Weekly Market Focus. 07 February Follow us on LinkedIn. Weekly Market Focus 07 February 2018 CONTENTS

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1 Weekly Market Focus 07 February 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 Market sell-off Rising U.S. wages (from +2.5% year-over-year in December 2017 to +2.9% year-over-year in January ) have triggered fears of higher inflation and an uptick in interest rates. Normally, a rise in bond yields and strong economic growth would hardly be a surprise. However, one can observe that the global economy and financial markets have behaved abnormally for quite a few years that the sell-off of the past few days require some reflections. In a world where inflation has remained extremely low, bonds are entering a bear market not because long-term economic growth is likely to be high, but because they were heavily overbought. The continued lack of signs of sustained inflationary pressures, accompanied with little change in the medium-term expectations of the Fed raising interest rates, should give some pause. In our opinion, the movements in financial markets so far are nothing particularly dramatic. For equities, drawing connections between short-term movements in the stock market and in the underlying economy is even more hazardous than in the case of bonds. Equity prices in developed markets have been rising rapidly over the past few years. It is unsurprising that there should be a correction at some point, and that it would come alongside higher long-term interest rates. At this stage, there is no need for policy makers and investors to panic. The global economy is in a broad-based upswing, there are no signs inflation is running out of control and that central banks will have to tighten policy suddenly. There is also little evidence that markets have become disorderly. While that risk remains, price movements so far are consistent with the world edging back towards some sort of normality. A buying opportunity We believe that it makes sense to buy the dip and to build up new positions in the equity markets. A simple and diversified way to do it is to acquire ETFs. The table below lists the performance of some indices since their recent peak and the related product. In terms of valuation and expected corporate profits, we remain particularly bullish on Europe and Japan. Index Last Peak Return since last peak ETF MSCI World 26 January -6.5% ishares Core MSCI World UCITS ETF S&P January -7.8% ishares Core S&P 500 UCITS ETF Nasdaq 26 January -7.2% ishares NASDAQ 100 UCITS ETF Nikkei January -10.4% ishares Nikkei 225 UCITS ETF Euro Stoxx January -6.7% ishares EURO STOXX 50 UCITS ETF Another solution to invest in this market is to sell volatility. VIX is a measure of market expectations of near-term volatility. It is often considered as a barometer of investor sentiment. While the index remained historically low for years, it surged from a level of 12 to 42 in a few days. The move was so strong, that some products that replicate the inverse performance of the index were suspended (e.g., Velocity Shares Daily Inverse VIX Short-Tern ETN). Selling volatility implies selling options, which can be done through structured products. Barrier reverse convertibles currently offer coupons that had not been seen for a while. For example, a 1-year product with Nestlé, Novartis, Roche in CHF with a continuous barrier at 75% offers a coupon of more than 8% in CHF. Other combinations are available upon request. Source: Bloomberg, HBS. All data as of 6 February, 10.30am. 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 From last Friday till today, the CHF is stronger against the USD and the EUR. The main reason for this appreciation of the CHF, was the downside of the equities market in the NYSE. Last Friday the US non-farm payroll was stronger than expected. Particularly the AWE which was much higher than anticipated. The market reacted quickly, afraid that the FED should hike interest rates more than three times this year. Markets are still waiting for an agreement between Merkel and the SPD. Both parties have started the negotiations on Tuesday morning and during all the night without finding a formal agreement. Conservative bloc had reopened topics that had previously been closed. If Merkel needs to return in front of the electors, the EUR would be in a bad position. Not much to add. A period of consolidation is expected to develop between and for a while. A clear break on either side will show a bigger move. The actual context for the GBP is not so easy. The GBP fell for a fourth day as a government official said, it was unlikely that the UK cabinet would agree its Brexit plan in meeting this week. UK Prime minister Theresa May s will hold two separate meetings on Wednesday and Thursday on the future trading relationship with the EU, but the British almost certainly won t reach an agreement at the meeting, according to the official. Overall this supports the view that it is too early for markets to price out the Brexit premium in the pound in the short term. Even though the pound has been the weakest performing currency among the G-10s so far and we have seen euro-sterling move higher, there is still more upside in store for euro-pound. The FX markets too reacted to the sea of red numbers on the global stock market indices, as nervousness has risen. However, panic attacks are not justified and there is no sign of them on the FX market. That is illustrated by the fact that the sell-off on global stock markets (seen as overdue by many and intensified by technical trading) has not put massive pressure on the EM currencies against the USD since Friday. As far as the US dollar is concerned, it is unfounded to suddenly get a fright that inflation could rocket as the result of one single set of data on wages, and that the FED would suddenly hike interest rates as much more notably than signaled so far and then the market has priced in. James Bullard (St. Louis Fed, non-voter) explained yesterday that wage rises did not necessarily have to translate into higher inflation. Moreover, US inflation has not yet reached the FED target and FED policy remains accommodative despite the rate hikes. And even if the panic on the stock market really was to continue and the risk of frictions on the financial markets was to become acute, surely past experiences teaches us that the FED acts more cautiously in times of market distortions. That means concerns about what would be a toxic combination of rising global risk aversion combined with even faster FED rate hikes for the financial markets are therefore unfounded. 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 down 4.5% on the last week, with a sharp rise of volatility moving from to On the upside, we found housewares and specialties up 11% and reinsurance up 6%. On the downside, there are too many drop of 5% or more to list them all, the main ones were healthcare distributors and construction materials down 10% and airfreight and logistic down 8%. S&P 500: the index fell sharply last week and has broken our first support to rebound on the support area. Yesterday s rebound has reached the 38.2% retracement standing at 2700 and could extend toward 2732 and A break above this last level will probably open the way to a test of the historical high. On the down side remains the first support area, a fall below this level will lead to the test of the very strong support standing at Eurostoxx 50: the index has broken the lower part of the upward channel in which it was evolving since 2016 to reach the horizontal support standing at The Index should bounce back from this level to test 3450 with a possible extension toward 3474 to close its gap. In case of a break of the 3363 support then the target of the correction will first be 3313 with a high probability to push further down to test area. EQUITY Developed countries Total return - 1 Week SMI -1.2% Euro Stoxx % DAX -0.5% FTSE % S&P % Dow Jones 0.4% Nikkei % Developing countries Russia/Micex 0.7% India/Nifty % China (HK) 0.7% - Upward move - Downward move FIXED INCOME Developed countries 2-year Yield 10-year Yield USA 1.3% 2.2% UK 0.2% 1.1% Germany -0.7% 0.4% France -0.5% 0.7% Italy -0.2% 2.0% Spain -0.4% 1.4% Switzerland -0.9% -0.1% Developing countries 2-year Yield 10-year Yield Russia 2.2% 4.0% COMMODITIES Total return - 1 Week Crude Oil 11.9% Gold 5.3% 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 08 February 09 February 14 February 14 February US US Initial Jobless Claims Wholesale Trade Sales MoM February 230K 232K December 1.5% 0.4% US CPI MoM January 0.1% 0.3% France CPI MoM January 0.1% 0.3% 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 HBS Trust Services (Mauritius) Ltd Hinduja India Mauritius Holdings Ltd 3rd Floor, 3B Citius Building, 31 Cybercity, Ebene, Mauritius Tel Fax 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 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