Markets volatile whilst economic data do not show any improvement Most equity markets ended the week on a higher note. The very significant volatility, however, makes it very difficult to infer from last week s market activity that the market has finally found its bottom, following the August corrections in the aftermath of China s devaluation decision. In fact, most economic data remain a source of uncertainty, as they have done little to dispel the concern of a continuing and deflationary global slowdown. Producer prices in China remained subdued, in line with a continuing contraction of the rate of growth of investments, and industrial production. In the United States one of the most followed consumer confidence indicators had a significant drop. All in all, a data-dependent Federal Reserve received more reasons for prudence, than for action. Luciano Jannelli, Ph.D., CFA Head Investment Strategy Tel: +971 (0)2 696 2340 luciano.jannelli@adcb.com Rahmatullah Khan Economist Tel: +971 (0)2 696 2843 rahmatullah.khan@adcb.com Federal Reserve might opt for a rate hike, but would do so with dovish qualifiers This week s economic data is at this point unlikely to significantly alter the case for- or against a rate hike already in September. The recent deterioration in financial conditions, as well as the not so good economic data, would however favour some rethink. On the other hand, the prospect of a rate hike in 2015 has been so well telegraphed and communicated by the Federal Reserve, such that the market is now widely expecting it to occur in December at the latest. This implies that the Federal Reserve might well decide to announce a hike already this Wednesday and then accompany it with a very dovish statement, indicating a path of very gradual further hikes not before 2016, and at any rate conditional on economic data further improving. Past week global markets performance Index Snapshot (World Indices) Index Latest Weekly Chg % YTD % S&P 500 1,961.1 2.1-4.8 Dow Jones 16,433.1 2.1-7.8 Nasdaq 4,822.3 3.0 1.8 Global Commodities, Currencies and Rates Commodity Latest Visit Investment Strategy Webpage to read our other reports. Weekly Chg % YTD % ICE Brent USD/bbl 48.1-3.0-16.0 Nymex WTI USD/bbl 44.6-3.1-16.2 OPEC Baskt USD/bbl 44.8-4.3-13.8 DAX 40 10,123.6 0.9 3.2 Nikkei 225 18,264.2 2.7 4.7 FTSE 100 6,117.8 1.2-6.8 Sensex 25,610.2 1.6-6.9 Hang Seng 21504.4 3.2-8.9 Regional Markets (Sunday to Thursday) ADX 4537.6 3.6 0.2 DFM 3621.3 1.4-4.0 Tadaw ul 7718.4 4.5-7.4 DSM 11853.0 4.5-3.5 MSM30 5800.99 0.9-8.5 BHSE 1290.9-0.7-9.5 KWSE 5764.9 0.1-11.8 MSCI MSCI World 1,627.0 2.0-4.8 MSCI EM 802.5 1.8-16.1 Gold 100 oz USD/t oz 1108.0-1.2-6.5 Platimum USD/t oz 969.9-2.1-19.7 Copper USD/MT 246.2 6.1-12.9 Alluminium 1621.25 1.9-11.6 Currencies EUR 1.1338 1.7-6.3 GBP 1.5429 1.7-1.0 JPY 120.59 1.3-0.7 CHF 0.9692-0.2 2.6 Rates USD Libor 3m 0.3372 1.6 31.9 USD Libor 12m 0.8556 0.6 36.1 UAE Eibor 3m 0.8257 0.9 21.9 UAE Eibor 12m 1.1571 0.6 13.9 US 3m Bills 0.0253-0.3-28.7 US 10yr Treasury 2.1883 3.0 0.8 Please refer to the disclaimer at the end of this publication Asset Management assetmanagement@adcb.com 1
Aug-14 Oct-14 Nov-14 Jan-15 Feb-15 Apr-15 May-15 Jul-15 Aug-15 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Aug-14 Oct-14 Nov-14 Jan-15 Feb-15 Apr-15 May-15 Jul-15 Aug-15 If the Fed will hike on September 17, it will be with abundant (dovish) qualifications Markets have remained volatile so far After the massive corrections that rocked global equity markets on August 21 st and in the week starting August 24 th, they seem to have found a bottom. Whilst it is unclear if that bottom will hold in the near future, volatility has hardly come down. Implied volatility, i.e. equity option premiums, has come down, yet remains at levels that if prolonged - are compatible with a bear market. In the meanwhile, uncertainty about the Federal Reserve interest rate policy remains high, as it is for the prospects of growth in China, and perhaps in the United States itself. 50.0 40.0 30.0 Implied volatility down, but still at high levels to do so now, but accompany such decision with a very dovish statement, signalling that the next rate hikes would not be before 2016, done in a very gradual manner, and in any case only if economic data continue to improve. Such move could paradoxically remove uncertainty and boost confidence. 101.0 100.5 100.0 99.5 99.0 98.5 Financial conditions' deterioration pre-empts rate hike? 20.0 10.0 Goldman Sachs Financial Conditions Index 0.0 VIX Index Fed uncertainty high. After the devaluation of the renminbi by the People s Bank of China (PBoC), the implied probability of a Fed rate hike in September has come from more than 50% to below 30%. The markets assessment of what the Fed is likely to do stands however in stark contrast with the expectations of the majority of economists, who according to the Bloomberg consensus poll - believe that the Fed will announce a 25 basis points hike on September 17. A partial solution to this conundrum lies in what both markets and economists believe, i.e. that in any case the Fed will hike rates in 2015. Indeed, the implied probability of the Fed fund futures for a rate hike in December is almost 60%. If a hike comes it will be with a lot of qualifiers. Clearly the financial conditions in the United States i.e. the combination of falling stock prices, widening credit spreads, higher market-based interest rates, as well as a stronger US dollar, have already deteriorated significantly, such that the Federal Reserve would not normally feel the need to hike rates. According to some economists, the deterioration of financial conditions in terms of its restrictive impact on the economy is in fact equivalent to something like three rate hikes (of 25 basis points each). We therefore suspect that the Federal Reserve is not so likely to hike rates, but since the markets anyway seem to anticipate a hike before the end of the year - it might still want Economic reasons for prudence still plenty. Besides weaker industrial indicators such as ISM manufacturing (51.1 vs 52.7), factory orders ex-transport (- 0.6% vs 0.6%) and manufacturing payrolls (-17K vs 12K), consumer sentiment indicators (Univ. of Mich. Sentiment 85.7 vs 91.9) also took a hit. 110 100 90 80 70 60 50 Market volatility affected consumer sentiments Univ. of Mich. Sentiment indicator and China slowdown shows no signs of bottoming In August industrial production in China grew 6.1% YoY compared to the expected 6.5% YoY, whilst investments grew only 10.9% compared to the expected 11.2%. It is reasonable to expect the China growth slowdown story to continue. We have always believed that the China stock market correction is more a reflection of China s economic woes, rather than a significant global problem by itself. After this latest batch of negative industrial production and invest numbers, the market might further correct. If this is going to trigger further market unrest on the eve of the Fed s decision, it will have even more reason to be prudent. Asset Management assetmanagement@adcb.com 2
Summary market outlook Global Yields Although Fed futures implied probability of a September rate hike came down, the US Treasury 10yr yield moved up slightly last week. We are heading into the Fed decision week and markets are largely divided in terms of expectations. This is likely to create volatility in the days leading up to the decision day. European sovereign yields are likely to be largely stable in the near term. Stress and Risk Indicators The VIX index moderated slightly over the week but remained elevated as compared to its recent levels (prior to the sell-off). The FOMC decision this week is expected to be an important event which will influence the index. Sovereign CDS spreads were largely stable with some further easing in Asian countries spreads. Precious Metals The gold price declined as global risk perceptions subsided further. Given that global risk is not completely off the table, it could benefit in the near term. However, we remain cautious on the precious metal. Local Equity Markets Despite a volatile week for the oil price, local equity markets closed in green last week. The recent support seems to have come from attractive valuations. If the oil price remains stable, the momentum could continue in the near term. The FOMC decision will also have an impact. Global Equity Markets Global equity markets gained last week. The Fed decision is going to be an important event for the equity markets globally. If China markets remain stable in the first days of the week, the Fed s decision whatever that decision will be might prove stabilizing. If the turmoil continues, the Federal Reserve might definitely renounce to hike rates in September. The latter scenario would not necessarily reassure the markets. Energy Energy prices are likely to remain volatile in the near term as the dust has not yet settled on which factors supply or demand are likely to prevail. We do not believe in a rapid return to the 60 US dollar a barrel level. Industrial Metals Uncertainty around the Emerging Economies growth, in particular China s, continues to weigh heavily on the industrial metals. Currencies Commentary Critical levels EURUSD GBPUSD A weaker set of data from the US combined with the upward revision of Eurozone growth in the second quarter supported the euro. Europe s single currency s gains are likely to revert as the Fed funds rate hike comes back under the focus. The British pound also benefitted with the weaker US economic data which led to the adjustment in the market expectations about the Fed hike in September. However, we think that it could give up its gains in the near term due to the same factors mentioned for the euro in the week ahead. R2-1.1498 R1-1.1418 S1-1.1190 S2-1.1042 R2-1.5663 R1-1.5546 S1-1.5242 S2-1.5055 USDJPY The Japanese yen behaved largely as a safe haven currency as it depreciated when global equity markets witnessed some rebound. The weaker set of economic data also helped the currency to move lower. It is likely to continue to move with the global risk perception and respective decisions by the BoJ and the Fed this week. R2 122.80 R1 121.69 S1 119.12 S2 117.66 Asset Management assetmanagement@adcb.com 3
Forthcoming important economic data United States 09/15/2015 Retail Sales Ex Auto MoM Aug 0.2% 0.4% 09/15/2015 Industrial Production MoM Aug -0.2% 0.6% 09/16/2015 CPI Ex Food and Energy YoY Aug 1.9% 1.8% 09/17/2015 NAHB Housing Market Index Sep 61 61 All eyes will be on the FOMC decision in the middle of the week. 09/17/2015 Housing Starts Aug 1170K 1206K 09/17/2015 Building Permits Aug 1155K 1130K 09/17/2015 FOMC Meeting Sep 17 Rate hike Japan 09/14/2015 Tertiary Industry Index MoM Jul 0.2% 0.3% Markets will focus on the BoJ meeting as recent disappointing 09/14/2015 Industrial Production MoM Jul F NA -0.6% economic data have increased the 09/15/2015 BoJ Meeting Sep 80T 80T pressure on the central bank to review its policy, i.e. increase the 09/17/2015 Trade Balance Aug - 542B - 268B size and scope of QE. 09/17/2015 Exports YoY Aug 4.4% 7.6% Euro zone 09/14/2015 Industrial Production MoM Jul 0.3% -0.4% 09/15/2015 Trade Balance Jul 21.4B 21.9B 09/15/2015 ZEW Survey Expectations Sep NA 47.6 09/16/2015 CPI Core YoY Aug F 1% 1% 09/15/2015 ZEW Survey Expectations (GE) Sep 18.3 25 ZEW surveys would be important for the markets to look at. China and India 09/14/2015 Exports YoY (India) Aug NA -10.3% 09/14/2015 Trade Balance (India) Aug -$10.7B -$12.8B 09/14/2015 CPI YoY (India) Aug 3.58% 3.78% Indian foreign trade data along with the inflation figure would be looked at by the market to see any rate cut possibility in coming weeks. Asset Management assetmanagement@adcb.com 4
Sources All information in this report has been obtained from the following sources except where indicated otherwise: 1. Bloomberg 2. Wall Street Journal 3. RTTNews 4. Reuters 5. Gulfbase 6. Zawya Disclaimer This publication is intended for general information purposes only. It should not be construed as an offer, recommendation or solicitation to purchase or dispose of any securities or to enter in any transaction or adopt any hedging, trading or investment strategy. Neither this publication nor anything contained herein shall form the basis of any contract or commitment whatsoever. Distribution of this publication does not oblige Abu Dhabi Commercial Bank PJSC ( ADCB ) to enter into any transaction. The content of this publication should not be considered legal, regulatory, credit, tax or accounting advice. Anyone proposing to rely on or use the information contained in the publication should independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professionals or experts regarding information contained in this publication. Information contained herein is based on various sources, including but not limited to public information, annual reports and statistical data that ADCB considers accurate and reliable. However, ADCB makes no representation or warranty as to the accuracy or completeness of any statement made in or in connection with this publication and accepts no responsibility whatsoever for any loss or damage caused by any act or omission taken as a result of the information contained in this publication. This publication is intended for qualified customers of ADCB. Charts, graphs and related data or information provided in this publication are intended to serve for illustrative purposes only. The information contained in this publication is prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors relevant to their determination. All statements as to future matters are not guaranteed to be accurate. ADCB expressly disclaims any obligation to update or revise any forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. ADCB does and may at any time solicit or provide commercial banking, investment banking, credit, advisory or other services to the companies covered in its publications. As a result, recipients of this publication should be aware that any or all of the foregoing services may at time give rise to a conflict of interest that could affect the objectivity of this publication. Past performance does not guarantee future results. Investment products are not bank deposits and are not guaranteed by ADCB. They are subject to investment risks, including possible loss of principal amount invested. Please refer to ADCB s Terms and Conditions for Investment Services. This publication is being furnished to you solely for your information and neither it nor any part of it may be used, forwarded, disclosed, distributed or delivered to anyone else. You may not copy, reproduce, display, modify or create derivative works from any data or information contained in this publication. Asset Management assetmanagement@adcb.com 5