Citigold. Citigold. FINANCIAL MARKET ANALYSIS 22 August Yellen s Jackson Hole meeting takes center stage. Performance.

Transcription

1 FINANCIAL MARKET ANALYSIS 22 August 2016 Yellen s Jackson Hole meeting takes center stage Last week, China's State Council formally approved the Shenzhen-HK stock connect which we expect to implement in late 4Q16. Daily quota will be the same as Shanghai-HK Connect (North-/South-bound Rmb13.0bn/10.5bn). In Citi s view, this may likely continue to build up market sentiment in the near-term. The highlight of this week will likely be the Fed's highly anticipated annual monetary policy symposium in Jackson Hole. Unless Yellen turns hawkish, the dovish track record of the FOMC leads Citi analysts to continue to expect a December interest rate hike, followed by two more hikes in With the markets currently pricing in only a 22% likelihood of a September hike, the Fed may not want to surprise investors ahead of the November US Presidential elections. In addition, there are still some lingering concerns over US growth and international developments (e.g. slower economic data out of China). Performance Major equity markets were lower last week, with the MSCI World falling marginally (-0.21%). In the US, the Dow Jones Industrial Average ticked 0.1% lower, the S&P 500 Index was nearly unchanged, and the Nasdaq inched 0.1% higher. European equities measured by the Stoxx Europe 600 Index lost 1.72%, the biggest weekly slide since the run-up to the Brexit referendum, while Japanese stocks fell given a pickup in Yen strength (Nikkei 225: -2.21% and Topix: -2.08%). Meanwhile, EM equities continued to finish the week higher (MSCI EM: 0.03%), led by MSCI Emerging Europe (0.01%). In contrast, the MSCI Latin America lost 0.75% and the MSCI Asia ex-japan dropped 0.08%. Within Asia, the Shanghai composite was the outperformer, gaining 1.88% on the week, and posting its second weekly advance. Asset Allocation Equities EM outperformance continues and we maintain a slight positive bias for emerging markets over developed. Looking forward, we expect to maintain our gradual de-risking of portfolio allocations overall. Credit US IG has lagged EUR IG and GBP IG. US credit may play catch-up but Citi analysts wait for more evidence that re-leveraging trends are turning before committing. Rates All eyes will be on Fed Chair Yellen s Jackson Hole speech. Yellen is unlikely to provide a hard signal for the next rate hike. Citi analysts continue to expect a liftoff in December and remain neutral US Treasury bonds. Commodities Citi analysts are bullish on gold in 0-3 months and have increased their tactical exposure to gold. US data fails to excite Citi Economic Surprise Index CESIUSD Index CESIEUR Index CESICNY Index HY bonds and EM debts outperform Accumulated 3-month Bond Index Returns World Govt Bonds Index Global EMD Index HY Index EM continue to outperform DM equities Accumulated 3-month Equity Index Returns MSCI World MSCI EM MSCI Asia Week Ahead Key Data and Event % 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% -1.0% 20% 15% 10% 5% 0% -5% -10% Date Country Data & Event Period Survey Prior Citi Fct 23-Aug EC Markit Eurozone Manufacturing PMI Aug P Aug EC Markit Eurozone Services PMI Aug P Aug EC Markit Eurozone Composite PMI Aug P Aug EC Consumer Confidence Aug A Aug SI CPI YoY Jul -0.5% -0.7% -0.3% 25-Aug US Initial Jobless Claims 20-Aug 265k 262k 255k 25-Aug US Durable Goods Orders Jul P 3.5% -3.9% 3.5% 25-Aug HK Exports YoY Jul -2.1% -1.0% -0.7% 25-Aug HK Imports YoY Jul -1.5% -0.9% 0.9% 26-Aug SI Industrial Production YoY Jul 0.9% -0.3% 2.3% 26-Aug JN Natl CPI YoY Jul -0.4% -0.4% -0.4% 26-Aug US GDP Annualized QoQ 2Q S 1.1% 1.2% 1.0% INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE. Page 1

2 Drivers and Risks by Market United States Driver: Citi anticipates better earnings in 2H16 driven by less drag from US dollar translation year over year, improvement from the Energy sector given the bounce in oil prices from late 2015, and a likely pickup in industrial production following seven months of ISM manufacturing new orders above 50. Risk: Markets are not expecting a rate hike in September, especially not ahead of the November US elections. Citi analysts continue to believe that December may be the time of the next rate hike, assuming Clinton wins the election. If Trump wins, Citi believes that a trade contraction may induce a recession sooner rather than later End-2016 Target: 2150 S&P 500 Implication: This week, all eyes will be on Fed Chair Yellen s Jackson Hole speech. Yellen is unlikely to provide a hard signal for the next rate hike. The Fed-led US dollar movement may be critical for 2H earnings. Europe Driver: UK and European equities look attractive in absolute dividend yield terms and cheap relative to government and corporate bond yields. Broadening central bank actions from the BoE and ECB are may likely continue to underpin fixed income yields which could also be positive for equities. Risk: In July, UK consumers and employers shrugged off the Brexit vote, but that does not materially challenge Citi s estimates of the referendum impact yet. What is worrying is that nearly two months on from the vote, there is no clarity about the future trade relationship with the EU and the world, how the government will get to such a proposal, and when it will deliver it. Uncertainty may increase again End-2016 Target: 310 DJ Stoxx TMI Implication: Citi analysts expect higher oil prices and improving sector Free Cash Flow (FCF) to deliver dividend security for the Energy sector. In Financials, Citi analysts see value in Banks, but prefer to get exposure more broadly with their preference of Autos for dividend security. Japan Driver: Net buying of Japanese equities by overseas investors has totalled trn since April 2016, which is almost the same as their total net selling ( trn), indicating no clear tendency toward buying or selling. Japanese stocks look attractive based on average valuations, but sector figures suggest that domestic demand and defensive sectors are not undervalued while export and cyclical sectors, which do appear undervalued, are sensitive to the Yen movement. Risk: Yen strength continues, with the USDJPY falling below the 100/$ level at times. While rapid yen appreciation could be a key risk for Japanese equities, the BoJ s ETF purchasing might mitigate the risk End-2016 Target: 1350 Japan Topix Implication: Japan s earnings season showed that there was a marked decline in profits at exporters and cyclical names, owing to a slowdown in the overseas economy and yen strength but domestic demand and defensive names posted firm earnings. Emerging Markets Driver: EM is open to global trade, with exports making up about 23% of its GDP. 18% of the exports go to the US, with the ratio highest in Mexico; Asia comes next. EMEA is more of a Euro-bloc trader. Risk: Any policies that affect trade would thus hurt EM. A Trump win could lead to protectionism and a stronger US dollar, which are negative for EM equities. Taiwan, Thailand and Korea could be most vulnerable in trade; in LatAm, Mexico is at greater risk than Brazil. EMEA is vulnerable to a Europe slowdown. Implication: A Clinton victory is seen as continuation of the status quo with rangebound US dollar and dovish Fed. A Clinton win may offer a relief rally in EM assets but overall, the potential move should be modest. End-2016 Target: MSCI Asia ex JP 300 Page 2

3 Currency Forecast Last price Forecasts Currency 19-Aug-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 G10-US Dollar Euro EURUSD Japanese yen USDJPY British Pound GBPUSD Swiss Franc USDCHF Australian Dollar AUDUSD New Zealand NZDUSD Canadian Dollar USDCAD EM Asia Chinese Renminbi USDCNY Hong Kong USDHKD Indonesian Rupiah USDIDR 13,163 13,213 13,399 13,509 13,529 13,549 13,569 Indian Rupee USDINR Korean Won USDKRW 1,118 1,097 1,086 1,082 1,086 1,090 1,094 Malaysian Ringgit USDMYR Philippine Peso USDPHP Singapore Dollar USDSGD Thai Baht USDTHB Taiwan Dollar USDTWD EM Europe Russian Ruble USDRUB South African Rand USDZAR EM Latam Brazilian Real USDBRL Mexican Peso USDMXN Source: Citi Research and Bloomberg as of 19 August 2016 \\ Weekly Market Performance (15 19 August 2016) -0.1% -0.2% -0.7% -0.8% -1.3% -1.7% -2.1% -0.3% 0.7% 0.6% 0.5% 0.5% 0.4% 0.3% 1.9% 9.1% -4% -2% 0% 2% 4% 6% 8% 10% Gold China Shanghai Composite HK Hang Seng Citi Global Emerging Mkt Sovereigns China HSCEI Citi High Yield Korea KOSPI MSCI Emerging Europe US S&P 500 MSCI AsiaXJapan MSCI AC World Citi World Broad Inv Grade MSCI Latin America UK FTSE 100 Taiwan TAIEX Europe Stoxx Europe 600 Japan TPX Index Market Performance (Year-To-Date) (As of 19 August 2016) Oil Short Rates and 10-Year Yield Forecasts Last price 19-Aug-16 3Q16 4Q16 1Q17 2Q17 3Q17 Short Rates (End of Period) US Japan Euro Area Year Yield (Period Average) US Japan Euro Area Source: Citi Research and Bloomberg as of 19 August % -7.0% -12.2% -16.3% 35.8% 31.0% 26.4% 16.8% 14.8% 14.5% 9.9% 9.2% 8.3% 6.8% 6.2% 5.2% 4.8% 4.7% MSCI Latin America Oil Gold MSCI Emerging Europe Citi Global Emerging Mkt Sovereigns Citi High Yield UK FTSE 100 MSCI AsiaXJapan Taiwan TAIEX US S&P 500 Citi World Broad Inv Grade MSCI AC World Korea KOSPI HK Hang Seng China HSCEI Europe Stoxx Europe 600 China Shanghai Composite Japan TPX Index -40% -20% 0% 20% 40% Page 3

4 World Market At Glance US / Global Last price 52-Week 52-Week 19-Aug-16 High Low 1 week 1 month 1 year Year-to-date Year-to-date (USD) MSCI World % 2.26% 1.16% 5.20% 5.20% Dow Jones Industrial Average % -0.03% 6.94% 6.47% 6.47% S&P % 0.93% 5.01% 6.85% 6.85% NASDAQ % 4.01% 4.37% 4.61% 4.61% Europe MSCI Europe % 3.48% -8.43% -2.32% -2.32% Stoxx Europe % 0.84% % -7.02% -3.13% FTSE % 2.41% 7.11% 9.88% -2.58% CAC % 1.63% -9.90% -5.10% -1.14% DAX % 5.64% -1.29% -1.85% 1.83% Japan NIKKEI % -1.06% % % 4.64% Topix % -2.68% % % 0.79% Emerging Markets MSCI Emerging Market % 4.86% 8.31% 14.63% 14.63% MSCI Latin America % 4.32% 18.18% 35.76% 35.76% MSCI Emerging Europe % 2.01% 5.17% 16.80% 16.80% Brazil Bovespa % 4.23% 26.85% 36.33% 67.00% Russia RTS % 1.35% 21.59% 27.56% 27.56% Asia MSCI Asia ex-japan % 4.16% 6.56% 9.18% 9.18% Australia S&P/ASX % 1.38% 2.72% 4.36% 9.04% China HSCEI (H-shares) % 6.87% -9.74% -0.57% -0.61% China Shanghai Composite % 2.35% % % % Hong Kong Hang Seng % 5.83% -1.00% 4.67% 4.62% India Sensex % 1.04% 0.52% 7.50% 6.07% Indonesia JCI % 4.70% 20.78% 17.92% 23.98% Malaysia KLCI % 1.03% 6.65% -0.29% 6.89% Korea KOSPI % 1.95% 6.03% 4.84% 10.64% Philippines PSE % -1.31% 7.98% 14.08% 15.30% Singapore STI % -2.59% -6.49% -1.34% 3.80% Taiwan TAIEX % -0.01% 12.62% 8.35% 12.75% Thailand SET % 3.13% 11.58% 19.47% 24.40% Commodity Historical Returns (%) Oil % 8.67% 18.92% 30.99% 30.99% Gold spot % 0.69% 18.30% 26.36% 26.36% Page 4

5 Disclaimer Citi analysts refers to investment professionals within Citi Research ( CR ), Citi Global Markets Inc. ( CGMI ) and voting members of the Citi Global Investment Committee. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. The information in this document has been obtained from reports issued by CGMI. Such information is based on sources CGMI believes to be reliable. CGMI, however, does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute CGMI's judgment as of the date of the report and are subject to change without notice. This document is for general information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this document may be reproduced in any manner without the written consent of Citibank N.A. Information in this document has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Investments are not deposits, are not obligations of, or guaranteed or insured by Citibank N.A., Citigroup Inc., or any of their affiliates or subsidiaries, or by any local government or insurance agency, and are subject to investment risk, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance, prices can go up or down. Some investment products (including mutual funds) are not available to US persons and may not be available in all jurisdictions. Investors should be aware that it is his/her responsibility to seek legal and/or tax advice regarding the legal and tax consequences of his/her investment transactions. If an investor changes residence, citizenship, nationality, or place of work, it is his/her responsibility to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable. Citibank does not provide legal and/or tax advice and is not responsible for advising an investor on the laws pertaining to his/her transaction. Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For more information, please refer to Country Specific Disclosures Australia : This document is distributed in Australia by Citigroup Pty Limited ABN , AFSL No , Australian credit licence Any advice is general advice only. It was prepared without taking into account your objectives, financial situation, or needs. Before acting on this advice you should consider if it's appropriate for your particular circumstances. You should also obtain and consider the relevant Product Disclosure Statement and terms and conditions before you make a decision about any financial product, and consider if it s suitable for your objectives, financial situation, or needs. Investors are advised to obtain independent legal, financial, and taxation advice prior to investing. Past performance is not an indicator of future performance. Investment products are not available to US people and may not be available in all jurisdictions. Bahrain : This document is distributed in Bahrain by Citibank, N.A., Bahrain. Citibank, N.A., Bahrain, may in its sole and absolute discretion provide various materials relating to the securities for information purposes only. Citibank, N.A., Bahrain is licensed by the Central Bank of Bahrain as a Conventional Retail Bank and is bound by the CBB s regulations and licensing conditions with regards to products and services provided by Citibank, N.A. Bahrain. These terms are governed by and shall be construed in accordance with the laws of the Kingdom of Bahrain. The Customer irrevocably agrees that the civil courts in the Bahrain shall have non-exclusive jurisdiction to hear and determine any suit, action or proceeding and to settle any disputes which may arise out of or in connection with these Terms and Conditions and for such purposes the Customer irrevocably submits to the jurisdiction of such courts. Investment products are not insured by government or governmental agencies. Investment and Treasury products are subject to Investment risk, including possible loss of principal amount invested. Past performance is not indicative of future results: prices can go up or down. Investors investing in investments and/or treasury products denominated in foreign (non-local) currency should be aware of the risk of exchange rate fluctuations that may cause loss of principal when foreign currency is converted to the investors home currency. Investment and Treasury products are not available to U.S. persons. All applications for investments and treasury products are subject to Terms and Conditions of the individual investment and Treasury products. Customer understands that it is his/her responsibility to seek legal and/or tax advice regarding the legal and tax consequences of his/her investment transactions. If customer changes residence, citizenship, nationality, or place of work, it is his/her responsibility to understand how his/her investment transactions are affected by such change and comply with all applicable laws and regulations as and when such becomes applicable. Customer understands that Citibank does not provide legal and/or tax advice and are not responsible for advising him/her on the laws pertaining to his/her transaction. Citibank Bahrain does not provide continuous monitoring of existing customer holdings. Hong Kong : This document is distributed in Hong Kong by Citibank (Hong Kong) Limited ("CHKL"). Prices and availability of financial instruments can be subject to change without notice. Certain high-volatility investments can be subject to sudden and large falls in value that could equal the amount invested. India : This document is distributed in India by Citibank N.A. Investment are subject to market risk including that of loss of principal amounts invested. Products so distributed are not obligations of, or guaranteed by, Citibank and are not bank deposits. Past performance does not guarantee future performance. Investment products cannot be offered to US and Canada Persons. Investors are advised to read and understand the Offer Documents carefully before investing. Indonesia : This report is made available in Indonesia through Citibank N.A., Indonesia Branch. Citibank N. A., Indonesia is a bank that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK). Korea : This document is distributed in South Korea by Citibank Korea Inc. Investors should be aware that investment products are not guaranteed by the Korea Deposit Insurance Corporation and are subject to investment risk including the possible loss of the principal amount invested. Investment products are not available to US persons. Malaysia : This document is distributed in Malaysia by Citibank Berhad. People's Republic of China : This document is distributed by Citibank (China) Co., Ltd in the People's Republic of China (excluding the Special Administrative Regions of Hong Kong and Macau, and Taiwan). Philippines : This document is made available in Philippines by Citicorp Financial Services and Insurance Brokerage Phils. Inc, and Citibank N.A. Philippine Branch. Investors should be aware that Investment products are not insured by the Philippine Deposit Insurance Corporation or Federal Deposit Insurance Corporation or any other government entity. Singapore : This report is distributed in Singapore by Citibank Singapore Limited ( CSL ). Investment products are not insured under the provisions of the Deposit Insurance and Policy Owners Protection Schemes Act of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme. Thailand : This document contains general information and insights distributed in Thailand by Citigroup and is made available in English language only. Citi does not dictate or solicit investment in any specific securities and similar products. Investment contains certain risk, please study prospectus before investing. Not an obligation of, or guaranteed by, Citibank. Not bank deposits. Subject to investment risks, including possible loss of the principal amount invested. Subject to price fluctuation. Past performance does not guarantee future performance. Not offered to US persons. Vietnam : This document is distributed in Vietnam by Citibank, N.A., - Ho Chi Minh City Branch and Citibank, N.A. - Hanoi Branch, licensed foreign bank s branches regulated by the State Bank of Vietnam. Investment contains certain risk, please study product s prospectus, relevant disclosures and disclaimers and the terms and conditions for details before investing. Investment products are not offered to US persons. United Kingdom : This document is distributed in U.K. by Citibank Europe plc, UK Branch. The registered address in the UK is Citibank Centre, Canada Square, Canary Wharf, London E14 5LB. Citibank Europe plc, UK Branch is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Page 5