Weekly Market Update 8 June 2015 Volatility continues to plague the markets Global sentiment remained hamstrung by continued volatility, courtesy of Friday's stronger-than-expected US labour report. Non-farm payrolls gained 280K in May, reigniting speculation on the commencement of Fed rate hikes. In the Eurozone consumer price inflation rose for the first time since November and the European Central Bank (ECB) President Draghi provided upbeat commentary regarding the progress of the quantitative easing (QE) programme as the central bank left its monetary policy unchanged. Greece has yet to strike a deal to unlock further bailout aid, leading to the postponement of last Friday s debt payment to the International Monetary Fund (IMF), the first nation since Zambia in the 1980s. Greece announced that it will bundle this month s payments to the IMF into one totaling almost 1.6bn, to be paid on June 30. Performance Global equities finished lower for the week with the MSCI AC World down 1.2%. The Dow Jones declined 0.9% and the S&P 500 Index decreased 0.7%, while the Nasdaq Composite Index was nearly unchanged. Over in Europe, the Stoxx Europe slid 2.7%, extending its lowest level in almost a month. Finally in Japan, the Topix dropped 0.4% last week for its first weekly loss in a month, while the Nikkei declined 0.5%. Within the emerging market space, emerging Europe was the worst performer, ending the week down 4.3%. In contrast, MSCI Latin America fell marginally by 0.5% while MSCI Asia ex Japan lost 1.9%. Within Asia, stocks in mainland China extended a solid weekly advance (SHCOMP: 8.9%) with the Shanghai Composite Index finishing above the 5,000 mark for the first time in seven years. Asset Allocation Equities Citi analysts expect continued volatility this year, as markets grapple with the uncertainty of monetary policy normalization. Credit Investment grade (IG) spreads have given up all their pre-qe gains. While Greek uncertainty and Bund volatility weigh on spreads, inflows are at an 18-month low. Citi analysts expect high yield to outperform IG. Rates European debt markets are now following the US QE as ECB QE has not so far created the squeeze in rates. Citi analysts maintain an underweight position in global sovereign bonds. Commodities Recent history shows commodities have held a tight inverse relationship with USD trends. Given Citi analysts outlook for renewed USD strength, they are neutral/bearish across many complexes near term. Lack of positive economic news in China Citi Economic Surprise Index CESIUSD Index CESIEUR Index CESICNY Index Govt bonds continue to lag behind Accumulated 3-month Bond Index Returns Asia outperforming EM peers Accumulated 3-month Equity Index Returns 120 90 60 30 0-30 -60-90 -120-150 World Govt Bonds Index Global EMD Index HY Index MSCI World MSCI EM MSCI Asia Week Ahead Key Data and Event 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 12% 10% 8% 6% 4% 2% 0% -2% -4% Date Country Data & Event Period Survey Prior Citi Fct 9-Jun CH CPI YoY May 1.3% 1.5% 1.4% 9-Jun CH PPI YoY May -4.5% -4.6% -4.4% 9-Jun EC GDP SA QoQ 1Q P 0.4% 0.4% 0.4% 10-Jun JN Machine Orders MoM Apr -2.1% 2.9% -2.8% 10-Jun JN PPI MoM May 0.2% 0.1% 0.1% 11-Jun CH Retail Sales YoY May 10.1% 10.0% 10.1% 11-Jun CH Industrial Production YoY May 6.0% 5.9% 6.3% 11-Jun CH Fixed Assets Ex Rural YTD YoY May 11.9% 12.0% 11.5% 11-Jun US Initial Jobless Claims 6-Jun 277K 276K 270K 11-Jun US Retail Sales Advance MoM May 1.2% 0.0% 1.1% 12-Jun JN Tertiary Industry Index MoM Apr 0.4% -1.0% 0.5% 12-Jun EC Industrial Production SA MoM Apr 0.4% -0.3% 0.3% Page 1
Drivers and Risks By Market United States Driver: Market trends may be driven by earnings guidance; up to 49.9% in June from 49.4% in May. Also earnings guidance is showing a meaningfully more positive inflection after several months of declines. Meanwhile, Citi analysts expect steady and healthy rise in income to power consumer spending going forward. Risk: Citi analysts remain generally constructive longer term but expect volatility to endure whilst the jobs and bond markets could reignite concerns on an earlier than expected rate hike. Implication: Citi analysts continue to maintain overweights on Banks, Insurance, IT and Real Estate. 2200 2100 2000 1900 1800 1700 1600 S&P 500 1500 Europe Driver: Citi analysts base case is Greece may to reach an agreement with its creditors before end June. The interim deal is likely to be conditional on the Greek government passing an agreed list of structural reforms through Parliament. Risk: Some uncertainty remains about negotiating parties ability to secure a comprehensive deal before the end-june deadline. A potential Greek government default, the imposition of capital controls, or Grexit are significant risks. 430 410 390 370 350 330 310 290 270 DJ Stoxx TMI Implication: Given the high priority currently being given to keep Greece in the Euro Area, there is room for some agreement, in Citi analysts view. Given Citi analysts bullish view on European equities, they maintain their buy-on-dips strategy. Japan Driver: The Nikkei survey on business investment shows large firms plan to increase investment by 10.5% YoY in 2015. By industry, manufacturers and nonmanufacturers intend to step up capital spending by 17.3% and 2.0%, respectively. If consumer spending continues to pick up going forward, nonmanufacturers business investment may surprise on the upside relative to their current cautious plans. Risk: Potential risks include: yen strength if hopes of an escape from deflation mount; and consumption tax hike in April 2017. 1700 1600 1500 1400 1300 1200 1100 1000 Japan Topix Implication: Citi analysts overweight basic materials and IT, which may benefit from improving domestic and overseas economies. From a valuation perspective, Citi analysts underweight consumer staples and healthcare, where overvaluation concerns have not been dispelled. Asia Driver: In China, the Mutual Recognition of Funds ( MRF ) between the Mainland and HK has been approved, effective from 1 July 2015. Citi analysts view MRF as a significant capital markets liberalisation initiative, which could accelerate the integration of A-/H-markets, given easier retail investors participation in both A-/Hmarkets. Risk: Citi analysts are cautious about valuations in A-share given that price/ earnings of the Shanghai Composite is at 40% premium over MSCI China. The gap may narrow given ongoing A-/H-market integration process. 660 640 620 600 580 560 540 520 500 480 MSCI Asia ex JP Implication: In Citi analysts view, MRF is more favourable to the Hong Kong market because of its access to a bigger retail market; Mainland deposits are 15x deeper than Hong Kong. Also Hong Kong funds have longer track record and are more competitive than ones on the Chinese mainland. Page 2
Currency Forecast Last price Forecasts Currency 05-Jun-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 G10-US Dollar Euro EURUSD 1.11 1.11 1.07 1.03 1.00 1.01 Japanese yen USDJPY 126 127 128 129 130 130 British Pound GBPUSD 1.53 1.56 1.53 1.50 1.47 1.48 Swiss Franc USDCHF 0.94 0.95 0.98 1.02 1.05 1.04 Australian Dollar AUDUSD 0.76 0.75 0.73 0.71 0.70 0.69 New Zealand NZDUSD 0.70 0.70 0.69 0.68 0.67 0.66 Canadian Dollar USDCAD 1.24 1.26 1.27 1.29 1.30 1.30 EM Asia Chinese Renminbi USDCNY 6.20 6.20 6.22 6.24 6.25 6.26 Hong Kong USDHKD 7.75 7.76 7.77 7.78 7.79 7.79 Indonesian Rupiah USDIDR 13,290 13,298 13,371 13,447 13,472 13,372 Indian Rupee USDINR 63.76 64.0 64.4 64.7 65.0 65.0 Korean Won USDKRW 1,111 1,144 1,145 1,139 1,133 1,126 Malaysian Ringgit USDMYR 3.72 3.70 3.72 3.74 3.75 3.74 Philippine Peso USDPHP 44.87 44.8 45.2 45.7 45.9 45.7 Singapore Dollar USDSGD 1.36 1.37 1.37 1.38 1.38 1.38 Thai Baht USDTHB 33.91 33.8 34.0 34.3 34.4 34.2 Taiwan Dollar USDTWD 30.94 31.2 31.4 31.6 31.8 31.7 EM Europe Russian Ruble USDRUB 56.13 53.1 54.0 55.8 57.0 56.8 South African Rand USDZAR 12.58 12.34 12.51 12.74 12.88 12.80 EM Latam Brazilian Real USDBRL 3.14 3.19 3.27 3.35 3.39 3.36 Mexican Peso USDMXN 15.71 15.5 15.5 15.4 15.3 15.2 Source: Citi Research and Bloomberg as of 5 June 2015 \\ Weekly Market Performance (1 5 June 2015) -1.9% -1.9% -2.2% -2.6% -2.7% -3.7% -4.3% -0.4% -0.7% -0.7% -1.2% -1.3% -1.4% -1.5% -1.6% 8.9% -10% 0% 10% China Shanghai Composite Japan TPX Index MSCI Latin America HK Hang Seng US S&P 500 Citi High Yield MSCI AC World China HSCEI Citi World Broad Inv Grade Citi Global Emerging Mkt Sovereigns Gold MSCI AsiaXJapan Korea KOSPI UK FTSE 100 Europe Stoxx Europe 600 Taiwan TAIEX MSCI Emerging Europe Market Performance (Year-To-Date) (As of 5 June 2015) Oil Short Rates and 10-Year Yield Forecasts Last price 05-Jun-15 3Q15 4Q15 Forecasts 1Q16 2Q16 3Q16 Short Rates (End of Period) US 0.25 0.25 0.50 0.50 0.75 1.00 Japan 0.10 0.1 0.1 0.1 0.1 0.1 Euro Area 0.05 0.05 0.05 0.05 0.05 0.05 10-Year Yield (Period Average) US 2.41 2.30 2.45 2.50 2.55 2.60 Japan 0.48 0.40 0.45 0.50 0.50 0.55 Euro Area 0.84 0.20 0.40 0.50 0.50 0.60 Source: Citi Research and Bloomberg as of 5 June 2015-1.1% -9.0% 55.3% 18.4% 16.1% 15.5% 14.4% 13.6% 11.0% 8.0% 6.9% 3.6% 3.4% 2.9% 1.6% 1.3% 0.4% China Shanghai Composite Japan TPX Index China HSCEI HK Hang Seng MSCI Emerging Europe Europe Stoxx Europe 600 Oil Korea KOSPI MSCI AsiaXJapan UK FTSE 100 Citi High Yield MSCI AC World US S&P 500 Citi Global Emerging Mkt Sovereigns Taiwan TAIEX Citi World Broad Inv Grade Gold MSCI Latin America -50% 0% 50% 100% Page 3
World Market At Glance US / Global Last price 52-Week 52-Week 05-Jun-15 High Low 1 week 1 month 1 year Year-to-date Year-to-date (USD) MSCI World 429.38 443.98 387.49-1.18% -1.34% 1.24% 2.94% 2.94% Dow Jones Industrial Average 17849.46 18351.36 15855.12-0.90% -0.44% 6.02% 0.15% 0.15% S&P 500 2092.83 2134.72 1820.66-0.69% 0.16% 7.85% 1.65% 1.65% NASDAQ 5068.46 5119.83 4116.60-0.03% 2.61% 17.97% 7.02% 7.02% Europe MSCI Europe 452.41 506.61 409.57-1.53% -1.82% -9.41% 3.79% 3.79% Stoxx Europe 600 389.00 415.18 302.48-2.72% -0.51% 12.76% 13.56% 4.42% FTSE100 6804.60 7122.74 6072.68-2.57% -1.78% -0.13% 3.63% 1.59% CAC40 4920.74 5283.71 3789.11-1.74% -1.07% 8.18% 15.17% 5.90% DAX 11197.15 12390.75 8354.97-1.90% -1.15% 12.56% 14.19% 4.51% Japan NIKKEI225 20460.90 20655.33 14529.03-0.50% 4.76% 35.69% 17.25% 11.59% Topix 1667.06 1683.19 1177.22-0.39% 5.14% 35.23% 18.44% 12.72% Emerging Markets MSCI Emerging Market 982.14 1104.31 906.25-2.20% -6.28% -5.11% 2.70% 2.70% MSCI Latin America 2482.52 3720.81 2317.86-0.55% -9.12% -23.66% -8.99% -8.99% MSCI Emerging Europe 137.38 198.14 106.52-4.30% -12.35% -27.74% 14.37% 14.37% MSCI EM Middle East & Africa 267.03 340.29 248.54-3.49% -10.01% -19.90% -1.38% -1.38% Brazil Bovespa 52973.38 62304.88 45852.81 0.40% -8.75% 2.74% 5.93% -11.18% Russia RTS 922.67 1421.07 578.21-4.76% -14.00% -30.83% 16.69% 16.69% Asia MSCI Asia ex-japan 602.40 644.14 542.90-1.90% -4.27% 5.15% 6.86% 6.86% Australia S&P/ASX 200 5498.46 5996.90 5122.00-4.82% -5.63% 1.13% 1.62% -5.10% China HSCEI (H-shares) 13914.61 14962.74 10097.35-1.34% -1.16% 34.25% 16.10% 16.11% China Shanghai Composite 5023.10 5104.04 2010.53 8.92% 16.85% 146.12% 55.29% 55.44% Hong Kong Hang Seng 27260.16 28588.52 22529.75-0.60% -1.78% 17.96% 15.48% 15.49% India Sensex30 26768.49 30024.74 24878.66-3.81% -2.45% 6.99% -2.66% -3.96% Indonesia JCI 5100.57 5524.04 4835.04-2.22% -1.16% 3.34% -2.42% -9.69% Malaysia KLCI 1745.33 1896.23 1671.82-0.13% -4.49% -6.62% -0.90% -7.75% Korea KOSPI 2068.10 2189.54 1876.27-2.21% -3.01% 3.64% 7.96% 5.44% Philippines PSE 7526.70 8136.97 6635.55-0.71% -4.96% 11.14% 4.10% 2.89% Singapore STI 3333.67 3549.85 3149.91-1.72% -3.96% 1.65% -0.94% -3.25% Taiwan TAIEX 9340.13 10014.28 8501.29-3.72% -4.89% 2.18% 0.35% 2.15% Thailand SET 1507.37 1619.77 1375.99 0.76% -1.27% 3.73% 0.65% -2.38% Commodity Historical Returns (%) Oil 59.13 107.73 42.03-1.94% -2.10% -42.30% 11.00% 11.00% Gold spot 1172.00 1345.46 1131.24-1.56% -1.79% -6.52% -1.09% -1.09% Page 4
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. Citi analysts refers to investment professionals within Citi Research ( CR ), Citi Global Markets Inc. ( CGMI ) and voting members of the Citi Global Investment Committee. For important disclosures concerning companies covered by Citi's Equity Research analysts, please refer to the attached link: https://www.citivelocity.com/cvr/eppublic/citi_research_disclosures. This document is based on information provided by Citigroup Investment Research, Citigroup Global Markets, Citigroup Global Wealth Management and Citigroup Alternative Investments. It is provided for your information only. It is not intended as an offer or solicitation for the purchase or sale of any security. Information in this document has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the information, consider its appropriateness, having regard to their objectives, financial situation and needs. Any decision to purchase securities mentioned herein should be made based on a review of your particular circumstances with your financial adviser. Investments referred to in this document are not recommendations of Citibank or its affiliates. Although information has been obtained from and is based upon sources that Citibank believes to be reliable, we do not guarantee its accuracy and it may be incomplete and condensed. All opinions, projections and estimates constitute the judgment of the author as of the date of publication and are subject to change without notice. Prices and availability of financial instruments also are subject to change without notice. Past performance is no guarantee of future results. Investment products are (i) not insured by any government agency; (ii) not a deposit or other obligation of, or guaranteed by, the depository institution; and (iii) subject to investment risks, including possible loss of the principal amount invested. All forecasts are expressions of opinion, are not a guarantee of future results, are subject to change without notice and may not meet our expectations due to a variety of economic, market and other factors. The document is not to be construed as a solicitation or recommendation of investment advice. Subject to the nature and contents of the document, the investments described herein are subject to fluctuations in price and/or value and investors may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal the amount invested. Certain investments contained in the document may have tax implications for private customers whereby levels and basis of taxation may be subject to change. Citibank does not provide tax advice and investors should seek advice from a tax adviser. Citibank N.A., London Branch is authorised and regulated by the Office of the Comptroller of the Currency (USA) and authorised by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of regulation by the Prudential Regulation Authority are available from us on request. Our firm reference number with our UK regulators is 124704. Citibank International Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Our firm reference number with our UK regulators is 122342. Citibank N.A., London Branch is registered as a branch in the UK at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. Registered number BR001018. Citibank International Limited has its registered office at Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB. Registered number 01088249. In Jersey, this document is communicated by Citibank N.A., Jersey Branch which has its registered address at PO Box 104, 38 Esplanade, St Helier, Jersey JE4 8QB. Citibank N.A., Jersey Branch is regulated by the Jersey Financial Services Commission. Citibank N.A. Jersey Branch is a participant in the Jersey Bank Depositors Compensation Scheme. The Scheme offers protection for eligible deposits of up to 50,000. The maximum total amount of compensation is capped at 100,000,000 in any 5 year period. Full details of the Scheme and banking groups covered are available on the States of Jersey website www.gov.je/dcs, or on request. Citibank N.A. is incorporated with limited liability in the USA. Head office: 399 Park Avenue, New York, NY 10043, USA. Citibank N.A. 2015. CITI, CITI and Arc Design are registered service marks of Citigroup Inc. Calls may be monitored or recorded for training and service quality purposes. Page 5