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CitigoldMonthlyMarketOutlook March2016
CitigoldMonthlyMarketOutlook March2016
CitigoldMonthlyMarketOutlook March2016
Outlook
March 2016
INVESTMENT PRODUCTS: NOT A BANK DEPOSIT. NOT GOVERNMENT INSURED. NO BANK GUARANTEE. MAY LOSE VALUE
Macro Overview
US: Further rate increases may be postponed until June or possibly September.
Europe: ECB may ease policy on March 10; Uncertainty around UK referendum poses a key risk
Japan: Further reduction in policy rates (from -0.1% currently to -0.3%) expected in July.
Asia: China announced a 50bps required reserve ratio (RRR) cut effective March 1st, taking average
RRR ratio down to 16.5% from 17%; Expect more monetary policy easing to come.
Equities: Overweight
While we believe it is too early to call the beginning of the next major bear market, we no longer expect
global equity indices to make new highs in 2016. Our lower MSCI AC World end-2016 target of 485
(from 525) reflects a reduction in our top-down 2016 EPS growth forecast to 3.5%.
Bonds: Underweight
High Grade: USD & euro IG credit spreads are attractive; Favour US financials & consumer driven
sectors (lodging, food/beverage).
High Yield: Defaults (ex-energy) remain low and valuations are attractive, though volatility to remain
Commodities: Neutral
Summary
2
Past performance is no guarantee of future results. Real results may vary.
Chart 1
ASX 200 Index
0%
United States
Next Fed hike likely postponed to June or September
-2%
-4%
-2.49%
-4.37%
-6%
-8%
-7.84%
-10%
-12%
-14%
-16%
-18%
-17.67%
-20%
1-Mth
YTD
1-Yr
Chart 1
S&P 500 Index
27.57%
30%
3-Yr*
25%
20%
15%
10%
5%
0%
-5%
-0.41%
-5.47%
-10%
1-Mth
YTD
-8.19%
1-Yr
3-Yr*
Euro - Area
UK referendum a key near term risk
Chart 2
Dow Jones Stoxx 600 Index
20%
Citi analysts are cutting our 2016 real GDP forecast by 0.4pp to
1.3% to reflect growing headwinds of tightening financial conditions
and more signs of softening external demand. With inflation staying
low and long-term inflation expectations drifting lower, we expect
the ECB to ease policy on March 10 (deposit rate cut and increase
in monthly purchases) in order to restore some credibility.
The UKs EU referendum (June 23) is a key near-term risk. We
believe that the UK is more likely to vote to stay in the EU than to
leave (probability of Brexit 30-40%). The effects of Brexit, if it
happens, are likely to be large and painful in economic and political
terms, both for the UK and the overall EU.
Given that Citi expects no significant and synchronized global
recession, we therefore see equity markets recovering from by yearend. But, we cut our end-2016 Stoxx 600 index target to 360 given
the near-term uncertainty and reduced growth expectations (topdown earnings growth of 0-5% for 2016-17E from 4-7%).
Japan
More BoJ easing measures expected in July
15.17%
15%
10%
5%
0%
-5%
-2.44%
-10%
-8.72%
-15%
-14.86%
-20%
1-Mth
YTD
1-Yr
Chart 3
Topix Index
40%
33.02%
30%
20%
10%
0%
-10%
3-Yr*
-9.37%
-20%
1-Mth
-16.12%
-14.83%
YTD
1-Yr
3-Yr*
Chart 4
MSCI Emerging Markets Index
0.0%
-5.0%
-0.27%
-6.78%
-10.0%
-15.0%
-20.0%
-25.0%
Within EMs, Asia is the most defensive of the three regions and
within Asia our preference is for North over South. A major risk for
Asia, which has an asset turn driven model, is a worsening of the
global trade environment, which hard hit earnings and domestic
liquidity.
In contrast, we are underweight in EMEA and LatAm. Weaker
commodity prices and an increase in political tensions are the two
big risks for EMEA. While in LatAm, we see weak EPS and
expensive valuations as the biggest concerns.
-25.24%
-30.0%
-29.80%
-35.0%
1-Mth
YTD
1-Yr
3-Yr*
Gold
Supported by safe haven flows in near term
Chart 5
GOLDS Commodity Index
20.0%
Gold rallied early in 2015 before falling to multi-year lows by yearend, but this year is shaping up to look quite different than last. For
one, US dollar appreciation is likely to remain contained this year
with US monetary policy looking increasingly less divergent from
other central banks as the Fed seems biased towards at least a
very slow hiking path going forward, with further policy easing on
the table if global markets continue to deteriorate.
15.0%
16.71%
10.78%
10.0%
2.10%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
Oil
YTD
1-Yr
3-Yr*
Chart 6
Brent Oil
10.0%
-21.58%
1-Mth
3.54%
0.0%
-10.0%
-3.51%
-20.0%
-30.0%
-80.0%
-40.0%
-42.52%
-50.0%
-60.0%
-70.0%
-67.71%
1-Mth
YTD
1-Yr
3-Yr*
Bond Markets
High grade corporate bonds: Valuations have become attractive
US Treasuries
We expect US yields to stay subdued in 2016 as the combination of slowing global growth, low inflation and
underperformance of risk assets continue to benefit Treasuries.
With wider spreads and benchmark yields near 3.6%, valuations are attractive. We favour US financials (vs. nonfinancials), considering significantly reduced balance sheet risks. Concerns over large US bank energy exposures
are overdone, in our view. Energy exposures range between 2-3% of total loans and are not likely to cause a crisis.
We also favour sectors linked to a strengthening US consumer, such as food/beverage and lodging.
Growth and disinflationary concerns have also impacted euro credit spreads, despite the ECBs growing QE bond
buying program. Idiosyncratic banking concerns over loan portfolios and their ability to make coupon payments on
certain subordinated securities, have agitated risk sentiment. Financials are likely to remain volatile, but favour longterm. We also favour consumption-related sectors, such as retailers.
High-Yield
In our view, both the US and European high yield markets are attractive. HY default rates are likely to rise, but
largely from the energy sector. Current energy default rates are around 11%, though non-energy is closer to 2.5%.
We remain underweight the energy sector, as stable (but low) oil prices still have negative implications for lower
quality issuers. That said, much of the fall in oil has been priced in. Nearly 100% of CCC-rated energy credits trade
at distressed levels. Volatility should persist, though higher quality issuers could see a sharp bounce as dynamics
improve.
With growing correlations versus risk assets and EM FX, a boost in commodities could provide a driver for mediumterm outperformance.
However, we remain cautious and favour high quality issuers. FX volatility is likely to persist, so we prefer US dollar
opportunities over local markets.
Euro Bonds
With the German Bund curve trading with negative yields through 2024 and 30-year maturities yielding below 1.0%,
we find little value.
Though better opportunities exist in periphery markets, political uncertainties (i.e., Spain) are likely to keep spreads
volatile.
Japan Bonds
The BOJ extended the life of QQE by introducing negative rates. Investors are likely to keep JGBs for capital gain
due to expectations of further BOJ cuts, and JGB yields are likely to drop with the lack of sellers, given that the
gross BOJ purchase size almost equals MOF gross issuance.
We expect volatility to increase as a small additional demand for duration such pension funds could push yields
lower, while possible large profit taking on banks JGB portfolio could cause a large correction in yields.
Asia Bonds
Though recent China policy allowing the reduction in minimum down-payments for first time home buyers should
boost the HY property sector (45% of China HY), further currency weakness and growth risks remain.
Citi analysts prefer an up-in-quality bias, as these credits are better suited to withstanding heightened volatility.
Bond Markets
6
Past performance is no guarantee of future results. Real results may vary.
Currency
USD: Revised Fed View = Less USD Upside
USD is expected to trade slightly weaker against G10 basket in near term. This is driven by elevated risk aversion that may
likely continue to see short covering in G10 currencies (CHF, JPY, EUR etc) and the market expecting a more dovish Fed
arising from weak economic data. Medium to long term though, Citi forecasts USD positives. Even in times of recessions,
USD is often seen as a safe haven; and if otherwise, strong economic data may likely further rally the USD.
In the euro zone, short term bias is towards possible near term Euro appreciation but still highly dependent on the
March 10 ECB meeting. A second successive market disappointment could see EUD/USD stronger; whereas if
Draghi delivers rate cuts and extend QE efforts, EUR may fall back a little but less dramatic as its potential upside
movements
Medium to long term, EUR is expected to trade close to current levels or maybe slightly lower if Fed commits to
tighten and USD proves its resilience as a safe haven.
Near term, volatility in GBP is likely to continue to build as Brexit remains a key concern with rising risk premia as
the June 23 referendum date approaches-- likely to increase downward pressure on the sterling
More medium term, assuming a no-Brexit base case, GBP may likely see a relief rally from depressed levels.
In near term, JPY is likely to continue its rally as demand is expected to remain strong for JPY in periods of risk
aversion and as markets continue to question the effectiveness of BoJs monetary policy
Medium term, much depends on the global growth outlook - stronger US growth would raise USD/JPY above the
CitiFX forecasts but a global recession may boost JPY more as it plays into the hands of a risk-off currency.
AUD: Australia is showing signs of consolidation but real risks to the economy lie in weak exports and while short
term, AUD/USD could rally a bit further, such gains are subdued by the decline in iron ore prices. In medium term,
AUD/USD may be weighed by the prospect of further RBA easing should the global backdrop worsen.
NZD: The New Zealand economy also looks to have reasonable momentum in parts of the domestic economy so it
is likely that the RBNZ may likely keep the OCR stable for now, however possibly with downside risks should dairy
prices remain under pressure. On the exchange rate, akin to AUD, Kiwi is being driven by the prospect of a more
neutral RBNZ in a short run but in medium term, NZD may likely decline against USD once the Fed signals it is
ready to tighten again.
CAD: Although the recent gains in CAD reflect CAD-USD swap rate differentials moving in favour of CAD, CAD is
likely to remain a hostage to oil prices overall - Citi Commodities Research think that the eventual evidence of
production cuts in oil may likely materialize later this year, potentially improving CADs terms of trade that could see
USD/CAD trade lower by year end.
In Asia EM, USD/CNY is expected to remain in an upward trajectory over the medium term which is likely to
pressure other Asia EM FX to weaken further.
Meanwhile in China, RMB is expected to depreciate further, bringing CNY to over 7.2 over the 6-12m horizon, as
the PBoC acts to restrain the current unsustainable pace of capital outflows.
But with FX reserves having fallen to USD3.2trn, losses towards USD2.5-2.8trn is likely to make authorities feel
uncomfortable in carrying out further FX intervention and the only option left might be for the currency to weaken
further until an equilibrium point is reached.
Currency
7
Past performance is no guarantee of future results. Real results may vary.
General Disclosure
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