2017 PREPARING FOR A YEAR OF REFLATION. Oct 20, 2016 Andreas Ruhlmann, Market Analyst at IG Bank

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1 2017 PREPARING FOR A YEAR OF REFLATION Oct 20, 2016 Andreas Ruhlmann, Market Analyst at IG Bank

2 DISCLAIMER CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved. This seminar for information purposes only and shouldn t be considered as trading advice

3 OBJECTIVES Preparing for Reflation Trump a dual effect Sectors to watch Geography: US should outperform Europe, selloff in some EM an opportunity The return of a rising dollar Volatility and Gold hedge

4 A YEAR OF REFLATION After several years of declining inflation we may be at the start of a major change: Core inflation (ex food and Energy) approaching target Stabilizing commodity prices Job market is tight, and wages are picking up Trump fiscal expansion may lead further rise in wages and inflation Bond yields and 10 year inflation expectation at 18 month high

5 CORE INFLATION (ex Food & Energy)

6 US WAGES Average hourly earnings are now growing at 2.8% year-over-year, the most since June 2009, and rising wages are pushing up inflation.

7 COPPER TURNED BULLISH COPPER leading indicator for the global economy, turned bullish for the first time since 2011 Broke downtrenline and Ichimoku cloud on the upside 200 Day MA upwards moving

8 WTI OIL: RANGE WITH UPWARDS BIAS 200D MA upward moving Ascending triangle Support at $40, resistance at $52 and $60 WATCH OPEC meeting on Nov 30th

9 US 10 YR NOTE 10 yr inflation expectation rose significantly following Trump election US 10 year yield currently at 2.2% (when bond falls, yield rise)

10 TRUMP EFFECT IS MIXED 1. Fiscal Stimulus: lower taxes for corporates and individuals, and higher infrastructure spending Rising consumption, wages and inflation Increased inflation = more bank lending (money velocity) potentially higher growth 2. Tighter Monetary Policy Higher inflation would lead to faster rate hikes Trump critized the Fed for staying too low for too long Positive for the USD May offset some of the benefits from fiscal stimulus 3. Trade barriers, protectionism Uncerstainty with regards to the US trade policies could weight on equities Will Trump soften? Rise of Anti-globalisation movement. Italy and France next? We remain selectively positive on US equity

11 SECTORS TO FAVOR (+) Cyclicals: Industrials, Energy, and Consumer (fiscal stimulus) Banks (abolition of Dodd Frank, rising yields) Favor local vs International (uncertainty on trade policy) Prefer small / medium Cap vs Large Cap (high beta prefered, 100% US) (-) Bond like equities (dividend stocks, Utilities, Telecom) Multinationals

12 GLOBAL UTILITIES vs GLOBAL BANKS

13 IYF ishares US Financials New 52 week high big consolidation period Rising 200D MA Above Ichimoku cloud Possible consolidation towards support

14 IYJ ishares US Industrials After consolidation, now back in bull trend Pull back are opportunities

15 US Utilities ETF Rising bond yield is putting pressure on Bond like equities Sector is still expensive: average P/Book at 5x More correction possible

16 RUSSELL 2000 vs SPX vs NAS100

17 US Small cap (Russel 2000) bullish trend, but losing steam Resumed upwards trend after ABC corrective move 200D MA nicely upwards looking New All time high Buy on pullback. Closest support b/w

18 Nasdaq 100 bull trend intact, 4500 major support Bull trend but underperformed Dow Jones, SP500 and Russel D MA, bull momentum and cloud Major support around 4500: 200D MA, 50% fibo, uptrenline AAPL, AMZN, GOOG, FB don t like Trump (Had strong ties with democrats, use foreign tax shelters, multinationals under pressure). The Tech selloff may be overdone

19 EUROPE BIG POLITICAL CALENDAR AHEAD December 4th: Italian Referendum March 2017: Netherland Election Spring 2017: French Election Autumn 2017: German Election Political uncertainty may weight european equities and the Euro Limited political flexibility ahead of these votes (Germany unlikely to approve any major changes before the election^)

20 Eurostoxx50: primary trend bearish, intermediary trend is sideways Primary trend is still bearish below cloud, Intermediary trend is sideways: flattish 200D MA, but momentum rising Need a break above 3200 to confirm a change of trend

21 DAX turned bullish, but still fragile Broke out of bear trendline and just above Ichimoku cloud 200D rising and acting as support Watch for a break of for next target If breaks risk of downdrift towards trendline

22 SMI Range trading b/w Need a break above the cloud and 8350 to confim uptrend

23 EMERGING MARKETS OVERSOLD? Fell on stronger USD, and trade protectionism fears but: A trade war is not for right now Cheap valuation Funds managers still underweight EM compared to history average Still lots of room for expansionary policy in some emerging markets Some EM less exposed to USD loans i.e. China, India

24 INDY Nifty 50 ETF Highest growth among EM (above 7%) At important support: mid point b/w past 52 week High/Low (cloud) 200 D MA still rising

25 FXI China 25 ETF 200 D MA rising Still in cloud, but unusually large due 2015 bubble

26 USD back into bullish trend? DXY dollar index 2 years of sideways trading, can it break? A hike in december is warranted, but Fed will need at least 2 more hikes in 2017 to surprise the market. Trump s fiscal policies could be the missing piece to drive inflation higher and incite the Fed to hike.

27 GOLD HEDGE STILL ATTRACTIVE Gold bulls under pressure on rising yield and rising USD Trump shock has magnified political uncertainty ahead of key votes in Europe. US markets near all time high = high demand for protection Expect volatility spikes around this events Remain bull as long as above 1170 (61.8% fibo, Ichimoku cloud)

28 IG BANK SA Rue du Rhône Genève Andreas Ruhlmann

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