Global Macro Highlights

Kevin A. Lenox, CFA

April, 2018

All comments and views are my own, not my employer

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 CONTENTS

Highlights
Financial Conditions
Global Central Banks
Global Economic Indicators
Equities
Fixed Income
Commodities and Currencies
Highlights:
• Near-term recession risk is low, but most high conviction leading indicators are rolling over. In
contrast with the correction in February, the global macro backdrop turned notably weaker by mid
March. Corporate earnings for the remainder of 2018 are likely to be revised lower.

• Financial conditions are tightening, mostly due to the increase in borrowing costs tied to LIBOR
resulting from the changes in the U.S. tax code for repatriation. Foreign borrowing and hedging
costs are also rising. Importantly, the systemically important credit markets are not currently
reflecting the stress seen in the short-term funding markets.

• LIBOR is the benchmark underpinning trillions of dollars in loans, mortgages, bonds and bank
deposits. LIBOR is likely to settle within a higher range than witnessed since the great recession;
therefore, higher borrowing costs are likely to persist.

• Higher borrowing costs typically leads to constrained household spending, weaker corporate profit
growth and reduced credit availability.

• Tighter financial conditions and slowing economic growth typically coincides with a strengthening
U.S. dollar. There’s an understated risk that the heavy speculative short position in the U.S. dollar
futures market, and massive speculative long position in oil futures could unwind rapidly.

• With approximately $11 trillion in foreign debt that is denominated in U.S. dollars, a sharp rise in the
U.S. dollar would further increase borrowing costs and slow global growth.

• Given stretched valuation levels for both stocks and bonds, the potential downside risks are
becoming more pronounced against more challenging fundamentals, trade tensions and rising
geopolitical risks.

• Statements and actions of global central bankers will likely remain the dominant influence over
asset prices. Global central bankers are hoping to continue reducing monetary stimulus, but
investors are assuming that the central bank put remains in place if stocks fall sharply.

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Financial Conditions
 Trillions in U.S. Dollar Debt are Tied to LIBOR. The Rise in Borrowing Costs is a
Direct Headwind for Corporate Profits, Availability of Credit and Economic Growth.

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Changes in the Tax Code and Higher Treasury Issuance are Driving the Spike in
Interbank Lending Spreads. Unlike 2008, Systemic Risk is Not Rising.

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Forward Markets are Already Anticipating a Decline in LIBOR-OIS.

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The Lenox Financial Conditions (Excludes Equities & VIX) Are the Tightest
Since December, 2016. Equity Flows Now Rotating to Defensive Stocks.

Lenox Financial Conditions Index and Cyclical/Defensive Industries

3.00 70

Tighter
2.00 85

1.00 100

0.00 115

-1.00 130

Looser

Source: Bloomberg
-2.00 145
Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17

Financial Conditions (LHS) Cyclical / Defensive, Inverted (RHS)

See Disclosures page for more information

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Bloomberg Financial Conditions Index Looks More Worrisome, Since it
Includes a 33% Weighting between the S&P 500 and VIX.

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The Rise in Borrowing and Hedging Costs is Global, so the Economic Impact
is More Far Reaching Than the U.S..

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Global Central Banks
Global Central Bank Stimulus Remains the Dominant Influence on Asset Prices.

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Rising Trajectory of Stimulus. BOJ Bought Stock ETF’s Aggressively in March, and
ECB Asset Purchases Focused on Corporates in March at 23% vs. 10% in 2017.

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Can Asset Prices Withstand the Planned Removal of Monetary Stimulus?

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Global Economic Indicators
Growth Slowed in the Global Manufacturing Sector for the Third Consecutive
Month, and the Lowest Reading Since October 2017.

JPMorgan Global Manufacturing PMI

57.50

55.00

52.50

50.00

47.50

Source: IHS Markit

45.00
Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17

PMI New Orders

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Recent Global Economic Data Suggests a Slowdown in Global Growth, With
the U.S. Economy Being Comparatively Resilient.

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 World Industrial Production has Stabilized at the Highest Growth Rate Since
the Great Recession, but Weaker Global PMI’s and Trade Tensions are Key Risks.

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 Overall, the Global Economy is Displaying More Late Cycle Signals.

Note: The diagram above is a hypothetical illustration of the business cycle. There is not always a chronological, linear progression among the
phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. Source: Fidelity
Investments (AART), as of March 18, 2018.
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Equities
S&P 500 Valuations are Stretched According to Most Metrics. Forecasted EPS of
$144* in 2018 Looks Too Optimistic Given Today’s Weaker Macro Environment.

S&P 500 Trailing 12-Month EPS

150 3,025

135 2,750

2,475
120

2,200
105

1,925
90
1,650
75
1,375
60
1,100

45
825

30
550

15 275
* Source: Standard & Poor’s, March 22 2018

0 0

Trailing 12-Month EPS (LHS) Price (RHS)

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 Technology Stocks are Losing Their Leadership Status, and Defensive Stocks
are Beginning to Outperform as Rates Decline. Market Breadth is Deteriorating.

150
Cyclical vs. Defensive Industries

140

130

120

110

100

90

Source: Bloomberg

80
Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17

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Rising Libor Rates are Contributing to the Weaker Relative Strength of Banks vs.
the S&P 500, but Not Consistent With the More Negative Signal From 2s10s.

3.50 0.05
Treasury Yield Curve and Bank Relative Strength

3.00

0.04

2.50

0.04
2.00

1.50
0.03

1.00

0.03

0.50

Source: Bloomberg
0.00 0.02
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

10-Year Treasury Yield 2s10s Rel. Str. BKX/S&P 500 (RHS)

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The Repatriation of Foreign Funds Should Lead to a Record Level of Stock
Buybacks, as U.S. Companies Remain the Largest Buyers.

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S&P 500 Breadth Has Weakened, as the Market Remains Supported by Shorter
List of Stocks

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Fixed Income
The Recent Decline in Stock Prices and Softer Economic Data, Including Wage
Growth, Has Eased Concerns About Inflation and Future Fed Rate Hikes.

3.50
Treasury Curve and Inflation Expectations

3.00

2.50

2.00

1.50

1.00

0.50

Source: Bloomberg

0.00
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

2s10s 10-Year 5-Year, 5-Year Forward Inflation Epectations

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 Higher Deficit Spending in Washington, Along With the Small Chance of a
Trade War Could Produce Higher Interest Rates if Foreign Buyers Slow Purchases.

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Deficits Don’t Matter, Until They Do. At Some Point, the Global Bond Market
Will Hit an Inflection Point in a Foreign Developed Country Before the U.S..

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Commodities and Currencies
 Higher S-T Funding Costs Typically Leads to a Stronger Dollar, Which Would
Weigh on Growth....$11 Trillion in Foreign Debt is Denominated in U.S. Dollars.

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Futures Positioning Remains Heavily Short the U.S. Dollar, and Primarily
Versus the Euro.

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U.S. Futures Continue to Reflect a Crowded Long Trade.

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Tighter Financial Conditions, and Slowing Global Growth Could Produce a Sharp
Unwinding of Speculative Flows That Leads to a Stronger Dollar and Lower Oil.

Trade-Weighted U.S. Dollar and Oil

90 130

95
115

100
100

105
85

110

70
115

55
120

40
125

Source: St. Louis Federal Reserve and Bloomberg

130 25
Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17

U.S. Trade-Weighted Dollar, Inverted (LHS) Oil, Brent (RHS)

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Near-Term, Treasury Yields Could Fall Quickly if Global Growth is Indeed
Shifting to a Lower Trajectory.

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The Recent Pattern of Weaker Global Growth and Tighter Credit Conditions is
Consistent With the Downward Trend in Industrial Metals

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 The Strengthening Yen is Another Risk Off Signal, Since Global Investors can
Borrow Yen at Very Low Rates. Carry (Borrowing) Costs Increase as the Yen Rises.

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 Important Definitions

S&P 500 Index

A broad based measurement of changes in stock market conditions based on the average performance of 500 widely held
common stocks. It is a capitalization-weighted, unmanaged index that is calculated on a total return basis with dividends
reinvested.
Russell 2000 Index
Comprised of the 2,000 lowest capitalization stocks in the Russell 3000, which make up the 3,000 largest capitalization stocks in
the U.S. stock market. It provides a barometer of how small-cap companies are performing.
MSCI EAFE Index
A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed
markets, excluding the US & Canada.
MSCI EMF Index
A free float-adjusted market capitalization index that is designed to measure equity-market performance in the global emerging
markets. As of April 2002, the MSCI EMF Index consisted of the following seven emerging market country indices: Argentina,
Brazil, Chile, Colombia, Mexico, Peru, and Venezuela.
MSCI EMF Index
A free float-adjusted market capitalization index that is designed to measure equity-market performance in the global emerging
markets. As of April 2002, the MSCI EMF Index consisted of the following seven emerging market country indices: Argentina
Lenox Financial Conditions Index
Primarily serves as a barometer of the health of the financial markets by reflecting the accessibility and cost of credit. The index
is comprised of eight variables that represent different aspects of financial conditions within the U.S. financial markets.
How to interpret the Lenox Financial Conditions Index: The value of the index, which begins in late 1997, represents average
financial conditions at the zero level. Values below zero suggest looser financial conditions, while values above zero suggest
tighter financial conditions. Tighter financial conditions suggest that the financial system is not functioning efficiently, which
reflects a heightened level of stress in the economy.
Bloomberg U.S. Financial Conditions Index
Provides a daily statistical measure of the relative strength of the U.S. money markets, bond markets, equity markets and is
considered an accurate gauge of the overall conditions in U.S. financial and credit markets.

.
 Disclosures

Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart,
graph or marketing piece to make decisions. The information contained herein is intended for information only, is not a
recommendation to buy or sell any securities, and should not be considered investment advice.
Equity investing involves market risk, including possible loss of principal. In general the bond market is volatile, and fixed income
securities carry interest rate, market, inflation, credit and default risk. Any fixed income security sold or redeemed prior to
maturity may be subject to a substantial gain or loss.
Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and
cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy
will outperform a portfolio that does not engage in such strategies. There are no investment strategies that guarantee a profit or
protect against loss. Past performance doesn’t guarantee future results. It is not possible to invest directly into an index.
Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart,
graph or marketing piece to make decisions. The information contained in this presentation is intended for information only, is
not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your
financial adviser with questions about your specific needs and circumstances.
The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and
completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently
verified. Certain statements contained within are forward-looking statements including, but not limited to, predictions or
indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by
their nature, they are subject to known and unknown risks and uncertainties .Opinions expressed are current as of the date of
this publication and are subject to change.
Investing involves market risk, including possible loss of principal. Investing in alternative assets involves higher risks than
traditional investments and are suitable only for the long term. They are not tax efficient and have higher fees than traditional
investments. They may also be highly leveraged and engage in speculative investment techniques, which can magnify the
potential for investment loss or gain. Indices are unmanaged and cannot be invested into directly..