weekly market view Earnings, commodities bullish for stocks Editorial

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1 weekly market view This reflects the views of the Wealth Management Group macro strategy 6 August 2015 Editorial Earnings, commodities bullish for stocks Earnings in Europe and Japan have beaten expectations, underscoring our bullish view on the two markets. Commodities decline to a 13-year low likely to keep inflation subdued, allowing monetary policy to stay supportive for equities. Weaker commodities are beneficial for some Emerging Markets (EM) such as India. Indian bonds remain attractive. Earnings underpin bullish Europe, Japan call. The first cut of the Q2 earnings season is out, and it depicts a constructive outlook for global equities, especially in Europe and Japan, the two regions where we have the highest conviction among global equity markets. More European companies in the benchmark Stoxx Europe 600 index beat profit estimates in Q than in any period since Banks and large exporters led profit growth on recovering credit demand and a boost from the weaker EUR. The 6% Q2 earnings growth forecast is in contrast to a 1% increase expected in the US. This underpins our bullish Europe equities call (FX hedged). (See page 3.) Japanese earnings continue to outperform expectations, with profit and sales growth outstripping US and European peers thanks to the weaker JPY. This supports our bullish call on Japanese stocks (FX hedged). Commodities decline backs Goldilocks environment for equities. The Bloomberg Commodity dropped to its lowest level since 2002, with crude oil approaching a six-year low, gold ploughing a new five-year low and industrial metals setting a new six-year low. We expect the declines to continue due to rising supplies and a stronger USD. The broad-based decline in commodities has wide-ranging implications, the foremost being keeping inflation near its current historical low levels. This view was corroborated by a deepening contraction in European producer prices in June and subdued inflation in the US (where the Fed s preferred inflation measure for June came in at 0.3% y/y). Low inflation, in turn, means monetary policy is likely to remain accommodative globally, including in the US, where any rate increase is likely to be gradual (even if the Fed initiates rate hikes later this year). This is bullish for global equities. Indian bonds likely to get a lift from lower commodity prices. India is likely to be one of the beneficiaries from the drop in oil and other commodity prices. Although the central bank held rates this week after lowering three times this year RBI Governor Rajan left the door open to further cuts. Weaker commodity prices are likely to keep inflation below its target 6% cap in the coming months. The monsoon has so far been close to normal, easing worries about food inflation. Indian stocks rebounded this week, outperforming Developed Markets and other EMs, with an index of medium-sized companies hitting a record. The benchmark Sensex is 5% below the record set in March. Although Indian bonds have remained rangebound, we remain bullish because of the attractive yield on offer, scope for capital gains on further rate cuts and stronger currency fundamentals, especially relative to other EMs. Major reforms, such as the approval of a national sales tax by the upper house of parliament, would provide an added boost for bonds. Indian bonds remain a key long-term holding in a multi-income portfolio. Contents Earnings, commodities bullish for stocks 1 Market performance summary 2 What does this mean for investors? 3 Technical Analysis 4 Economic & Market Calendar 6 Disclosure Appendix 7 Earnings growth expectations have been revised upwards across Developed Markets since March, with Japan leading the way 12-month forward earnings growth forecasts for Japan, Europe and the US % y/y Commodity prices are testing multi-year lows, keeping inflation subdued worldwide Brent crude oil, gold, Bloomberg Industrial Metals (ed to 100 = August 2000) : 100 = August Jan-14 May-14 Oct-14 Mar-15 Aug Steve Brice Chief Investment Strategist Clive McDonnell Head, Equity Strategy Manpreet Gill Head, FICC Strategy Adi Monappa, CFA Head, Asset Allocation & Portfolio Construction Japan Europe US 0 Jul-00 Apr-04 Jan-08 Oct-11 Aug-15 Brent crude Gold Industrial commodities Audrey Goh, CFA Senior Strategist 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 -16.5% -5.2% -8.6% -4.8% -1.9% -3.8% -1.9% -4.6% 3.3% 4.3% 3.2% 2.2% 1.8% 4.7% 7.3% % 18.2% 13.3% 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 -1.0% -2.1% % -2.1% 1.9% 1.4% 0.9% 0.4% 1.1% 1.5% 2.5% -11.8% -4.9% -4.1% 1.0% 2.0% 2.8% 5.4% 8.4% 7.1% 15.1% Equity Sector Consumer Discretionary Consumer Staples Energy Financial Healthcare Industrial IT Materials Telecom Utilities Global Property Equity/REITs -3.6% -0.9% 1.4% 1.5% 0.9% 0.6% Bonds Sovereign -10.5% -4.6% -4.4% 3.5% 0.6% Global IG Sovereign Global HY Sovereign EM IG Sovereign US Sovereign EU Sovereign Asia EM Local Currency -1.2% % -5.6% 0.4% 1.8% 4.8% Bonds Credit Global IG Corporates Global High Yield Corporates US High Yield Europe High Yield Asia High Yield Corporates -0.3% % -12.9% -12.1% -15.2% -17.8% -8.5% -21.9% -8.4% Commodity Diversified Commodity Agriculture Energy Industrial Metal Precious Metal Crude Oil Gold -7.0% -4.3% -1.9% -2.1% -0.5% -0.3% % -2.4% -4.2% -4.3% FX (against USD) Asia ex-japan AUD EUR GBP JPY SGD % -0.6% 0.9% -0.3% 1.2% 1.9% 2.0% 1.2% -25% -15% -5% 5% 15% Alternatives Composite (All strategies) Arbitrage Event Driven Equity Long/Short Macro CTAs - -8% -3% 2% *Performance in USD terms unless otherwise stated, YTD period from 31 December 2014 to 05 Aug 2015, 1 week period: 30 July to 05 Aug 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? Europe and Japan led gains in global equities on the back of stronger-than-expected Q2 profits. European government bond yields rose as business confidence improved. Crude oil slumped 7% over the past week, dragging commodities to a 13-year low. The USD was boosted by rising expectation of a September rate hike. Equities: European stocks outperform on solid earnings Earnings support European equities outperformance. Over 60% of the companies in the Stoxx Europe 600 index that have announced Q2 earnings so far have beaten profit estimates. This is the highest since Profit growth has been led by banks and large exporters. Q2 earnings are forecast to grow 6% versus the 5% forecast at the start of July. Across the Atlantic, US earnings have staged a turnaround, moving to 1% growth currently from a forecast of 3% earnings contraction at the start of July. Excluding energy, earnings are forecast to grow 9% in Q2. Japanese earnings continue to beat estimates. Over 60% of the Topix companies that have reported earnings so far have beaten Q2 profit estimates. A similar proportion has beaten sales estimates. This supports our bullish outlook for Japanese equities on an FX-hedged basis. Rising bond yields could weigh on Singapore REITs. REITS have declined 4% YTD, though total returns have been flat once the yield is incorporated. We remain cautious given earnings have been mixed so far. China earnings to drive equities. China stocks remained volatile, but the Shanghai Composite remained above the crucial 3,400 level. Authorities this week raised the hurdles for short-selling equities. Results from banks and technology companies due this month will be key drivers for stocks in the near term. Bonds: US 2-year Treasury yields test four-year highs US short-term yields to rise faster than long-term yields. US 2- year Treasury yields are close to the key 0.75% resistance level. Meanwhile, US 10-year yields fell to a two-month low earlier this week after data showed that US wage growth weakened in Q2. However, the yields recovered to around 2.26% after US services sector confidence jumped to 10-year high and comments from Fed s Lockhart backing a September rate rise. DM High Yield (HY) bonds to stay under pressure. The yield premium on the bonds continued to rise, driven by the energy sector, as oil prices fell close to the six-year low it hit in March. We prefer to cap exposure to total HY bonds at benchmark levels of 10% for a moderate investor. FX: AUD bounces after the RBA drops reference to weaker currency AUD gains likely to be fleeting. The RBA left its policy rate unchanged and did not make any reference to the need for a weaker currency. However, we believe continued commodity price declines and an impending Fed rate hike are likely to keep the AUD under pressure. Any rally is likely to be short-lived. Continued deflation, weak growth to weigh on SGD. The SGD weakened to a five-month low following weak manufacturing data and broad-based USD strength. The recent fall in commodity prices is likely to add to deflationary pressures and weigh on the SGD. Commodities: Commodities fall to a 13-year low Rising supplies, a strong USD likely to keep prices under pressure. The Bloomberg Commodities fell to its lowest level since Oil prices renewed their decline, approaching a sixyear low that it hit in March. Rising supplies from OPEC and non- OPEC producers are likely to keep weighing on prices. Benchmark (USD) performance w/w* Cash Equities Bonds Commodities USD Asian FX *week of 30 July 2015 to 05 Aug 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) Stocks in Europe and Japan outperformed other Developed Markets in the past week on strong earnings Performance of key stock indices in 30 Jul-05 Aug (%) Developed Markets Emerging Markets US energy sector HY bond yield premiums have soared over the past month, while the rest of the HY universe has remained relatively subdued Bond yield premiums for US HY, US HY energy sector and US HY non-energy sector bonds Yield premium The AUD is likely to remain under pressure as iron ore prices continue to decline AUD/USD; Iron ore (USD/tonne) (RHS) AUD/USD Global equities Asia ex-japan US Europe Japan % % 300 Jul-14 Oct-14 Jan-15 Apr-15 Aug US HY US HY non-energy US HY energy Jul-10 Oct-11 Jan-13 Apr-14 Aug-15 AUD Iron ore (RHS) USD/tonne This reflects the views of the Wealth Management Group 3

4 Technical Analysis S&P 500 Neutral The index continues to trade above the upward slanting trendline at USD 2,060 and has also held above the 200DMA level of USD 2,070 that has been providing support since This suggests a continued positive bias. However, the daily and weekly RSI momentum indicators have been hovering around the 50 mid-mark, indicating indecisive sentiment. Hence, it is preferable to wait for a pullback to the support of USD 2,040-1,990, or a decisive crossing of the resistance of USD 2,140 before considering taking fresh exposure. Support 2,040 Resistance 2,140 MSCI AC Asia ex-japan (USD) Caution recommended 2,200 2,150 2,100 2,050 2,000 1,950 1,900 1,850 1,800 1, ,700 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 S&P dma 100 dma 200 dma The index has broken its almost threeyear long intermediate rising trendline but has found support at USD 540- USD 520 region in-force since The sharp fall from the high of USD 640 has dented the medium-term momentum. However, current oversold readings could provide some relief. Currently, it stands above the crucial support of USD 540-USD 520. Any recovery from current levels needs to be monitored closely until we get a confirmation of a bottom. Support 520 Resistance Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13 Aug-13 Mar-14 Oct-14 May-15 MSCI Asia ex-japan 50 dma 100 dma 200 dma Euro Stoxx 600 Bullish The index has shown a strong recovery from the 200DMA support line. A higher bottom was formed signalling a positive undertone. We view this setup as a bullish continuation signal and expect the uptrend to resume as long as the support of EUR 380 is not breached. Momentum indicators are turning positive and are in sync with prices, supporting our positive bias. Support 380 Resistance Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Stoxx Euro dma 100 dma 200 dma This reflects the views of the Wealth Management Group 4

5 US 10-year Treasury yields Range bound US 10-year Treasury yields continued to retrace from the resistance of 2.5% but maintained its overall positive bias. It continues to trade above the previous intermediate lows. We expect yields to remain rangebound between %, while a breakout on either side could lend further direction in the medium term. Support 2.05% Resistance 2.5% % Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun US 10YR 50 dma 100 dma 200 dma Brent Crude Oil Bearish Brent crude appears to have completed its intermediate upward retracement as it reversed lower from the recent high of USD 66. The RSI momentum indicator has once again started to move lower, in sync with prices, indicating the possibility of further downside. We expect a strong move towards USD 40 if it decisively breaks the psychological USD 50 mark. Support 40 Resistance 61 USD Jun-14 Sep-14 Nov-14 Feb-15 May-15 Aug-15 Brent oil 50 dma 100 dma 200 dma Bloomberg Commodity (BCOM) Bearish The downtrend momentum for the index accelerated after it breached a crucial bearish head and-shoulders pattern neckline at 122. It is now close to testing the 2002 lows of 88 from which a minor rebound cannot be ruled out. However, a breach of this is likely to see it test the 1999 low of 75. Support 88 Resistance (Weekly Chart) Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 BCOM 50dma 100 dma 200 dma This reflects the views of the Wealth Management Group 5

6 MON Economic & Market Calendar Next Week: Aug 10 - Aug 14 This Week: Aug 03 - Aug 07 Event Period Expected Prior Event Period Actual Prior JN BoP Current Account Balance Jun B SK BoP Current Account Balance USD Mn Jun JN Bank Lending Ex-Trusts y/y Jul 2.60% JN Nikkei Japan PMI Mfg Jul F JN Consumer Confidence Jul 41.7 SK Nikkei South Korea PMI Mfg Jul EC Sentix Investor Confidence Aug 18.5 CH Caixin China PMI Mfg Jul F IN Nikkei India PMI Mfg Jul EC Markit Eurozone Manufacturing PMI Jul F US Personal Income Jun 0.4% 0.4% US Real Personal Spending Jun 0.4% US PCE Core y/y Jun 1.3% 1.3% US ISM Manufacturing Jul TUE WED THUR SK Export Price y/y Jul -2.20% SK CPI y/y Jul JN Money Stock M2 y/y Jul 3.80% JN Monetary Base y/y Jul 32.8% 34.2% JN Money Stock M3 y/y Jul 3.10% AU Trade Balance Jun -2933M -2677M JN Machine Tool Orders y/y Jul P 6.60% AU Retail Sales m/m Jun 0.4% EC ZEW Survey Expectations Aug 42.7 JN Real Cash Earnings y/y Jun -2.9% GE ZEW Survey Current Situation Aug 63.9 AU RBA Cash Rate Target Aug % 2.00% GE ZEW Survey Expectations Aug 29.7 IN RBI Repurchase Rate Aug % 7.25% US NFIB Small Business Optimism Jul 94.1 UK Nationwide House Px NSA y/y Jul 3.5% 3.3% CA Housing Starts Jul 202.8K AU Commodity y/y Jul % US Nonfarm Productivity Q2 P 1.50% -3.10% EC PPI y/y Jun -2.2% -2.00% US Unit Labor Costs Q2 P -0.50% 6.70% US Factory Orders Jun 1.8% -1.1% US Wholesale Trade Sales m/m Jun 0.30% SK Unemployment rate SA Jul 3.90% JN Nikkei Japan PMI Services Jul JN PPI y/y Jul -2.40% JN Nikkei Japan PMI Composite Jul AU Westpac Consumer Conf SA m/m Aug -3.20% CH Caixin China PMI Composite Jul AU Wage Price y/y Q2 2.30% CH Caixin China PMI Services Jul JN Industrial Production y/y Jun F 2.00% IN Nikkei India PMI Services Jul CH Retail Sales y/y Jul 10.50% 10.60% IN Nikkei India PMI Composite Jul CH Industrial Production y/y Jul 7.00% 6.80% RU Markit Russia PMI Composite Jul CH Fixed Assets Ex Rural YTD y/y Jul 11.60% 11.40% EC Markit Eurozone Services PMI Jul F CH Bloomberg GDP Monthly Estimate y/y Jul 6.91% EC Markit Eurozone Composite PMI Jul F UK Average Weekly Earnings 3M/y/y Jun 3.20% UK Markit/CIPS UK Composite PMI Jul UK ILO Unemployment Rate 3Mths Jun 5.60% EC Retail Sales y/y Jun 1.2% 2.6% UK Employment Change 3M/3M Jun -67K US ADP Employment Change Jul 185K 229K EC Industrial Production WDA y/y Jun 1.60% US Trade Balance Jun -$43.84B -$41.87B IN Industrial Production y/y Jun 2.70% US Markit US Composite PMI Jul F IN CPI y/y Jul 5.40% US ISM Non-Manf. Composite Jul CA Teranet/National Bank HPI y/y Jul 5.10% US JOLTS Job Openings Jun 5363 SK BoK 7-Day Repo Rate Aug % AU Employment Change Jul 38.5K 7.0K JN Machine Orders y/y Jun 19.30% AU Unemployment Rate Jul 6.3% 6.1% AU Consumer Inflation Expectation Aug 3.40% EC Markit Eurozone Retail PMI Jul 50.4 GE CPI EU Harmonized y/y Jul F 0.10% UK Bank of England Bank Rate Aug % EC ECB account of the monetary policy UK Bank of England Inflation Report meeting US Retail Sales Advance m/m Jul 0.40% -0.30% US Retail Sales Ex Auto and Gas Jul -0.20% US Import Price y/y Jul % US Business Inventories Jun 0.30% 0.30% FRI/SAT ID BoP Current Account Balance Q2 -$3848M JN BOJ Annual Rise in Monetary Base Aug 7 80T GE GDP WDA y/y Q2 P 1.00% GE Industrial Production WDA y/y Jun 2.10% IN Wholesale Prices y/y Jul -2.40% GE Current Account Balance Jun 11.1B EC GDP SA q/q Q2 A 0.40% GE Exports SA m/m Jun 1.70% EC GDP SA y/y Q2 A 1.00% UK Trade Balance Jun EC CPI y/y Jul F 0.20% BZ IBGE Inflation IPCA y/y Jul 8.89% EC CPI Core y/y Jul F 1.00% CA Unemployment Rate Jul 6.80% US PPI Final Demand y/y Jul -0.70% CA Net Change in Employment Jul -6.4K US PPI Ex Food and Energy y/y Jul 0.80% US Change in Nonfarm Payrolls Jul 223K US Industrial Production m/m Jul 0.20% 0.30% US Unemployment Rate Jul 5.30% US Capacity Utilization Jul 77.90% 78.40% US Average Hourly Earnings y/y Jul 2.00% US U. of Mich. Sentiment Aug P 93.1 US Average Weekly Hours All Employees Jul 34.5 US U. of Mich. Current Conditions Aug P US Underemployment Rate Jul 10.50% US U. of Mich. Expectations Aug P 84.1 US Labor Force Participation Rate Jul 62.60% US U. of Mich. 1 Yr Inflation Aug P 2.80% CA Ivey Purchasing Managers SA Jul 55.9 US U. of Mich Yr Inflation Aug P 2.80% 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 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 6

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