Weekly Market Focus. 26 September Follow us on LinkedIn. Weekly Market Focus 26 September 2018 CONTENTS

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1 Weekly Market Focus 26 September 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 Gold market Gold prices extended lower in August to set a low at $1,160.30/oz per oz. Up until recently, the downtrend had been relentless since April s high at $1,365.25/oz failed to overcome the January high at $1,366.15/oz, which formed a double top. Interest in Gold in most areas of demand has been weak, even investment interest this despite numerous escalations in the geopolitical arena, including US trade disputes, some jittery emerging markets and the prospects of deeper US sanctions against Iran, all of which could trigger financial crises. The geopolitical situation probably should warrant a pick-up in interest in Gold, but there has been a massive amount of selling from the funds trading Comex. Short positions climbed to a high of 222,210 contracts on 21st August from a recent low of 72,512 contracts in mid-june, while the gross long position has fallen to 207,370 contracts from 220,620 contracts in late-july and a peak of 305,812 contracts in January. Despite the wave of bearishness affecting the funds trading Gold, ETF investors are only seeing a gradual reduction in holdings. The ETFs saw holdings fall 43 tonnes to 2,045 tonnes in August. Peak holdings this year were 2,200 tonnes. Total Gold demand in the second quarter dropped four percent to 964 tonnes, compared with the same quarter last year, according to the World Gold Council. Consumer demand fell one percent (767 tonnes), investment demand dropped nine percent (281 tonnes), jewellery demand fell two percent (510 tonnes) and demand from technology was up three percent (83 tonnes), while total supply climbed three percent to 1,120 tonnes. In the first half of the year, demand of around 1,960 tonnes was the lowest it has been since The rising US interest rate environment and US President Donald Trump s America First policy are both factors behind the strength of the dollar. US equity markets are benefitting from the strong US economy too, all of which continues to keep the opportunity cost of holding Gold high. As the US economy shines, many others do not. Country-specific crises, whether political or financial, and whether triggered by higher US interest rates, poor governance or the threat of sanctions and trade tariffs, seem to be on the increase. The countries currently in focus are Turkey, Argentina, Iran, South Africa, Russia, Brazil and even Italy, but while these countries issues may have started in isolation, they are now being seen as more connected, which raises the risk of contagion and an emerging market crisis. This could be a win-win situation for Gold. As the emerging market barometer rises then safe-haven interest in Gold may return, especially given that Gold is now much cheaper than it has been for a long time. Alternatively, if the leading central banks of the world start fearing an emerging market crisis they may slow down their monetary policy tightening. Ironically, even Trump sees the rising US interest rate policy and stronger dollar as undermining America s competitive advantage. So, either the US Fed, or Trump, may tweak policy to halt the rise in the dollar, which in turn could be a bullish development for Gold. The high opportunity cost of holding Gold has no doubt weakened investors appetite to hold the metal. But, there is a big difference from not holding Gold to being of short it. The rapid shift in the funds position from being net long to net short and the record level of the gross short position suggests the market is vulnerable to a short-covering rally. The Fed s current hawkish stance favours a strong dollar, but the pain higher US interest rates are likely to cause emerging markets, especially if they also start to suffer a drop off in trade, may well mean the Fed becomes more dovish for the sake of the global economy. Any weakening in the dollar could then trigger short covering by the funds and that could lead to an aggressive rebound in prices. Source: Scotiabank 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 CHF EUR GBP USD JPY INR Since we do not expect that the crisis in Turkey and Argentina will le lead to major contagion risks for other emerging markets and we do not expect a general crisis in the emerging markets, the Swiss franc is unlikely to appreciate significantly further in the coming weeks and will tend to weaken somewhat once the situation calms down. Some people just hear what they want to hear. That was the case when the euro traded at stronger levels after markets heard the words vigorous pick-up in connection with inflation in the euro zone from ECB President Mario Draghi. What a shame Draghi was not referring to the current inflation trend but only the assumptions on which the ECB s longer term forecasts are based. According to the ECB expert one could therefore even interpret his comments in a dovish manner, i.e. that the central bankers are forecasting a much stronger rise in inflation than we are currently witnessing so that their inflation outlook is becoming increasingly uncertain. The pound rose against its G-10 counterparts after U.K. Prime Minister Theresa May ruled out early elections, while havens eased amid rising oil prices and higher yields as traders shrugged off belligerent U.S. rhetoric on trade. There is much talk about it but the exchange rates reflect very little of it. We are talking about the trade war between China and the US that is no doubt at risk of escalating ever further. However, what is interesting is that voices are now emerging who are interpreting the development negatively for the US dollar. They are pointing out that the trade war could turn into a currency war in which the US administration starts to actively weaken the US dollar. Of course it cannot be denied that this risk exists, but we must consider the likelihood of such a scenario to be relatively small at this moment. As we have frequently explained at this juncture the government would need the support of the US central bank to effectively weaken the dollar. The central bank on the other hand is currently busy taking action against an overheating economy and rising inflation risks, which leads to the exact opposite: a stronger dollar. And that is also the reason why we are still of the view that, if anything, the tariff conflict with China should have a positive effect on the dollar, as it raises import prices and therefore inflation which would cause the Fed to hike interest rates more aggressively. According to the minutes of the July meeting a member of the Bank of Japan (BoJ) board had warned that by making the yield target more flexible interest rates would rise which would in turn lead to an undesirable rise in real interest rates and that in turn would endanger the inflation target. As we know very well this member was outvoted. 10-year yields have reached the highest levels since 2016, but so far we have not seen a strong rise. Does that mean the warning was indeed unjustified? The answer is no. Real yields have risen much more notably than nominal interest rates would suggest and that is due to the collapse in inflation expectations. It would seem that this measure has backfired. The signals on India s beleaguered rupee are still pointing down. The speed of the currency s fall will hinge on central bank support -- which has dwindled in the past few weeks. The rupee continues to face a toxic mix of forces. Rising oil prices are boosting the import bill, driving the current account deficit wider. Capital inflows have been insufficient to fill the gap. 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 was up 0.4% last week, with a light decrease in volatility from to There was no significant (more than 5%) sector increase last week. On the downside, we find alternative carriers down 9%, while diversified support service was down 8%. The investors will watch carefully the Fed statement following tonight s meeting as the hike of 25bp is nearly sure. They will also keep an eye on the Fed s preferred inflation gauge, the PCE (Personal Consumption Expenditures) released on Friday. There is still a lot to monitor on the Tariffs side with escalating tensions between the US and China and on the Brexit side with a rhetoric escalation and apparently a large number of unresolved issues. S&P 500: The index continues its uptrend and remains on track to reach its 2950 target and 2870 are the first two supports. A break of this last level will lead to the 2800 support before 2760 (the bottom of the uptrend initiated in February 2016). Eurostoxx 50: The index is moving toward 3450, our minimum target is now the first support and the key level to maintain the current upward dynamic toward 3450, 3340 and 3260 being the next ones. EQUITY Developed countries Total return - 1 Week SMI 0.7% Euro Stoxx % DAX 1.3% FTSE % S&P % Dow Jones 0.3% Nikkei % Developing countries Russia/Micex 1.8% India/Nifty % China (HK) 2.8% FIXED INCOME Developed countries 2-year Yield 10-year Yield USA 2.8% 3.1% UK 0.8% 1.6% Germany -0.5% 0.5% France -0.3% 0.8% Italy 0.8% 2.9% Spain -0.2% 1.5% Switzerland -0.7% 0.0% Developing countries 2-year Yield 10-year Yield Russia 3.7% 5.0% - Upward move - Downward move COMMODITIES Total return - 1 Week Crude Oil 5.2% Gold -0.5% 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 26 Sept 2018 US New Home Sales August 627k 630k 27 Sept 2018 US GDP Annualized QoQ 2Q 4.2% 4.2% 27 Sept2018 Germany CPI YoY September 2.0% 2.0% 27 Sept 2018 Italy Consumer Confidence Index September 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 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