5 October 2012 Contents Don t fight the Fed Pg 1 Gloomy data and QE Pg 2 Conclusion Pg 3 Technical analysis Pg 4 Economic & Market Calendar Pg 6 3-12 month Market Outlook Pg 7 Gold up significantly off its May lows Gold Spot USD/Oz 1900 1850 1800 1750 1700 1650 1600 1550 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Gold Spot 50 dma 100 dma 200 dma Key events this week Data / Event Date Australia Unemployment Rate Oct 11 South Korea 7-Day Repo Rate Oct 11 Bank Indonesia Reference Rate Oct 11 China New Yuan Loans Oct 12 China Money Supply - M2 Oct 12 Singapore GDP (YoY) Oct 12 16.5% This reflects the views of the Wealth Management Group Don t fight the Fed Comments from the ECB and FOMC minutes point to a willingness to continue implementing very easy monetary policy for an extended period of time. Even if you disagree with their policy prescriptive, the saying don t fight the Fed is particularly relevant today. In our opinion, QE and easy monetary policy will eventually be inflationary and likely cause the debasement of fiat currencies against real assets. While the markets may sell off in the short term, due to an escalation of the debt crisis in peripheral Europe, we continue to like equities, commodities (in particular gold) and US high yield corporate bonds on a 12m basis. Should there be significant weakness, we would look to add to these asset classes, particularly to gold. MACRO OVERVIEW US ISM data showed an expansion in September, supported by stronger export orders. Initial jobless claims marginally worse. Debt crisis remains the primary concern despite the Spanish bank stress test results being better than expected. UK s manufacturing PMI data in September contracted more than expected. Fitch Ratings noted that there was increasing pressure for UK s sovereign rating to be downgraded. Japan - Tankan manufacturing survey points to further weakness in economic activity. China Manufacturing PMI continued to show a contraction. FIXED INCOME Continue to favour US high yield and Asia local currency bonds Prefer to keep maturity profile short in USD bond portfolios EQUITIES Maintain focus on more defensive areas and companies with high and sustainable dividend yields (OW IT, Energy and Materials) Rob Aspin, CFA Steve Brice Manpreet Gill Suren Chelliah Victor Teo Senior Investment Strategist Chief Investment Strategist Senior Investment Strategist Investment Strategist Investment Strategist COMMODITIES Higher long term inflation expectations likely to push gold price higher CURRENCIES Asian currencies expected to continue appreciating against the USD albeit at a more moderate pace This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank
Gloomy data and QE Benchmark (USD) performance w/w* MSCI AC World Daily TR Net USD *week of 27 Sep to 4 Oct 2012 Inflation expectations suggest deflation risks limited given Fed stance US 10yr breakeven and QE Citigroup World BIG DJ UBS Commodities 3 2.5 2 1.5 1 0.5 JP Morgan Cash QE1 DXY ADXY -0.25 0.01 0.21 0.11 0.70 1.29-1 -0.5 0 0.5 1 1.5 2 % QE2 Operation Twist 0 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 India moving forward on policy reforms Policy quadrant QE3 Economic data continued to come in weak across most markets, particularly in the Euro-zone and Japan. While still sluggish, the data out of the US was ahead of market expectations, which is encouraging. While data continues to be gloomy, it is consistent with our expectations of a muddle through environment. The various comments from the ECB, certain Fed Governors and the FOMC minutes all point to QE being a core policy tool, supporting our view that inflation is a risk further out. In the US: The FOMC minutes highlight that participants see significant downside risks to growth and persistent headwinds to the recovery, most notably due to the Euro area banking and fiscal crisis. Most participants had the view that inflation would be only slightly above the annual rate of 1.6% for 2012 and that it would remain subdued over 2012-2015. All participants thought the first increase in the Fed funds rate would not be warranted until 2015 and only two expressed concern that very accommodative policy could lead to imbalances in the financial system. There was only one dissenter on the vote for QE3. While the Fed has not provided any clear guidance on their target for unemployment, in a recent interview the Chicago Fed Governor highlighted his view that easy monetary policies should be maintained until unemployment reached at least 7% and that the Fed should only back off once inflation reached around 3%. In terms of underlying data, the US remains the only major market where economic data continues to come in marginally better than market expectations. In the EU: Draghi reiterated his determination to preserve the single currency at a conference on Thursday. While not announcing any new policy initiatives he reiterated that the ECB s Outright Monetary Transactions (OMT) programme would be an effective backstop for bond markets. He highlighted that the ECB would only buy bonds from countries receiving a bailout, once they had obtained full market access and were issuing bonds to the wider market. Economic data in the EU continued to be week with Euro zone unemployment coming in at 11.4% and PMI manufacturing at 46.1, signifying continued contraction. Draghi also warned that the euro-area would remain weak in the near term. While the Economic Surprise index is still negative, the trend is showing improvement. In the UK: PMI manufacturing data came in weaker than expected. House prices also fell more than expected and consumer credit was down over the month. The BoE left rates unchanged and maintained the asset purchase target of GBP375bn. In China: PMI manufacturing data came in weaker than anticipated and shows continued contraction. Source: Standard Chartered In India: The recent policy changes are a significant positive. The government has taken steps to fast track a number of key infrastructure projects as well as open the retail market to foreign direct investment, a significant step. There is also talk that other areas of the economy may be opened up to FDI. In conclusion, while economic growth is weak, policy makers seem convinced easy monetary policy and QE is the most viable medication. 2
What does this mean for investors? Equities have performed well with QE MSCI AC World 400 350 300 250 200 QE1 QE2 150 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Gold prices approaching record levels Gold and Fed s Balance sheet USD mlns Asia currencies to appreciate moderately against USD DXY and ADXY Indices 3500 3000 2500 2000 1000 Operation Twist 500 Nov-05 Oct-06 Sep-07 Aug-08 Jul-09 Jun-10 May-11 Apr-12 Fed size of balance sheet Gold (RHS) 121 120 119 118 117 116 115 114 113 72 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 ADXY DXY Curncy (RHS) 84 82 80 78 76 74 QE3 1900 1700 1300 1100 900 700 500 Even if you disagree with their policy prescriptive, the saying don t fight the Fed is particularly relevant today. QE will eventually, in our opinion, be inflationary and likely cause the debasement of fiat currencies against real assets. While the fiscal cliff, heightened geopolitical tensions and weak economic data can cause investors to look for the security of holding cash and sovereign bonds, we continue to prefer equities and commodities, particularly gold, as a longer term store of wealth. In Equities, our preference would be to remain biased towards a more defensive positioning. From a thematic perspective, this means we prefer large cap to small cap and companies that have high quality earnings (ROA/ROE), strong balance sheets and pay high and sustainable dividends. On a global basis, we particularly like IT and Energy, where we see tremendous value. These sectors also have a substantial proportion of revenues from the Emerging markets, which is a theme we like. We are also Overweight Materials, with the gold miners being the bulk of this exposure. We continue to suggest investors with excessive exposure to western banks (banks are only 5% of the S&P500 index) consider using the recent rally to reduce these positions. Our focus within commodities remains on oil and gold. Commodities have continued to perform well across the board following ECB and Fed statements. Gold in particular is likely to be a key beneficiary of central bank policy and higher US inflationary risks in the longer term. Oil continues to be an excellent hedge against heightened geopolitical tensions in the Middle East. While Underweight bonds, US high yield credit remains our preferred fixed income asset class. While returns are likely to moderate with nominal yields now at historical lows, the search for yield is likely to continue to underpin high yield bonds, Keep maturity profile short. While we do not expect Treasury yields to rise sharply (2.1% looks to be strong resistance for the benchmark 10yr Treasury), we doubt that current yields will compensate for the level of inflation in coming years. Asian currencies are likely to continue appreciating against the USD, but at a more moderate pace. Rising long term inflation expectations has pushed the USD lower, which has supported Asian currencies. However, should risks to global growth and the periphery s bond market increase, the USD may be pushed higher on safe haven demand. Key events next week: US: University of Michigan Confidence ; Europe: Euro-Zone Industrial Production y/y; Asia: Australia Unemployment Rate, South Korea 7-Day Repo Rate, Bank Indonesia Reference Rate, China New Yuan Loans, China Money Supply M2, Singapore GDP y/y. Conclusion: With the markets looking fairly complacent (the VIX is down to 14.5), Greece and Spain still in a holding pattern and the looming issue of the fiscal cliff, we expect we could see some weakness in risk assets in the short term. Given continued concerns that inflation may be significantly higher further out and the low yield offered by sovereign bonds, we continue to Overweight equities, commodities, US high yield bonds and Asian local currency bonds. 3
Technical Analysis S&P 500 The S&P 500 has touched a high of 1474 and corrected. If the decline, off the high, breaches the initial support level of 1400 then the correction may extend else the bias stays positive along with mild consolidations. 1450 1400 1400 1350 1300 1250 1200 1150 1100 S&P 500 50 dma 100 dma 200 dma Hang Seng China Enterprises The index is trading within a narrow band of 8900-10100 and currently it is closer to the higher band of this range. The has been a laggard so far in terms of momentum but there appears to be room for a rally to 10600, but only if it gets past the initial resistance of 10100. 13000 12000 11000 10600 10000 9000 8900 8000 7000 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 HSCEi 50 dma 100 dma 200 dma Euro Stoxx 600 Euro Stoxx has witnessed a sizeable rally from the lows. We remain watchful of overbought technical indicators, which are beginning to look stretched, and the loss of momentum. The level of 265 remains crucial if it has to sustain these levels but the risk/reward ratio looks unfavourable at these levels. 290 280 280 270 260 265 250 240 230 220 210 Stoxx Euro 600 50 dma 100 dma 200 dma 4
Brent Crude Last week s failure to rebound above 112 has confirmed the reversal in momentum to the downside. Support lies around 104 and resistance at 115. Likely to trade within broad range. 130 125 120 115 115 USD 110 105 100 104 95 90 85 Brent oil 50 dma 100 dma 200 dma Gold The short term stretched technical momentum indicators have relatively come off in the past two weeks. While prices sustaining above 1740 is still remains positive for the overall outlook. The prices can spike higher especially once it climbs above 1800 levels to 1835. But the significant divergence in the short term and long term averages appear to suggest it would get volatile as it moves higher. 1950 1900 1850 1800 1800 USD/Oz 1750 1700 1740 1650 1600 1550 Golds 50 dma 100 dma 200 dma Copper Copper has rallied sharply from the lows of 7300 and continues to trade with a positive bias. Going ahead, as long it stays above 8000 the next resistance level is at 8600 which is the previous high, where it faced stiff resistance. 10000 9000 8600 USD per tonne 8000 7000 7300 6000 Copper LME 3 mth 50 dma 100 dma 200 dma 5
Economic & Market Calendar 5 October 2012 MON Next Week: October 8 - October 12 This Week: October 1 - October 5 Event Period Expected Prior Event Period Actual Prior GE Wholesale price (YoY) Sep -- 3.10% JN Vehicle Sales (YoY) Sep -8.10% 7.30% UK Lloyds Employment Confidence Sep -- -43 GE PMI Manufacturing Sep F 47.4 47.4 GE Exports SA (MoM) Aug -0.50% 0.40% EC PMI Manufacturing Sep F 46.1 46 GE Imports SA (MoM) Aug -0.10% 0.70% EC Euro-Zone Unemployment Rate Aug 11.40% 11.40% EC Sentix Investor Confidence Oct -- -23.2 US ISM Manufacturing Sep 51.5 49.6 GE Industrial Prod. YoY (nsa w da) Aug -1.50% -1.40% SK Ext Trade - Export (YoY) Sep -1.80% -6.20% ID Consumer Confidence Sep -- 115.7 CH Manufacturing PMI Sep 49.8 49.2 CH HSBC Services PMI Sep -- 52 TA HSBC Manufacturing PMI Sep 45.6 46.1 HK Purchasing Managers Sep -- 50.5 ID Inflation (YoY) Sep 4.31% 4.58% TA Total Exports (YoY) Sep 1.00% -4.20% TH Consumer Price (YoY) Sep 3.38% 2.69% TA Total Imports (YoY) Sep -5.30% -7.60% ID Exports (YoY) Aug -24.30% -7.30% IN Exports YoY% Aug -9.70% -14.80% TUE UK Industrial Production (YoY) Aug -1.00% -0.80% SK Consumer Price (YoY) Sep 2.00% 1.20% UK Manufacturing Production (YoY) Aug -0.60% -0.50% SK HSBC Manufacturing PMI Sep 45.7 47.5 AU NAB Business Conditions Sep -- 1 NZ ANZ Commodity Price Sep 3.50% 0.50% AU NAB Business Confidence Sep -- -2 AU RBA CASH TARGET 2-Oct 3.25% 3.50% AU RBA Commodity Price Au Sep 90.1 89.2 AU RBA Commodity SDR YoY% Sep -14.90% -14.70% SI Electronics Sector Sep 50 50.7 SI Purchasing Managers Sep 48.7 49.1 WED SK Unemployment Rate (SA) Sep 3.20% 3.10% EC PMI Composite Sep F 46.1 45.9 AU Westpac Consumer Confidence Oct -- 98.2 EC Euro-Zone Retail Sales (YoY) Aug -1.30% -1.40% US MBA Mortgage Applications 28-Sep 16.60% 2.80% US ISM Non-Manf. Composite Sep 55.1 53.7 CH Non-manufacturing PMI Sep 53.7 56.3 THUR US Fed's Beige Book UK BOE ANNOUNCES RATES 4-Oct 0.50% 0.50% JN Machine Orders YOY% Aug -4.50% 1.70% EC ECB Announces Interest Rates 4-Oct 0.75% 0.75% JN Consumer Confidence Sep -- 40.5 US Initial Jobless Claims 29-Sep 367K 363K EC ECB Publishes Oct. Monthly Report US Factory Orders Aug -5.20% 2.60% US Import Price (YoY) Sep -- -2.20% HK Retail Sales - Value (YoY) Aug 4.50% 3.90% US Initial Jobless Claims 6-Oct 365K 367K HK Retail Sales - Volume (YoY) Aug 3.20% 1.40% SK Producer Price (YoY) Sep -- 0.30% AU Unemployment Rate Sep 5.30% 5.10% SK South Korea 7-Day Repo Rate 11-Oct 2.75% 3.00% MA Industrial Production YoY Aug -2.00% 1.40% ID Bank Indonesia Reference Rate 11-Oct -- 5.75% FRI JN Japan Money Stock M2 YoY Sep 2.40% 2.40% US Minutes of FOMC Meeting EC Euro-Zone Ind. Prod. w da (YoY) Aug -- -2.40% JN Leading CI Aug P 93 US Producer Price (YoY) Sep 1.70% 2.00% GE Factory Orders YoY (nsa) Aug -4.50% US PPI Ex Food & Energy (YoY) Sep 2.50% 2.50% US Change in Nonfarm Payrolls Sep 96K US U. of Michigan Confidence Oct P 77.8 78.3 JN BOJ Target Rate 5-Oct 0.10% CH New Yuan Loans Sep 680.0B 703.9B TA CPI YoY% Sep 3.42% CH Money Supply - M2 (YoY) Sep 13.60% 13.50% PH Consumer Price (YoY) Sep 3.80% SI GDP (YoY) 3Q A -- 2.00% MA Exports YoY% Aug -1.90% IN Industrial Production YoY Aug -- 0.10% Previous data are for the preceding period unless otherw ise indicated Previous data are for the preceding period unless otherw ise indicated Data are % change on preivous period unless otherw ise indicated Data are % change on preivous period unless otherw ise indicated p- preliminary data, f- final data, sa - seasonally adjusted p- preliminary data, f- final data, sa - seasonally adjusted YoY - year on year, MoM - month-on-month YoY - year on year, MoM - month-on-month 6
3-12 Month Market Outlook Central bank policy rates Spot Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 US 0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 Europe 0.75 0.50 0.50 0.50 0.50 0.50 0.50 UK 0.50 0.50 0.50 0.50 0.50 0.50 0.50 Japan 0.10 0.10 0.10 0.10 0.10 0.10 0.10 Australia 3.25 3.25 3.25 3.25 3.50 4.00 4.25 China 6.00 6.00 6.00 6.00 6.00 6.25 6.50 Taiwan 1.88 1.88 1.88 2.00 2.13 2.25 2.38 Malaysia 3.00 3.00 3.00 3.00 3.00 3.25 3.25 Indonesia 5.75 5.75 5.75 5.75 6.00 6.25 6.25 South Korea 3.00 2.50 2.50 2.50 2.50 2.50 2.75 India 8.00 8.00 7.75 7.50 7.25 7.00 7.00 Philippines 3.75 3.50 3.50 3.75 4.00 4.00 4.00 Thailand 3.00 2.75 2.75 2.50 2.50 2.50 2.50 Forex Spot Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 EUR/USD 1.30 1.27 1.23 1.21 1.21 1.25 - GBP/USD 1.62 1.59 1.55 1.53 1.58 1.63 - USD/JPY 78.56 82.00 83.00 84.00 85.00 85.00 - USD/CAD 0.98 0.98 0.99 1.00 0.98 0.98 - USD/CHF 0.93 0.95 0.98 1.00 1.00 0.97 - AUD/USD 1.03 1.07 1.05 1.03 1.00 0.95 - NZD/USD 0.82 0.81 0.79 0.78 0.82 0.86 - USD/CNY 6.32 6.31 6.29 6.27 6.23 6.19 - USD/SGD 1.23 1.22 1.20 1.21 1.20 1.17 - USD/MYR 3.05 3.02 2.97 3.02 2.97 2.90 - USD/IDR 9589 9,600 9,400 9,500 9,400 9,200 - USD/KRW 1111 1,100 1,070 1,070 1,060 1,040 - USD/INR 51.75 53.00 52.50 54.00 52.50 51.00 - USD/THB 30.53 30.50 30.00 30.50 30.25 29.75 - USD/PHP 41.42 40.50 40.00 41.00 40.50 39.50 - Commodities Spot Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Gold 1794.45 1,750 1,800 1,900 1,900 1,900 - Silver 35.07 33 34 35 35 35 - WTI Crude Oil 112.08 114 110 107 112 115 - Copper 8300.00 8,500 8,500 9,000 9,000 9,000 - Aluminium 2112.00 2,100 2,200 2,200 2,200 220 - Corn 755.75 820 830 780 760 780 - Soybeans 1555.25 1,675 1,500 1,550 1,450 1,500 - Wheat 870.00 890 920 880 800 850 - Global Research (5 Oct 2012 Economics Weekly and 20 Sept 2012 Commodity Roadmap) * Period averages for each quarter. 7
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