weekly market view Equities rally on capped yields Editorial macro strategy 21 July 2017 This reflects the views of the Wealth Management Group

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1 weekly market view macro strategy 21 July 2017 This reflects the views of the Wealth Management Group Editorial Equities rally on capped yields Equities likely to extend gains on capped yields, strong earnings and improved technicals, in our view. Equities: Bullish technicals and capped yields are likely to support further gains. We like Asia ex-japan (on a technical breakout) and Euro area (on higher sales and margins). Bonds: Tepid inflation likely to cap bond yields, bolstering the case for multi-asset income strategies for income investors. FX: We close our medium-term bearish AUD/USD view, but remain bullish USD/JPY as the BoJ maintains ultra-loose policy. What s new? Equities rally to new highs. Reduced inflation, policy rate and yield expectations caused equities to rally sharply to new record highs. Asia ex-japan, one of our most preferred regions, has outperformed other major regions month-to-date, with Hong Kong and Hong Kong-listed China equities leading gains. US equities rose to new highs, with earnings continuing to surprise positively. We remain positive and, in the short term, see the rally as an extension of a brightening technical outlook. Euro area equities hit new highs in USD terms. There has been much media attention on Euro area equities approximately 4% fall in local currency terms over the past two months on rising concerns that EUR strength will undermine future earnings. However, a stronger EUR meant Euro area equities hit a hit a new high this week in USD terms. Bond yields remained subdued following US inflation data. US CPI inflation slowed to 1.6% as market expectations of the likelihood of another Fed rate hike this year fell to about 40% (from about 60% two weeks ago). Japan, Euro area central banks leave policies unchanged. The BoJ pledged to leave its ultra-loose policy in place until inflation rises sustainably, consistent with our long-term bearish view on the JPY. Meanwhile, the ECB made no shift in policy or its outlook, noting that the Governing Council would only reassess policy in Autumn. The Fed meeting next week is key. Deleveraging remains a focus in China. Chinese President Xi Jinping announced the setting up of a Financial Stability and Development Committee. While a continued focus on managing excessive leverage is a long-term positive, it reinforces our view of prioritising quality within Asia s corporate bond markets. Contents Equities rally on capped yields 1 Market performance summary 2 What does this mean for investors? 3 Top client questions 4 Economic & Market Calendar 5 Disclosure Appendix 6 Euro area equities in USD terms extended gains to reach new highs on the back of a rising EUR MSCI Europe ex-uk, in USD and EUR terms Index, in USD Source: Bloomberg, Standard Chartered Asia ex-japan equities have broken just above recent highs, a bullish technical outcome MSCI Asia ex-japan index Index Jan-17 Mar-17 May-17 Jul-17 Index, in USD Source: Bloomberg, Standard Chartered Steve Brice Chief Investment Strategist Clive McDonnell Head, Equity Strategy Tariq Ali, CFA Strategist Abhilash Narayan Strategist Index, in local currency (RHS) May-14 Jun-15 Jul-16 Aug-17 Index, in local currency Implications Maintain equities exposure. Strong momentum, capped bond yields and upside earnings surprises point to continued gains. Euro area and Asia ex-japan remain our preferred regions. Income strategies to benefit. While we maintain our long-term preference for a balanced multi-asset strategy, capped bond yields reinforce our view that multi-asset income strategies are likely to remain relevant for income-oriented investors. What we are watching? Fed FOMC, US home sales, Australia and Singapore inflation. Manpreet Gill Head, FICC Strategy Adi Monappa, CFA Head, Asset Allocation & Portfolio Solutions Audrey Goh, CFA Director, Asset Allocation & Portfolio Solutions Arun Kelshiker, CFA Executive Director, Asset Allocation & Portfolio Solutions Rajat Bhattacharya Strategist Trang Nguyen Analyst, Asset Allocation & Portfolio Solutions DJ Cheong Strategist Jeff Chen Analyst, Asset Allocation & Portfolio Solutions Jill Yip Investment 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 14.6% 12.6% 13.4% 24.6% 11.5% 10.0% 19.1% 7.1% 11.8% 14.4% 28.0% 16.0% 3.3% 18.5% 5.6% 32.9% 26.8% 35.1% 24.7% 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 -0.1% 0.1% 0.4% 0.3% 1.4% 1.3% 1.4% 1.9% 1.1% 1.4% 0.7% 1.5% 2.4% 1.8% 2.5% 2.4% 3.9% 4.3% -4.6% 14.7% 12.8% 14.0% 17.7% 15.1% 15.3% 4.9% 12.9% 9.2% 27.0% Equity Sector Consumer Discretionary Consumer Staples Energy Financial Healthcare Industrial IT Materials Telecom Utilities Global Property Equity/REITs 1.5% 1.6% 2.0% 1.7% 2.1% 1.7% 2.0% 1.9% 2.5% Bonds Sovereign 5.8% 8.9% 7.0% 11.8% 7.9% DM IG Sovereign US Sovereign EU Sovereign EM Sovereign Hard Currency EM Sovereign Local Currency Asia EM Local Currency 1.5% 2.5% 0.7% 1.6% 0.8% 6.6% 7.6% 5.8% 4.2% 14.8% Bonds Credit DM IG Corporates DM High Yield Corporates US High Yield Europe High Yield Asia Hard Currency 0.2% 1.2% 0.9% 0.8% -19.0% -16.2% -4.0% - 5.8% 5.6% 8.0% Commodity Diversified Commodity Agriculture Energy Industrial Metal Precious Metal Crude Oil Gold 3.1% 2.5% 0.7% 2.7% 1.8% 3.7% 10.4% 10.6% 5.1% 4.6% 6.0% FX (against USD) Asia ex-japan AUD EUR GBP JPY SGD 2.9% 2.0% 0.3% 1.2% 0.6% - 3.4% 2.4% 5.6% 4.9% -30% -20% -10% 0% 10% 20% 30% 40% Alternatives Composite (All strategies) Relative Value Event Driven Equity Long/Short Macro CTAs -0.2% 0.3% 0.3% 0.4% -2% 0% 2% 4% 6% *Performance in USD terms unless otherwise stated, YTD period from 31 December 2016 to 13 July 2017, 1 week period: 13 July 2017 to 20 July 2017 Sources: MSCI, JP Morgan, Barclays Capital, Citigroup, HFRX, FTSE, Bloomberg, Standard Chartered This reflects the views of the Wealth Management Group 2

3 What does this mean for investors? Global equities and corporate bonds extended gains, with markets across the spectrum recording gains. Oil prices rose while the US Dollar fell. Equities: Earnings likely to remain supported US Q2 earnings maintained trend of beating expectations. However, the banking sector weakened after disappointment over the impact of rising rates on net interest margins and, in some cases, reduced H2 earnings guidance. While we prefer the banking sector in the Euro area, US equities as a whole remain a core holding, in our view. Conviction in Euro area remains despite EUR strength. Recent EUR gains have raised questions on the impact of currency strength on the corporate earnings outlook. However, we believe a recovery in sales and signs of improvement in corporate margins more than compensates for recent currency gains. As such, we do not believe EUR strength will de-rail the equity market, especially in USD terms. Financial regulator long-term positive for China equities. China President Xi Jinping announced the creation of the Financial Stability and Development Committee to strengthen financial oversight and rein in financial risks. This is positive in the long term for the China financial sector and is likely to provide another catalyst for China equities to extend their recent outperformance relative to other Asia ex-japan markets. Bonds: Maintain focus on quality in Asia corporate bonds Maintain preference for quality in Asia corporate bonds. China s continued focus on deleveraging may elevate risks for the weakest parts of the Asia corporate bond market. As such, we maintain our preference for favouring quality (Investment Grade [IG] over High Yield [HY]) over blindly chasing the highest yield on offer within Asia corporate bonds. FX: USD likely to extend declines to key support region Near-term USD outlook remains poor. The USD extended its decline this week following weaker-than-expected inflation data and a scale back in Fed rate hike expectations. Technically, the US Dollar index (DXY) remains in a firm bear trend with no signs of a base, which leads us to be cautious about chasing any bear market rally. Nonetheless, we believe the region is key as this coincides with many important technical support levels. Close our medium-term bearish AUD view, retain weak JPY bias. We have decided to cut our bearish view following what we see as key break higher this week (see page 4 for more details). The weak USD has clearly hurt our bullish USD-JPY view, but we have not seen a similar technical break. Meanwhile, the BoJ s policy statement this week suggests little reason to expect any change in stance, which should ensure interest rate differentials widen over time in the USD s favour. We believe the correction will be limited to support at 110. EUR/USD breached its medium-term consolidation range, settling above the 1.15 key resistance. This break improves the technical outlook, despite easing bond yields and the ECB holding back from signalling an imminent end to ultra-loose policy. Commodities: Oil extends rebound Continued fall in inventories support oil prices. US crude oil and gasoline inventories extended declines last week, supporting our continued view that prices are likely to rise in the near term. Benchmark (USD) performance w/w* Commodities *Week of 13 July 2017 to 20 July 2017 Source: MSCI, JP Morgan, Citigroup, Bloomberg, Standard Chartered (Indices used are JP Morgan Cash, MSCI AC World TR, Citi Non-MBS WorldBig Govt/Govt Sponsored, Bloomberg Commodity, DXY and ADXY) Short-term trend for oil, gold improve Technical levels of key market indicators as of 20 July 1st 1st Short- Index Spot support resistance term trend S&P500 2,473 2,400 2,500 STOXX 50 3,499 3,391 3,549 FTSE 100 7,488 7,302 7,532 Nikkei ,133 19,750 20,400 Shanghai Comp 3,245 3,165 3,294 Hang Seng 26,740 25,600 27,000 MSCI Asia ex-japan MSCI EM 1,059 1,024 1,070 Brent crude oil (ICE) Gold 1,244 1,194 1,260 UST 10Y Yield Source: Trading Central, Standard Chartered Note: Arrows represent short-term trend opinions Asia IG corporate bonds have performed as well as HY month-to-date despite the lower credit risk JPMorgan Asia credit index, IG and HY total returns Performance Source: JPMorgan, Bloomberg, Standard Chartered USD approaching a region of technical support US Dollar index (DXY) Index Cash Equities Bonds USD Index Asian FX Source: Bloomberg, Standard Chartered Jun Jul Jul Jul Jul-17 IG HY Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 % This reflects the views of the Wealth Management Group 3

4 Top client questions Q1. What has caused the recent AUD rally? Is it likely to continue? We believe the following factors have been most significant in driving the AUD to break above its sideways trend: 1. Broad USD weakness the USD sold off broadly amid reduced expectations of a Fed rate hike 2. Surging iron ore prices a strong recovery in prices from a low base 3. Hawkish market perception of RBA policy messaging market expectations of a 2017 rate hike have increased Technical indicators suggest the rally could extend. AUD/USD has broken above key resistance at (the medium-term range top) and the chart set-up is positive (higher lows since its 2016 low), suggesting the pair has already reached a medium-term bottom. A break above (200DMA on weekly charts) and (May 2015 top) from here will determine if the rally has further legs. However, a stretched positioning is a risk. Fundamentals are still mixed: USD weakness could take a pause beyond the very short term as it approaches a region of technical support (see page 3) Supply-side constraints may limit the iron ore rally; inventories remain at an all-time high, while China real estate fixed asset investment (a long-term driver of iron ore prices) shows no signs of rebounding The RBA s stance is unclear. An elevated unemployment level (close to 2008 levels), flat wage growth and slowing momentum in job creation argue for no tightening on the immediate horizon. However, the market interpreted minutes from the last RBA meeting as signalling a more hawkish bias than before. On balance, we favour closing our medium-term bearish view on AUD/USD. While we are not fully convinced fundamentals have moved in favour of a stronger AUD, the currency pair has undoubtedly broken higher, against our expectations. Therefore, we believe risk management favours closing our medium-term bearish AUD/USD view at current levels. Gap in policy rates has narrowed, though recent messaging suggests RBA s tilt may be shifting Fed and RBA policy rates % Sep-12 Jul-13 May-14 Mar-15 Jan-16 Nov-16 Sep-17 Fed fund rate Source: Bloomberg, Standard Chartered RBA cash rate This reflects the views of the Wealth Management Group 4

5 Economic & Market Calendar Event Next Week Date Period Expected Prior US Markit US Manufacturing PMI Jul P 52.0 US Markit US Composite PMI Jul P 53.0 MON US Existing Home Sales MoM Jun -1.4% 1.1% EC PPI YoY Jun 4.1% EC Import Price Index YoY Jun 4.1% SK Consumer Confidence Jul TUE UK CBI Business Optimism Jul 1 US Conf. Board Consumer Confidence Jul US New Home Sales MoM Jun 0.9% 2.9% WED THUR FRI/SAT JN PPI Services YoY Jun 0.7% JN Small Business Confidence Jul 49.2 US Fed FOMC meeting Jul % EC Unemployment Rate Q 18.8% US GDP Annualized QoQ Q A 2.6% 1.4% US U. of Mich. Sentiment Jul F US U. of Mich. Current Conditions Jul F Event This Week Date Period Actual Prior MON CH GDP y/y Q 6.9% 6.9% IN Exports y/y Jun 4.4% 8.3% UK CPI y/y Jun 2.6% 2.9% TUE EC CPI y/y Jun F 1.3% 1.3% US Import Price Index m/m Jun -0.2% -0.3% WED EC Construction Output m/m May -0.7% 0.3% EC ECB Current Account SA May 30.1b 22.2b THUR EC Current Account NSA May 18.3b 21.5b EC Euro Area First Quarter Government Deficit JN BOJ Monetary Policy Statement JN BOJ Policy Balance Rate Jun -0.1% -0.1% SK Exports 20 Days y/y Jul 22.4% 24.4% FRI/SAT EC ECB Survey of Professional Forecasters UK Public Finances (PSNCR) Jun 13.4b UK Central Government NCR Jun 10.5b CA CPI y/y Jun 1.3% Previous data are for the preceding period unless otherwise indicated Data are % change on previous period unless otherwise indicated P - preliminary data, F - final data, sa - seasonally adjusted y/y year-on-year, m/m - month-on-month Source: Bloomberg, Standard Chartered; key indicators highlighted in blue Previous data are for the preceding period unless otherwise indicated Data are % change on previous period unless otherwise indicated P - preliminary data, F - final data, sa - seasonally adjusted y/y year-on-year, m/m - month-on-month This reflects the views of the Wealth Management Group 5

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