weekly market view Higher bond yields reflect global upturn Editorial macro strategy 12 January 2018

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1 EPS growth y/y % % weekly market view macro strategy 12 January 2018 This reflects the views of the Wealth Management Group Editorial Higher bond yields reflect global upturn The modest rise in bond yields so far is unlikely to derail the risk-asset rally, given that it likely reflects the upturn in global growth and higher oil prices. Equities: US corporates are likely to report strong Q4 earnings, but guidance on the impact of tax cuts will be watched closely. China equities to continue to benefit from Stock Connect inflows. Bonds: US 10-year Treasury yields face key resistance at 2.63%. Our preferred EM bonds gain from strong inflows. FX: The USD index s brief rebound is likely to fade. However, we expect USD/JPY to rebound strongly. See Outlook 2018: Turning up the heat, published on 8 December, for more details on our key investment themes. What s new? Bond yield recovery backed by improving fundamentals. A strong pick up in global growth, a nascent rise in inflation expectations amid increasing oil prices and US tax cuts are the factors likely pushing US and German bond yields higher. Speculation that China may reduce bond buying or that the Bank of Japan may taper policy accommodation are less convincing factors, in our view. At least partly because of this, we believe the recovery in bond yields is unlikely to derail the rally in equities and other risk assets as long as the yield rise is gradual and supported by improving fundamentals. Having said that, the 2.63% level for 10-year US Treasury yields is a key technical level, a breach of which would likely renew concerns the morethan-three-decade-long Treasury bull market is ending. USD/JPY may rebound, even as USD rebound fades. The USD Index s brief bounce after three weeks of declines was not surprising, given that it was oversold. We expect USD weakness to resume over the coming months amid a continued upturn in growth outside the US. However, USD/JPY is likely to be an exception; we expect the pair to rebound strongly after the recent fall below 112, as we are unconvinced the BoJ is poised to withdraw its accommodative monetary policy, despite curtailing purchase of longer-term bonds this week (see page 3). ECB meeting minutes point to continued accommodation. ECB policymakers remain concerned about subdued inflation despite the strong upturn in growth. While economic and investor confidence and industrial sector data are at multi-year highs and the unemployment rate fell to a nine-year low, there is a substantial slack in labour markets in southern Europe, which is likely keeping inflation subdued. Given this, we expect only a gradual rise in bond yields, in turn supporting Euro area equities. What we are watching US Q4 earnings and guidance. US Q4 corporate earnings are estimated to have risen 12%, led by the energy, materials and technology sectors. These sectors, along with financials and industrials, are among our most favoured sectors for We would watch for guidance on the impact of tax cuts to assess the likelihood of future buybacks and capacity expansions. Contents Higher bond yields reflect global upturn 1 Market performance summary 2 What does this mean for investors? 3 Top client questions 4 Economic & Market Calendar 5 Disclosure Appendix 6 US 10-year Treasury yields face key resistance at 2.63% US 2-year and 10-year Treasury yields Jan-80 Jul-89 Jan-99 Jul-08 Jan-18 Source: Bloomberg, Standard Chartered US consensus estimates point to an acceleration in earnings growth in 2018 S&P500 quarterly earnings growth and estimates US 10-year yield Source: Thomson Reuters, Standard Chartered Steve Brice Chief Investment Strategist Clive McDonnell Head, Equity Strategy Manpreet Gill Head, FICC Strategy Adi Monappa, CFA Head, Asset Allocation & Portfolio Solutions Audrey Goh, CFA Senior Strategist, Asset Allocation & Portfolio Solutions Arun Kelshiker, CFA Senior Strategist, Asset Allocation & Portfolio Solutions Daniel Lam, CFA Senior Strategist, Asset Allocation & Portfolio Solutions Belle Chan Senior Strategist US 2-year yield Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Actual Consensus Rajat Bhattacharya Senior Strategist Tariq Ali, CFA Strategist Francis Lim Quantitative Strategist Jill Yip, CFA Senior Strategist Abhilash Narayan Strategist Cedric Lam Strategist Trang Nguyen Analyst, Asset Allocation & Portfolio Solutions DJ Cheong 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 - 3.3% 1.7% 3.3% 3.4% 3.6% 2.2% 2.5% 5.4% 0.9% 3.3% 1.8% 0.7% 2.0% 3.0% 4.8% 6.0% 6.5% 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 -1.7% -0.6% 1.4% 1.6% 0.9% 0.7% 1.4% 0.2% 0.5% 0.1% 1.7% 1.1% 1.4% 2.7% -0.9% -1.8% -0.6% 5.2% 3.8% 3.4% 4.5% 4.7% Equity Sector Consumer Discretionary Consumer Staples Energy Financial Healthcare Industrial IT Materials Telecom Utilities Global Property Equity/REITs -1.0% -1.1% 2.0% 1.6% 2.0% 2.1% 0.9% 1.6% Bonds Sovereign -0.6% 0.1% 0.9% DM IG Sovereign US Sovereign EU Sovereign EM Sovereign Hard Currency EM Sovereign Local Currency Asia EM Local Currency -0.9% 0.0% 0.6% 0.7% 0.6% Bonds Credit DM IG Corporates DM High Yield Corporates US High Yield Europe High Yield Asia Hard Currency 0.0% - 0.1% -2.0% -0.8% 0.2% 0.5% 3.0% 3.6% Commodity Diversified Commodity Agriculture Energy Industrial Metal Precious Metal Crude Oil Gold -1.8% % 1.7% 2.4% 1.1% 0.2% 0.2% 0.5% FX (against USD) Asia ex-japan AUD EUR GBP JPY SGD 0.0% 2.0% -4% -2% 0% 2% 4% 6% 8% Alternatives Composite (All strategies) Relative Value Event Driven Equity Long/Short Macro CTAs 0.3% 0.3% -3% -2% -1% 0% 1% 2% 3% *Performance in USD terms unless otherwise stated, YTD period from 31 December 2017 to 11 Jan 2018, 1 week period: 04 Jan 2018 to 11 Jan 2018 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 % GBP/USD ppt 12 January 2018 weekly market view What does this mean for investors? Global stocks set new highs, led by Japan and the US. Developed Market government bonds led losses in debt markets. Crude oil extended gains to a three-year high, but metals declined. Equities: China equities extend rally China equities benefitting from flows, policy. The MSCI China has risen 6% YTD, driven by sustained inflows from Mainland investors via the Hong Kong/China Stock Connect. In addition, possible measures to relax listing rules on the Hong Kong exchange, which could make the exchange more attractive for high-growth China technology companies preparing to list overseas, has had a positive impact on market sentiment. China remains one of our preferred markets in Asia. Japan s strong fundamentals support equities. The Nikkei 225 has risen YTD, as markets factor in an improving outlook for the economy and corporate earnings. Equities gained despite a strengthening JPY, which point to a broadening in the drivers of corporate earnings beyond a reliance on a weaker exchange rate. However, the resilience needs to be sustained to make us more positive. Until then, Japan equities remain a core holding. Bonds: EM bonds boosted by strong inflows Continue to rotate into EM bonds. Global investor sentiment towards Emerging Markets (EM) continues to strengthen as illustrated by rising inflows into EM debt, especially EM USDdenominated bonds. EM USD government bonds remain one of our preferred areas within bonds, as they are well supported by synchronised global growth and higher commodity prices. US HY bond gains backed by strong fundamentals. US High Yield (HY) bond valuations (measured by credit spreads) rose to their highest level since 2007 on increased risk appetite. Valuation concerns notwithstanding, US high yield bonds are likely to benefit from US tax reform, as lower corporate tax rates are expected to boost their capacity to cover interest payments. FX: Turning bearish on GBP; still bearish on JPY Tactically bearish on GBP/USD. We believe markets are underpricing potential short-term Brexit-related risks. Markets do not expect significant volatility over the next three months a timeframe which includes the March EU summit, widely seen as a deadline for the UK to secure a transition period for its trade relationship with the EU ahead of Brexit. The GBP has also run ahead of short-term interest rate differentials, suggesting currency markets are pricing in an overly optimistic rate hiking scenario. This leaves the GBP vulnerable to a correction, in our opinion. Remain bullish on USD/JPY. USD/JPY fell below the support level, but will likely see support at The JPY had been boosted by the BoJ s decision to reduce year bond purchases, which some market participants (mistakenly, in our opinion) have labelled a shift in the BoJ s monetary policy stance. The BoJ is now focused on maintaining 10-year JGB yields within 0.1% to 0.1% rather than meeting quantitative JGB purchase targets, a stance we believe remains consistent with easy monetary policy. Therefore, we believe the JPY is likely to face renewed weakness as bond yields outside Japan continue to rise, pushing USD/JPY higher. USD/SGD chart set-up remains bearish following a retreat from the resistance. The pair is poised to test the recent low at (50% retracement of the 2011 rally), and a break could open significant downside possibilities. Benchmark (USD) performance w/w* Cash Equities Bonds Commodities USD Index Asian FX *Week of 04 January 2018 to 11 January 2018 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) S&P500 is testing its first key technical resistance Technical levels of key market indicators as of 11 Jan 1st 1st Short- Index Spot support resistance term trend S&P500 2,768 2,650 2,770 STOXX 50 3,595 3,469 3,630 FTSE 100 7,763 7,544 7,781 Nikkei ,710 22,450 24,500 Shanghai Comp 3,425 3,320 3,450 Hang Seng 31,120 29,300 32,000 MSCI Asia ex-japan MSCI EM 1,197 1,135 1,250 Brent crude oil (ICE) Gold 1,324 1,280 1,358 UST 10Y Yield Source: Trading Central, Standard Chartered Note: Arrows represent short-term trend opinions US HY bond premiums over Treasuries fell to their lowest level since 2007 amid strong risk appetite US HY bond yield spread over Treasuries Source: Bloomberg, Standard Chartered GBP/USD has run ahead of interest rate differentials even as Brexit risks remain on the forefront UK-US 2-year interest rate differentials and GBP/USD Source: Bloomberg, Standard Chartered % 0 Jan-07 Oct-09 Jul-12 Apr-15 Jan Jan-15 Jan-16 Jan-17 Jan-18 GBP-USD 2 year interest rate differential GBP/USD (RHS) This reflects the views of the Wealth Management Group 3

4 Top client questions Q1. Do you expect oil prices to extend recent gains? What would be the best approach for an investor seeking investment opportunities from rising oil prices? Oil prices recently made new three-year highs, driven by a multitude of factors including rising geopolitical tensions (between the US and Iran), falling global oil stockpiles, one-off supply disruptions and weather-related factors. Although we believe OPEC-led production cuts are likely to continue, we believe prices will be capped in the near term amid the lack of further positive catalysts and record high speculative positioning. While prices could take a breather in the short term, we continue to believe the long-term outlook for oil prices will be mainly determined by supply factors. The return of US shale is a key factor to watch, as US producers could capitalise on current prices to ramp up production even OPEC as strives to maintain output cuts. We continue to expect the demand-supply balance to gradually tighten, though note signs of moderating growth in China could slow the process. We see multiple opportunities to gain exposure to oil prices, though we would prefer to wait for better entry levels. We note that global energy sector equities have lagged the recent oil price rally. As fundamentals of the global energy sector have improved owing to lower operating costs and breakevens, and higher margins, we are comfortable taking exposure through this equity sector given we remain positive on the broader equity market. We also believe Emerging Market (USD) bonds are likely to be a beneficiary in light of the large proportion of oil-producing countries in the index. US energy sector equities have outperformed the S&P500 index since the start of the year amid rising oil prices Performance of various S&P500 sectors (31 Dec Jan 2018) Consumer Discretionary Consumer Staples Energy Financial Healthcare Industrial IT Materials Telecom Utilities -1.8% Global Property Equity/REITs -0.9% -0.6% Source: Bloomberg, Standard Chartered 3.8% 3.4% 4.5% 4.7% 5.2% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% This reflects the views of the Wealth Management Group 4

5 FRI/SAT WED TUE MON FRI/ SAT THUS WED TUE MON 12 January 2018 weekly market view Economic & Market Calendar Event Next Week Date Period Expected Prior JN Money Stock M2 y/y 15-Jan-18 Dec 4.1% 4.0% IN Wholesale Prices y/y 15-Jan-18 Dec 4.0% 3.9% UK CPI Core y/y 16-Jan-18 Dec 2.7% US Industrial Production m/m 17-Jan-18 Dec 0.2% 0.2% CA Bank of Canada Rate Decision 17-Jan Jan 1.0% CH GDP y/y 18-Jan-18 4Q 6.7% 6.8% CH Fixed Assets Ex Rural YTD y/y 18-Jan-18 Dec 7.1% 7.2% CH Retail Sales y/y 18-Jan-18 Dec 10.2% 10.2% CH Industrial Production y/y 18-Jan-18 Dec 6.1% 6.1% US Housing Starts 18-Jan-18 Dec 1270k 1297k US Building Permits 18-Jan-18 Dec 1288k 1303k US Philadelphia Fed Business Outlook 18-Jan-18 Jan SA SARB Announce Interest Rate 18-Jan Jan 6.75% SK BoK 7-Day Repo Rate 18-Jan Jan UK Retail Sales Ex Auto Fuel y/y 19-Jan-18 Dec US U. of Mich. Sentiment 19-Jan-18 Jan P Event This Week Date Period Actual Prior GE Factory Orders WDA y/y 08-Jan-18 Nov 8.7% 7.2% EC Sentix Investor Confidence 08-Jan-18 Jan EC Retail Sales y/y 08-Jan-18 Nov 2.8% 0.2% US Consumer Credit 09-Jan-18 Nov $27.95b $20.53b JN Real Cash Earnings y/y 09-Jan-18 Nov 0.1% GE Industrial Production WDA y/y 09-Jan-18 Nov 5.6% 2.8% GE Exports SA m/m 09-Jan-18 Nov 4.1% EC Unemployment Rate 09-Jan-18 Nov 8.7% 8.8% CH PPI y/y 10-Jan-18 Dec 4.9% 5.8% CH CPI y/y 10-Jan-18 Dec 1.8% 1.7% IN CPI y/y 12-Jan-18 Dec 4.9% IN Industrial Production y/y 12-Jan-18 Nov 2.2% US CPI Ex Food and Energy y/y 12-Jan-18 Dec 1.7% US Retail Sales Ex Auto and Gas 12-Jan-18 Dec 0.8% CH Exports y/y 12-Jan-18 Dec 12.3% 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 This reflects the views of the Wealth Management Group 5

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9 Uganda: Our Investment products and services are distributed by Standard Chartered Bank Uganda Limited, which is licensed by the Capital Markets Authority as an investment adviser. United Kingdom: Standard Chartered Bank (trading as Standard Chartered Private Bank) is an authorised financial services provider (licence number 45747) in terms of the South African Financial Advisory and Intermediary Services Act, Zambia: This document is distributed by Standard Chartered Bank Zambia Plc, a company incorporated in Zambia and registered as a commercial bank and licensed by the Bank of Zambia under the Banking and Financial Services Act Chapter 387 of the Laws of Zambia. Market Abuse Regulation (MAR) Disclaimer Standard Chartered Bank is incorporated in England with limited liability by Royal Charter 1853 Reference Number ZC18. The Principal Office of the Company is situated in England at 1 Basinghall Avenue, London, EC2V 5DD. Standard Chartered Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. Banking activities may be carried out internationally by different Standard Chartered Bank branches, subsidiaries and affiliates (collectively SCB ) according to local regulatory requirements. Opinions may contain outright "buy", "sell", "hold" or other opinions. The time horizon of this opinion is dependent on prevailing market conditions and there is no planned frequency for updates to the opinion. This opinion is not independent of SCB s own trading strategies or positions. SCB and/or its affiliates or its respective officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities or financial instruments referred to in this document or have material interest in any such securities or related investments. Therefore, it is possible, and you should assume, that SCB has a material interest in one or more of the financial instruments mentioned herein. If specific companies are mentioned in this communication, please note that SCB may at times do business or seek to do business with the companies covered in this communication; hold a position in, or have economic exposure to, such companies; and/or invest in the financial products issued by these companies. Further, SCB may be involved in activities such as dealing in, holding, acting as market makers or liquidity providers, or performing financial or advisory services including but not limited to, lead manager or colead manager in relation to any of the products referred to in this communication. SCB may have received compensation for these services and activities. Accordingly, SCB may have a conflict of interest that could affect the objectivity of this communication. SCB has in place policies and procedures, logical access controls and physical information walls to help ensure confidential information, including material non-public or inside information is not disclosed unless in line with its policies and procedures and the rules of its regulators. Please refer to for more detailed disclosures, including past opinions in the last 12 months and conflict of interests, as well as disclaimers. This document must not be forwarded or otherwise made available to any other person without the express written consent of SCB. THIS IS NOT A RESEARCH REPORT AND HAS NOT BEEN PRODUCED BY A RESEARCH UNIT. 9