Citigold FINANCIAL MARKET ANALYSIS 25 July 2016 All eyes on BoJ and Fed this week Over the weekend, the G20 Finance Ministers and Central Bankers sounded the alarm on weak growth, political and financial market volatility, and the rising anti-globalization sentiment in the West. To address these concerns, the G20 members urged to make the benefits of growth shared more broadly across and within countries. And to use all policy tools monetary, fiscal and structural to support growth. This week is headlined by the mid-week monetary policy decision from the Federal Open Market Committee (FOMC), with no changes expected to its current policy stance, while the US earnings season ramps-up. The BoJ also meets this week where Citi analysts expect a policy rate cut from -10bps to -30bps and an increase in ETF purchases from 3.3trn to 5trn- 6trn. Market participants are expecting a broader stimulus package to be announced before the BOJ meeting. Performance Global stocks posted another weekly advance as the MSCI World rose 0.35%. US markets were higher for the week, as the Dow Jones Industrial Average gained 0.29%, the S&P 500 Index increased 0.61% and the Nasdaq Composite advanced 1.4%. European equities as measured by the Stoxx Europe 600 Index rose 0.71%, a second weekly advance. Japanese stocks also rose (Nikkei 225: 0.78% and Topix: 0.79%) on hopes of more stimulus measures. Meanwhile, EM equities finished the week higher (MSCI EM: 0.17%), led by MSCI Latin America and MSCI Asia ex-japan gaining 1.62% and 0.40% respectively. MSCI Emerging Europe lost 1.08% on the back of the failed coup in Turkey. Within Asia, Indonesia was the outperformer, with the Jakarta Composite index gaining 1.70% for the week, despite the central bank leaving its interest rate on hold at 6.5% on Thursday. Asset Allocation Equities We believe dividends offer more favourable relative value in comparison to fixed income. Within equities, we are turning more constructive on emerging markets relative to developed markets. Credit We are less positive on low yielding Euro-denominated fixed income allocations after substantial yield declines and now prefer EM Asia and EMEA sovereign debt. We are overweight in Latin America (hard currency and local), local Asian bonds, and neutral EMEA. Rates The low global interest rate environment should anchor the long-end for US Treasuries as foreign investors continue to bid up safe haven, higher yielding USD assets. Commodities While prospective Fed tightening could lead to some pullback, extremely low global bond yields suggest a rising value for gold as a risk hedge. Recent string of upbeat US data Citi Economic Surprise Index CESIUSD Index CESIEUR Index CESICNY Index HY bonds and EM debts outperform Accumulated 3-month Bond Index Returns World Govt Bonds Index Global EMD Index HY Index Another weekly advance for equities Accumulated 3-month Equity Index Returns MSCI World MSCI EM MSCI Asia Week Ahead Key Data and Event 60 30 0 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -30-60 -1.0% 4% 2% 0% -2% -4% -6% -8% -10% Date Country Data & Event Period Survey Prior Citi Fct 26-Jul SK GDP YoY 2Q P 3.0% 2.8% 3.0% 26-Jul HK Exports YoY Jun -1.6% -0.1% -0.6% 26-Jul HK Imports YoY Jun -5.0% -4.3% -5.2% 27-Jul EC Economic Confidence Jul 103.6 104.4 103.1 29-Jul JN Natl CPI YoY Jun -0.4% -0.4% -0.5% 29-Jul JN Industrial Production YoY Jun P -2.9% -0.4% -3.0% 29-Jul JN Retail Trade YoY Jun -1.2% -1.9% -1.2% 29-Jul US GDP Annualized QoQ 2Q A 2.6% 1.1% 2.3% 29-Jul EC Unemployment Rate Jun 10.1% 10.1% 10.0% 29-Jul EC CPI Estimate YoY Jul 0.1% -- 0.2% 29-Jul EC GDP SA QoQ 2Q A 0.3% 0.6% 0.4% 29-Jul TA GDP YoY 2Q P 0.7% -0.7% 0.6% INVESTMENT PRODUCTS: variety of economic, NOT A BANK market DEPOSIT. and other NOT factors. GOVERNMENT Likewise, past INSURED. performance NO BANK is no guarantee GUARANTEE. of future MAY results. LOSE VALUE. Page 1
Drivers and Risks by Market United States Driver: Despite the weak payrolls number in May, subsequent data on production, retail sales, and housing starts have been surprisingly strong. Moreover, global market reactions have been limited and localized following multiple economic and political shocks, including the "Leave" vote outcome, the unfolding Italian banking system crisis, and an attempted coup in Turkey. Risk: For a September rate hike to be realistic, we believe the Committee would require a very unlikely but significant jump in the inflation rate. For example, CPI inflation rising above 2.5% (yoy) for the August and September prints, with accompanying sharp and sustained increases in growth and employment. 2200 2100 2000 1900 1800 1700 1600 1500 End-2016 Target: 2150 S&P 500 Implication: Chair Yellen may likely wait until her August Jackson Hole speech to hint at any shift in policy. Despite divisions within the FOMC, we believe there remains potential for a December rate hike if the labour market and growth data hold up, and inflation continues to rise as expected. Europe Driver: Last week, the ECB Governing Council (GC) left all its key rates unchanged. It reiterated that it intends to keep rates at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases. It also reaffirmed that monthly asset purchases of 80bn are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim. Risk: Draghi noted the Brexit vote was not estimated to have had a major impact so far, but remains a risk to the Eurozone economy. 430 410 390 370 350 330 310 290 270 End-2016 Target: 310 DJ Stoxx TMI Implication: Citi analysts maintain the view that a majority of the GC members may likely conclude that the persistent undershooting of the inflation target requires a formal extension of the QE programme beyond Mar-17, and that a small 10bp cut in the rate for its Main Refinancing Operations (MRO) could encourage banks to borrow more from the ECB. Japan Driver: Citi s baseline scenario for this week s BoJ meeting is for a policy rate cut from -10bps to -30bps and an increase in ETF purchases from 3.3trn to 5trn- 6trn. We believe the BoJ will have to act in order to keep its projection of 2% inflation for FY2017. Otherwise, the bank may revise down its CPI projections significantly and its commitment to the inflation target would be questioned. Risk: Should the BoJ decide not to ease further, the Nikkei could fall back to the mid-15,000s, where it was prior to the current run-up. We also believe the market could react unfavourably should the BoJ focus mostly on cutting rates further. 1700 1600 1500 1400 1300 1200 1100 1000 End-2016 Target: 1350 Japan Topix Implication: Expanding both QE and fiscal spending should, in theory, stimulate the economy. In this case, Citi analysts think the Nikkei could rise above 17,000, recovering to the pre-brexit range of 15,750-18,000. Emerging Markets Driver: EM banks have led the global banking sector rally YTD. While the DM banks index is down 13% YTD, EM banks are up 3%. The EM bank rally has been led by the Thailand, Philippines and Taiwan in Asia, while Peru, Brazil and Russia were major gainers outside Asia. In-spite of the rally YTD, the EM Banks sector largely trades below historical median valuations. Risk: Key risks include ongoing global trade recession and EM negative spill-over. Implication: Within Asia, we are overweight banks in India, Indonesia, Thailand, Philippines, and largely underweight North Asia and Singapore (on low rates hurting net interest margins. Outside Asia, we are relatively bullish on banks in Russia and Brazil but have been cautious on Turkey, albeit the pullback following the failed coup may present an opportunity. End-2016 Target: 530 600 550 500 450 400 350 MSCI Asia ex JP 300 Page 2
Currency Forecast Last price Forecasts Currency 22-Jul-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 G10-US Dollar Euro EURUSD 1.10 1.12 1.15 1.15 1.16 1.17 1.17 Japanese yen USDJPY 106 105 105 104 103 102 101 British Pound GBPUSD 1.31 1.27 1.28 1.28 1.29 1.30 1.30 Swiss Franc USDCHF 0.99 0.97 0.96 0.95 0.95 0.94 0.94 Australian Dollar AUDUSD 0.75 0.78 0.78 0.78 0.78 0.79 0.79 New Zealand NZDUSD 0.70 0.70 0.70 0.70 0.70 0.69 0.69 Canadian Dollar USDCAD 1.31 1.28 1.26 1.25 1.24 1.23 1.21 EM Asia Chinese Renminbi USDCNY 6.68 6.77 6.79 6.83 6.87 6.91 6.95 Hong Kong USDHKD 7.76 7.77 7.78 7.78 7.78 7.79 7.79 Indonesian Rupiah USDIDR 13,095 13,316 13,464 13,515 13,535 13,555 13,575 Indian Rupee USDINR 67.1 69.1 69.8 70.0 70.0 70.0 70.0 Korean Won USDKRW 1,134 1,168 1,178 1,168 1,152 1,136 1,120 Malaysian Ringgit USDMYR 4.06 4.11 4.10 4.05 3.99 3.93 3.87 Philippine Peso USDPHP 47.1 47.8 48.0 47.9 47.8 47.7 47.6 Singapore Dollar USDSGD 1.36 1.39 1.39 1.39 1.39 1.40 1.40 Thai Baht USDTHB 35.0 35.7 35.9 35.8 35.6 35.4 35.2 Taiwan Dollar USDTWD 32.0 32.4 32.5 32.6 32.7 32.8 32.9 EM Europe Russian Ruble USDRUB 64.8 61.0 60.2 60.1 60.3 60.6 60.8 South African Rand USDZAR 14.29 15.27 15.45 15.55 15.61 15.67 15.73 EM Latam Brazilian Real USDBRL 3.26 3.38 3.48 3.55 3.61 3.67 3.73 Mexican Peso USDMXN 18.5 18.9 19.0 18.9 18.8 18.7 18.6 Source: Citi Research and Bloomberg as of 22 July 2016 \\ Weekly Market Performance (18-22 July 2016) -3.8% -1.1% -1.1% -1.4% -0.2% -0.2% -0.3% 0.4% 0.4% 0.2% 0.1% 1.6% 0.9% 0.8% 0.7% 0.7% 0.6% -5% -4% -3% -2% -1% 0% 1% 2% MSCI Latin America 1.4% HK Hang Seng UK FTSE 100 Japan TPX Index Europe Stoxx Europe 600 Taiwan TAIEX US S&P 500 MSCI AsiaXJapan MSCI AC World Citi High Yield Citi World Broad Inv Grade Citi Global Emerging Mkt Sovereigns China HSCEI Korea KOSPI MSCI Emerging Europe Gold China Shanghai Composite Market Performance (Year-To-Date) (As of 22 July 2016) Oil Short Rates and 10-Year Yield Forecasts Last price 22-Jul-16 3Q16 4Q16 1Q17 2Q17 3Q17 Short Rates (End of Period) US 0.50 0.50 0.75 0.75 1.00 1.00 Japan -0.10-0.30-0.30-0.30-0.30-0.50 Euro Area 0.00-0.05-0.10-0.25-0.25-0.25 10-Year Yield (Period Average) US 1.57 1.60 1.60 1.65 1.65 1.65 Japan -0.23-0.25-0.25-0.25-0.20-0.20 Euro Area -0.03-0.10-0.15-0.20-0.20-0.15 Source: Citi Research and Bloomberg as of 22 July 2016-6.5% -7.0% -14.2% -14.9% 30.7% 24.6% 19.3% 13.6% 12.9% 12.6% 8.1% 7.8% 6.4% 5.9% 5.1% 3.3% 2.5% 0.2% MSCI Latin America Gold Oil MSCI Emerging Europe Citi High Yield Citi Global Emerging Mkt Sovereigns Taiwan TAIEX UK FTSE 100 US S&P 500 Citi World Broad Inv Grade MSCI AsiaXJapan MSCI AC World Korea KOSPI HK Hang Seng China HSCEI Europe Stoxx Europe 600 Japan TPX Index China Shanghai Composite -40% -20% 0% 20% 40% Page 3
World Market At Glance US / Global Last price 52-Week 52-Week 22-Jul-16 High Low 1 week 1 month 1 year Year-to-date Year-to-date (USD) MSCI World 412.67 427.93 351.25 0.35% 2.60% -3.67% 3.33% 3.33% Dow Jones Industrial Average 18570.85 18622.01 15370.33 0.29% 4.44% 4.03% 6.58% 6.58% S&P 500 2175.03 2175.63 1810.10 0.61% 4.30% 2.88% 6.41% 6.41% NASDAQ 5100.16 5176.77 4209.76 1.40% 5.52% -1.38% 1.85% 1.85% Europe MSCI Europe 389.92 459.91 353.59-0.31% -2.61% -14.35% -5.12% -5.12% Stoxx Europe 600 340.33 404.05 302.59 0.71% -0.29% -14.98% -6.97% -6.10% FTSE100 6730.48 6764.82 5499.51 0.92% 7.50% 0.95% 7.82% -4.08% CAC40 4381.10 5217.80 3892.46 0.20% 0.02% -13.80% -5.52% -4.64% DAX 10147.46 11669.86 8699.29 0.80% 0.76% -11.92% -5.54% -5.06% Japan NIKKEI225 16627.25 20946.93 14864.01 0.78% 3.50% -19.26% -12.64% -0.78% Topix 1327.51 1702.83 1192.80 0.79% 3.34% -19.81% -14.20% -2.55% Emerging Markets MSCI Emerging Market 869.30 922.85 686.74 0.17% 4.82% -6.64% 9.46% 9.46% MSCI Latin America 2392.21 2408.54 1550.47 1.62% 10.83% 0.41% 30.74% 30.74% MSCI Emerging Europe 125.32 133.76 91.09-1.08% 0.49% -5.94% 13.57% 13.57% Brazil Bovespa 57002.08 57170.56 37046.07 2.56% 13.65% 11.95% 31.49% 58.00% Russia RTS 935.98 975.21 607.14-2.88% 0.94% 3.79% 23.64% 23.64% Asia MSCI Asia ex-japan 525.63 563.43 434.84 0.40% 4.76% -7.05% 5.14% 5.14% Australia S&P/ASX 200 5498.19 5727.70 4706.70 1.26% 4.31% -2.07% 3.82% 6.14% China HSCEI (H-shares) 9031.93 11760.42 7498.81-0.20% 3.07% -23.03% -6.51% -6.60% China Shanghai Composite 3012.82 4184.45 2638.30-1.36% 3.69% -25.17% -14.87% -17.28% Hong Kong Hang Seng 21964.27 25279.95 18278.80 1.41% 5.62% -13.13% 0.23% 0.13% India Sensex30 27803.24 28417.59 22494.61-0.12% 3.88% -2.46% 6.45% 4.93% Indonesia JCI 5197.25 5268.87 4033.59 1.70% 6.13% 5.92% 13.16% 19.52% Malaysia KLCI 1657.42 1744.19 1503.68-0.66% 1.20% -4.17% -2.07% 3.53% Korea KOSPI 2010.34 2064.72 1800.75-0.34% 0.89% -2.63% 2.50% 6.10% Philippines PSE 8025.35 8118.44 6084.28-0.06% 3.47% 5.10% 15.44% 15.00% Singapore STI 2945.35 3366.52 2528.44 0.68% 5.71% -12.32% 2.17% 6.57% Taiwan TAIEX 9013.14 9085.91 7203.07 0.71% 3.41% 1.06% 8.10% 11.16% Thailand SET 1509.13 1517.59 1220.96 1.15% 5.93% 4.23% 17.17% 20.93% Commodity Historical Returns (%) Oil 44.19 51.67 26.05-3.83% -10.05% -10.16% 19.30% 19.30% Gold spot 1322.45 1375.45 1046.43-1.13% 4.43% 20.85% 24.59% 24.59% Page 4
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