Weekly Market Focus. 04 April Follow us on LinkedIn. Weekly Market Focus 04 April 2018 CONTENTS

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1 Weekly Market Focus 04 April 2018 CONTENTS Asset class review... 2 Forex... 3 Views from the trading floor... 4 Calendars... 5 Contacts... 6 Disclaimer... 7 Follow us on LinkedIn H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 1

2 ASSET CLASS REVIEW With the benefits of the fiscal stimulus, strong global demand and the weaker dollar, economists expect GDP growth to accelerate to 2.8% in As the fiscal stimulus begins to wear off and the cumulative monetary tightening starts to slow, however, GDP growth may slow in the second half of While it isn t our scenario, there is a risk of a modest economic slowdown developing in US Economy The continued strength of jobs gains and the one-off boost to disposable incomes from tax cuts should ensure that consumption expands by close to 3% this year. But with those supports set to fade next year and the cumulative effect of the Fed s policy tightening likely to build, economists anticipate a marked downturn in spending growth in The outsized 3.8% annualised rise in consumption in the fourth quarter of 2017 was flattered by a post-hurricane surge in spending, which is now fading. Underlying retail sales growth slowed sharply around the turn of the year. The 300,000 plus vehicles damaged in the hurricanes prompted a surge in replacement demand at the end of last year, which is now also largely over. As a result, overall consumption growth looks set to slump back to around 2.0% annualised in the first quarter. The fundamentals are still in place for consumption growth to rebound over the rest of the year. The tax cuts passed by Congress at the end of last year only started to show up in households takehome pay in February. That will provide a 0.8% boost to incomes this year, albeit disproportionally focused on high income households who tend to have a higher marginal propensity to save. Consumer confidence has remained close to record highs. Admittedly, the surge in confidence seen since the 2016 election has not translated into a pick-up in the pace of consumption growth. But it does appear to have enabled households to raise their spending at a decent clip even as income growth slowed. The decline in the household saving rate, to a more than decade-low at the end of last year, mirrors the rise in consumer confidence. A big factor behind the drop in household saving has been households rising net wealth, which looks set to reach a fresh record high in the first quarter. It would take a much larger fall in the stock market than we saw at the beginning of February to significantly hit household net wealth. Barring a big fall in equity prices, an even lower saving rate can probably be sustained. But the drop in household saving does at least underline that the current pace of spending growth cannot be sustained forever. What s more, income growth will moderate over the coming years as the pace of job gains slows. In addition, the Fed s monetary tightening will squeeze spending, particularly on rate sensitive durable goods. Spending on debt service and other financial obligations is still below its long-run average, but rising. That said, any downturn in spending should be relatively mild. Household debt as a share of GDP is much lower than it was in the run-up to the 2008 financial crisis. There are some signs of excesses in auto loans and credit card borrowing, but both categories are only a fraction of the size of the mortgage market. Moreover, banks have been quick to rein in lending to low quality borrowers, reducing the risk of a sharp rise in delinquencies. H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 2

3 FOREX Equity markets remain volatile with the S&P testing the 2015 uptrend and currently opening below the 200 mda, signally further weakness is probable. The USD index rose late last week as a consequence of month end extensions and currently hovers around The Yen is the best performer losing 200 USD pips from last week. Quarter-end flows from the Japanese fiscal year-end contributing to the move caused some large dislocations in the traditional FX correlations. EURUSD again failed to test , the 200MMA, and has since pared back to the 2017 trend line towards /00. There is still a large long EURUSD position in the market so any breach of could cause concerns for bulls is the major pivot for the cross. CHF EUR USD JPY There is some market chatter regarding the SNB tightening its monetary policy reins before the BoJ and ECB considering the SNB are already meeting their inflation target of 0-2% with inflation at 0.6%. We attach a low probability to this scenario remembering that the SNB explicitly wants to prevent a renewed strong appreciation of the franc against the EUR. While this risk remains, raising interest rates seems unlikely. Therefore we can assume that future monetary policy adjustments depends mainly on the ECB. As soon as the ECB starts to hike interest rates significantly the SNB is likely to feel encouraged to also hike interest rates without having to worry about stronger franc appreciation against the euro. As a first ECB rate hike seems likely next year, there is a good chance that the SNB will then also start thinking about its own exit strategy. Wednesday brings the March inflation data for the EZ today. Inflation data from other member states indicates an uptick is probable in the headline number. We expect little reaction in rates markets or EURUSD as the market does not prices any movement in interest rates until The cross again has failed to trade towards the handle, the cross being pushed higher in a risk off mood due to equity weakness. Broadly speaking EURUSD remains in its year to date / (approx.) range.. We see an eventual retest through over the medium term but need some clarity from the ECB on the timing of QE for this to occur. There is decent support at /1.2180, the Jan and Feb lows, with stronger support coming in from the 2017 bull trendline at / We see demand waiting at these levels. Risks to upside moves would be the result of a close below opening the gate for weakness to , the 2017 high. Current pricing is neutral (1.2265) so we await probes lower towards before assuming upside risk. The dollar has moved higher but still rotates around Over the past week or so, some relief has come to USD bulls as fast money looks to capitalize on month-end portfolio adjustments. The DXY is back to the watermark at time of writing, Tuesday, but it needs to trade cleanly through for dollar bulls to gain confidence of a more deep seated rebound. Risks to the downside is a close below The March FOMC rate hike resulted in some weakness for the USD as markets didn t receive any hint of a fourth hike for This move was short-lived as EUR and JPY strengthened to unsustainable levels spurring a sharp correction. The Fed s median dots have moved higher, but judging by the economic data market consensus looks for a total of three FOMC hikes for We still expect interest rate differentials to be the key driver of FX markets moving forward. The key economic releases this week are ISM non-manufacturing on Wednesday, and the employment report on Friday. Finally, the widening of the LIBOR/OIS spread still is a flavour for STIR markets with the spread still edging wider now to 58bps. This may provide some support for the USD but it should be treated as an interest rate trading opportuning, not FX. USDJPY has bounced of the March low and now trades close to USD 200 pips higher. There was some dislocation of traditional correlations of USDJPY and USD long end yields last week. We expect yields too correct higher this week and take USDJPY higher with it. Focus this week in Yen space is the recent comments from the BOJ governor Kuroda. The BOJ is discussing how it may exit from its QE program; however, Kuroda was cited as saying that it s still too early to reveal anything yet. Internally we re conducting various discussions, at the staff level, Kuroda said in response to a question from a lawmaker. The BOJ is also sensitive to price movements, the economy and markets in general. Technically the selling has subsided in USDJPY yet the risk remains of further weakness. Prices are in a bear flag channel and failure to trade back through /95 may result in another test towards handle. Above last weeks high we would envisage an extension towards and , and eventually to the key pivot of /40. Above here marks the 50% Fibo of the 2018 down-move. Support to the downside rests at /45 and with key support at As previously mentioned USDJPY direction is been driven by long term rates and equity volatility. Risks taken on USDJPY should be nimble and content to take 100 pips from the market. H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 3

4 VIEWS FROM THE TRADING FLOOR Equity S&P fell 1.7% on the last week, with no significant change of the volatility that moved from to On the upside, we find no significant rise (more than 5%), the best performing one were residential REITs and tobacco up 4%. On the downside, internet retailers were down nearly 10%, semiconductor equipment 7% and home entertainment software down 6%. This week, in the US, the focus will be on the employment report released on Friday, which is likely to show ongoing labour market strength and keep the Federal Reserve on track to push interest rates. The consensus expects +185k for the change in nonfarm payrolls and an unemployment rate of 4%. S&P 500: So far the index managed to preserve the bottom of its bull trend started in February 2016, which is now standing at 2580.If it does not hold, then we can expect a correction toward 2470 with a possible extension to On the upside if 2662 remains the first resistance before 2743 and Eurostoxx 50: the index has reintegrated its trading range but still flirting the 3306 support. A new break will target the support area. On the upside 3452 remains the main target and resistance. EQUITY Developed countries Total return - 1 Week SMI 0.3% Euro Stoxx % DAX 0.6% FTSE % S&P % Dow Jones -0.9% Nikkei % Developing countries Russia/Micex 0.1% India/Nifty % China (HK) -3.3% FIXED INCOME Developed countries 2-year Yield 10-year Yield USA 2.3% 2.8% UK 0.8% 1.4% Germany -0.6% 0.5% France -0.5% 0.7% Italy -0.3% 1.8% Spain -0.4% 1.2% Switzerland -0.9% 0.0% Developing countries 2-year Yield 10-year Yield Russia 3.3% 4.5% - Upward move - Downward move COMMODITIES Total return - 1 Week Crude Oil 1.9% Gold 1.6% H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 4

5 CALENDARS Economic Events Date of release Domicile Event Period Actual Estimated 05 April 2018 US Initial Jobless Claims March 215k 225k 05 April 2018 US Trade Balance February -$56.6 -$56.8b 06 April 2018 Germany 28 March 2018 Italy Factory Orders MoM Unemployment Rate February -3.9% 1.5% February 11.1% 11% H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 5

6 Contacts Geneva Headquarters Hinduja Bank (Switzerland) Ltd Place de la Fusterie 3bis 1204 Geneva, Switzerland Tel Fax Branches Zurich Florastrasse Zurich, Switzerland Tel Fax Lugano Viale Serafino Balestra Lugano, Switzerland Tel Fax Representative Office London Room no: 117, First Floor, Regus, 100 Pall Mall, London SW1Y5NQ Tel Subsidiaries Switzerland Rowena AG Grenzstrasse St Margrethen, Switzerland Tel Fax Dubai Hinduja Bank (Middle East) Ltd Dubai International Financial Centre Building GV 10, 2nd Floor, Office 205 Dubai, UAE Tel Mauritius Hinduja India Mauritius Holdings Ltd HBS Trust Services (Mauritius) Ltd 4th Floor, The AXIS 26 Bank Street, Ebene Mauritius Tel USA Hinduja Capital Advisors Inc 520 Madison Ave., 34th Floor New York, 10022, USA Tel Fax UK Amas Investment & Project Services Ltd Room no: 117, First Floor, Regus, 100 Pall Mall, London SW1Y5NQ Tel Fax India Paterson Securities Pvt Ltd Bhavani Mansion 3, 4th Lane Nungambakkam High Road Chennai - 34 India Cayman Island Hinduja Bank & Trust (Cayman) Ltd c/o P.O. Box 2407GT Grand Cayman Cayman Islands H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 6

7 Publisher Hinduja Bank (Switzerland) Ltd Place de la Fusterie 3 bis 1204 Geneva, Switzerland Tel Fax info@hindujabank.com Disclaimer The information in this publication was developed using data which Hinduja Bank (Switzerland) Ltd assumes to be accurate; nevertheless, Hinduja Bank (Switzerland) Ltd accepts no liability and offers no guarantee. The availability of such information does neither constitute a recommendation nor a solicitation to buy or sell any of the products and services discussed herein. Statements made in this publication can be changed without prior notice. The Bank or its subsidiaries or affiliates cannot be engaged in any legal action, claim or dispute for any result, performance, losses or any other reason linked to any information provided in this document. Moreover, the content is not intended for individuals (or entities) who (which), by reason of their nationality or domicile or for any other reason, are subject to foreign regulations prohibiting access to banking services or investment instruments via one or several distribution channels, or prohibiting or restricting the use of any information provided in this document. Hinduja Bank (Switzerland) Ltd, Geneva 2018 H i n d u j a B a n k ( S w i t z e r l a n d ) L t d 7