Staples 05/02/ % -13.5% Short Utilities 05/02/ % -23.3% Long Gold 02/11/16 1, , % 11.0% Long WTI Crude Oil 01/27/ % 157.5% Long Dec 16 Fed Funds 99.5 Put 02/29/ % % Long Nifty Index 04/18/16 7, , % 16.0% Long USD/JPY 04/28/ % -16.1% Short EUR/RUB 01/28/ % 31.2% Short EUR/USD 03/13/ % 8.4% Long USD/CNY 09/17/14 CNY CNY % 4.2% Closed Macro Trading Ideas (2016) Position Start Date Start Price Close Date Close Price Long S&P 500 Index 02/09/16 1, /18/16 2, % Short AUD/USD 11/10/14 $ /07/16 $ % Long Consumer Discretionary 12/01/ /18/ % Long Australian 10 year (2.75% 04/21/2024) 11/10/14 $ /07/16 $ % Short S&P 500 Index 08/31/15 1, /22/16 1, % US 2yr-10yr Spread Trade 01/14/ /29/ % Short EUR/GBP 09/04/ /04/ % Long GBP/JPY 12/23/ /04/ % Long S&P Financials 11/06/ /14/ % Long EU Banks 03/10/ /13/ % Long EU Equities (STOXX 600) 10/22/ /11/ % Long China Equities (A-Shares benchmark) 11/11/15 3, /11/16 3, % Long India Equities 04/01/ /02/ % 4

5 GLOBAL CENTRAL BANK SCORECARD: The global currency war continued last week, as both the Bank of Korea and the Bank of Russia cut rates. All eyes will be on the US Federal Reserve Bank this week. GLOBAL CENTRAL BANK SCORECARD Country/Region: Rate Last Action Date Action Current Policy Leaning: Tighter US bps 12/16/15 Raised rates for the first time since June Mexico bps 02/17/16 Raised rates for second time since December South Africa bps 03/17/16 Raised rates for the 6th time since Brazil bps 06/03/15 Recently paused its rate hikes but rates are up +650 bps since March Current Policy Leaning: Neutral UK bps 03/04/09 BOE is moving towards a tightening stance, but 8 of 9 voters say no hike yet. Denmark (0.65) +10bps 01/08/16 Raised rates slightly but still negative. Current Policy Leaning: Accomodative Switzerland (0.75) -50bps 01/15/15 Cut rates additional -50bps and removed minimum exchange for the euro Sweden (0.50) -15bps 03/18/15 Cut rates further into negative territory ECB/Euro Area - -5bps 03/10/16 Cut rates across the board & increased QE program to 80 billion per month Japan bps 12/19/08 10/31/14- Increased Asset Purchases and talk of increasing again. Israel bps 02/23/15 Cut rates -15bps, first cut in 7 months. Canada bps 07/15/15 Cut rates for second time this year Norway bps 03/18/16 Cut rates another -25bps South Korea bps 06/09/16 Cut rates for the first time in a year. Australia bps 05/03/16 Cut rates another -25 bps to record low New Zealand bps 12/10/15 Cut rates for 4th time in six months (first rate cuts since March 2011) China bps 10/23/15 Cut rates for 6th time and lowered Reserved Ratio once again India bps 04/06/16 Cut rates for the fifth time in past two years Indonesia bps 03/17/16 Cut rates for 3rd time this year Turkey bps 02/24/15 Cut rates -25 bps after significant decrease in January Russia bps 06/14/16 Cut rates for first time in a year. WEEK IN REVIEW BEST & WORST PERFORMERS: BEST/WORST PERFORMING S&P 500 SECTORS: S&P 500 Sectors Sector LAST PRICE 5-Day % MTD % YTD % EPS P/Sales P/E S&P 500 INDEX ENERGY TECHNOLOGY INDUSTRIALS CONSUMER DISCRETIONARY HEALTH CARE MATERIALS FINANCIALS UTILITIES CONSUMER STAPLES TELECOM

6 BEST/WORST PERFORMING GLOBAL BOND MARKETS: Over the past week, there were bond rallies in Russia (-34 basis points to 8.649%), Canada (-12 bps), the U.S. (-11 bps to 1.623%), and Germany (-7 bps to 0.017%). That s correct, Germany is on the brink of negative 10-year rates. Conversely, there were bond sell offs in Greece (+41 bps to 7.776%), Brazil (+7 bps), and South Africa (+6 bps). GLOBAL BOND MARKET - LARGEST MOVERS COUNTRY 10-Year Bond Yield 5-Day Net BPS MTD Net BEST/WORST PERFORMING WORLD STOCK MARKETS: Over the past week, global stock markets fell -1.57% on average. There were notable declines in many European nations: Czech Republic (-8.50% W/W), Greece (-7.02% W/W), Spain (-5.67% W/W), Italy (-5.46% W/W), Luxembourg (-5.38% W/W), Denmark (-4.97% W/W), Ireland (-4.76% W/W), Germany (-4.23% W/W), and France (-4.17% W/W). Also, note that China and Japan were both down over -3% over the past week. Conversely, there were weekly gains in Argentina (+4.17%), Saudi Arabia (+1.74%), Dubai (+1.35%), Abu Dhabi (+1.20%), and Russia (+0.89%). BPS YTD Net BPS 12-Month Net BPS Greece Brazil South Africa India Portugal Germany Switzerland (0.471) Hong Kong Singapore USA South Korea Canada Russia

7 WORLD STOCK MARKET INDEXES - BEST / WORST PERFORMERS COUNTRY Price 5-Day % MTD % QTD % YTD % 12-Month % Argentina 13, Saudi Arabia 6, Serbia #N/A N/A U.A.E. - Dubai 3, Colombia 9, #N/A N/A U.A.E. - Abu Dhabi 4, Russia 1, France 4, Hungary 25, Germany 9, EU Switzerland 7, Ireland 6, Denmark Luxembourg 1, #N/A N/A Italy 16, Spain 8, Greece #N/A N/A Czech Republic BEST AND WORST PERFORMING COMMODITIES MARKETS: Over the past week, WTI Oil fell -2.96% and Brent Oil fell -1.42%, due to a slightly stronger U.S. Dollar and profit taking over $50. On the other hand, Natural Gas increased +5.43% and it is now up % YTD. Furthermore, there were notable increases in Gold (+3.42% W/W), Silver (+5.79%), Sugar (+4.69%), Soybeans (+4.48%), Coffee (+2.43%), and Corn (+1.81%). P/E 7

8 Commodities Commodity LAST PRICE 5-Day % MTD % YTD % 12-Month % ENERGY Oil (WTI) Oil (Brent) RBOB Gasoline Natural Gas Heating Oil METALS Gold 1, Silver Platinum Copper Aluminum 12, AGRICULTURE Corn Wheat Soybeans 1, Coffee Cocoa 3, Cotton Sugar # Orange Juice Milk Lumber Live Cattle Lean Hogs

9 BEST/WORST PERFORMING CURRENCIES: Over the past week, the US Dollar increased last week on a flight to safety, as the DXY index increased +0.71% W/W. Note that the dollar increased versus the Euro (+0.93% W/W) but fell versus the Japanese Yen (- 1.45%). Furthermore, the US Dollar strengthened notably versus the British Pound (+1.96%-on increased Brexit fears), the Swedish Krona (+1.95%), and the Russian Ruble (+1.19%). GLOBAL CURRENCIES FX Cross LAST PRICE 5-Day % MTD % YTD % 12-Month % DXY USD/CAD USD/SEK USD/MXN USD/JPY USD/INR USD/HKD USD/CNY USD/CHF USD/BRL USD/RUB GBP/USD GBP/EUR GBP/JPY EUR/CHF EUR/DKK EUR/RUB EUR/GBP EUR/JPY EUR/USD AUD/JPY AUD/USD

10 MAJOR GLOBAL BOND MARKETS: GLOBAL BOND MARKET 10 YEAR YIELDS COUNTRY 10-Year Bond Yield 5-Day Net BPS MTD Net BPS YTD Net BPS 12-Month Net BPS Switzerland (0.471) Japan (0.157) Germany Denmark France Belgium Ireland Hong Kong Canada U.K Italy Spain South Korea USA Singapore Australia China Portugal Mexico India Greece Russia South Africa Brazil

11 MAJOR GLOBAL STOCK MARKETS: MAJOR GLOBAL STOCK MARKET INDEXES COUNTRY Price 5-Day % MTD % QTD % YTD % 1-Year Total % P/E USA-DJIA 17, USA-S&P 500 2, USA-Nasdaq 4, Russia 1, Portugal 4, Hong Kong 20, Taiwan 8, Israel 1, China 2, South Korea 1, Finland 7, Ireland 6, New Zealand 6, Japan 16, USA-S&P 500 2, Sweden 1, India 26, Germany 9, Canada 14, France 4, Spain 8, Australia 5, Switzerland 7, EU Netherlands Mexico 45, Belgium 12, U.K. 6, South Africa 52, Brazil 49, Norway Italy 16, DISCLOSURE APPENDIX This publication is for Institutional Investor use only and not for distribution to the general public. The comments herein are based on the author s opinion at a particular point in time and may change at any time without notice. Merion Capital Group does not guarantee the accuracy or completeness of the information contained herein. Merion Capital Group is a FINRA-registered broker-dealer. Merion Capital Group shares in the commissions for trades that are executed through Tourmaline Partners, LLC, a FINRA-registered broker-dealer. This report is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a general or personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Past performance is not a guarantee of future performance. All investments involve risk, including the loss of all of the original capital invested. 11