Citigold

FINANCIAL MARKET ANALYSIS | 29 September 2014

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Monetary policy and global growth concerns hit stocks
Last week, another round of relatively upbeat US economic data, headlined
by a surge in new home sales, continued growth in manufacturing activity,
and stronger-than-expected core durable goods orders, fostered concerns
about a sooner-than-expected Fed rate hike.
Meanwhile, we saw disappointing economic data coming out from the
Eurozone. This further fueled optimism regarding additional stimulus
measures from the European Central Bank (ECB), with ECB President
Mario Draghi reiterating its commitment to combat the threat of deflation
and sluggish growth.
Elsewhere, Bank of England (BoE) Governor Carney suggested rate
increases in the UK may be nearing amid signs that conditions for the
economy to normalize are being met.
Disappointing data out from Europe
Citi Economic Surprise Index


Source: Bloomberg as of 26 September 2014

Treasuries head for worst month this year
Accumulated 3-month Bond Index Returns


Source: Bloomberg as of 26 September 2014

Equities slipped from record high territory
Accumulated 3-month Equity Index Returns


Source: Bloomberg as of 26 September 2014





Source: Bloomberg as of 26 September 2014

Performance
Global equity markets stepped back from record high territory last week,
with the MSCI All-Country World Index losing 1.97%. US equities fell with
the S&P500 and Dow J ones Industrial Average dropping 1.37% and 0.96%
respectively. European equity markets were also lower with the Stoxx
Europe 600 Index down 1.78%. J apan held on last week as the Nikkei fell
marginally by 0.56% and the Topix was flat.
EM equities took a beating last week MSCI Latin America (-3.60%), MSCI
Emerging Europe (-2.22%) and MSCI Asia ex J apan (-2.17%). Within Asia,
Thailand was the best performing market as the SET index gained 0.96%.
Also, Chinese equities managed to close in positive territory (SHCOMP:
0.78%).
Asset Allocation
Policy divergence amongst major central banks will be a key FX driver.
The US$ DXY index has already rallied 7%. Also we expect it to rise
another 9% by mid-2015 given the likelihood of Fed tightening. This US$
rally is more like 2004-05 when equities rose and US treasuries fell.
Equities J apanese equities have the most robust positive relationship with
a strong US$. UK equities should also benefit. A rising US$ is not as bad for
EM equities as many think. In general, the global Energy sector has the most
negative relationship with a stronger US$.
Credit With ECB QE as our base case scenario, we remain optimistic on
credit and favour Europe versus the US on a mid-2015 horizon.
Rates Medium term, we forecast higher yields across the major
government bond markets. On a relative basis, EMU bonds and J GBs may
outperform.
Commodities A stronger US dollar is a headwind for commodities overall,
whilst individual supply/demand fundamentals pull in different directions.


-60
-30
0
30
60
Jun-14 Jul-14 Aug-14
CESIUSD Index CESIEUR Index CESICNY Index
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
Jun-14 Jul-14 Aug-14
Global EMD Index HY Index (local ccy) World Govt Bonds Index
-4%
-2%
0%
2%
4%
6%
Jun-14 Jul-14 Aug-14
MSCI World MSCI EM MSCI Asia
Date Country Period Survey Prior Citi Fct
29-Sep EC EconomicConfidence Sep 99.9 100.6 99.5
29-Sep HK Retail SalesValueYoY Aug -2.0% -3.1% -2.0%
30-Sep JN Industrial ProductionMoM AugP 0.20% 0.40% -0.30%
30-Sep JN Retail TradeYoY Aug 0.1% 0.5% -0.9%
30-Sep CH HSBCChinaManufacturingPMI SepF 50.5 50.5 --
30-Sep EC Unemployment Rate Aug 11.5% 11.5% 11.4%
30-Sep EC CPI EstimateYoY Sep 0.30% 0.40% 0.30%
1-Oct EC Markit EurozoneManufacturingPM SepF 50.5 50.5 50.5
1-Oct CH ManufacturingPMI Sep 51.0 51.1 50.9
2-Oct US Initial JoblessClaims 27-Sep 298K 293K 300K
3-Oct US ChangeinNonfarmPayrolls Sep 215K 142K 175K
3-Oct EC Retail SalesMoM Aug 0.1% -0.4% 0.0%
Data & Event
Week Ahead Key Data and Event
Citigold

FINANCIAL MARKET ANALYSIS
29 September 2014


Citigold
FINANCIAL MARKET ANALYSIS | 29 September 2014


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Drivers and Risks By Market

United States
Driver: Earnings estimate trends have slipped of late. At the end of J une, bottom-
up consensus numbers showed 3Q14 projections of 8% EPS growth, but those
estimates have slid to 5% now. However, Citis top-down forecast is maintained at
8% YoY earnings gains on the back of a stronger economic backdrop.
Risk: Foreign exchange translation may be a bit of a headwind and commodity
price weakness also may restrain the upside opportunity in EPS growth.
Implication: While the broad equity market may need to absorb changes in Fed
policy direction over the next few months, the key earnings catalyst for further
share price appreciation may have to wait until early 2015 when management
teams will have formal budgets to provide more detailed guidance.



End-2014 Target: 2000
Mid-2015 Target: 2100


Source: Bloomberg as of 26 September 2014


Europe
Driver: The ECB's recent shift to focus on the size of its balance sheet is
significant. However, even if the ECB manages to achieve the desired balance
sheet increase, additional QE would be likely, as the current measures are too
small to return inflation to the ECBs target. The expectation of further ECB easing
is a major driver going forward.
Risk: Many of markets healthy return forecasts are largely based on outlook for
further ECB actions. Disappointment on that front would probably mean weaker
returns to European equities. While systemic risks have fallen sharply over the
past two years, weak growth and disinflation remain in focus. Citi analysts have
shaved their 2015-17 GDP forecasts to 1.4%, 1.8% and 1.8%, respectively while
lifting their 2015-17 inflation profile by 0.2pp.
Implication: We prefer Financials and Cyclicals to Defensives. In particular, we
Overweight Insurance, Basic Resources, Autos, Banks, Tech, Travel & Leisure.
End-2014 Target: 370
Mid-2015 Target: 385


Source: Bloomberg as of 26 September 2014

Japan
Driver: The BoJ may implement additional easing measures (probably in J an 15)
after PM Abe makes an official decision on another consumption tax hike (slated
for Oct 15) in December. In our view, the BoJ may focus more on ETFs
purchases rather than J GBs. Also, media reports say that that the equity
weighting in the new core GPIF portfolio will be above 20%, supporting our
optimism about increased demand for J apanese equities.
Risk: Despite a sharp slowdown in the economy, PM Abe may officially confirm in
early December that the government will implement another consumption tax hike
planned for Oct-2015. Once again, tax hike could negatively impact on
households real income, dampening consumer spending.
Implication: At the sector level, we think transport equipment, rubber products,
and financials look promising as the yen weakens.

End-2014 Target: 1350
Mid-2015 Target: 1470


Source: Bloomberg as of 26 September 2014

Asia
Driver: What weve been seeing in EM lately is an echo of May 2013, the start of
the taper tantrum. Last May, EM was faced with two shocks: i) expectations of
earlier than expected rate hikes in the US, and ii) concerns on growth in China.
Risk: Slower-than-expected China growth is raising questions about the global
commodities cycle and hence EM exports. Given commodity-exporting economies
have higher levels of macro vulnerability, capital flight from these markets could
pressure nominal exchange rates and create challenges to net borrowers.
Implication: We prefer manufactured goods exporters to commodity exporters.
Commodity exporters are may underperform given that commodities tend to
weaken when the dollar strengthens while manufactured goods exporters may
benefit from demand growth in the US.



End-2014 Target: 610
Mid-2015 Target: 680


Source: Bloomberg as of 26 September 2014
1600
1650
1700
1750
1800
1850
1900
1950
2000
2050
S&P 500
300
310
320
330
340
350
360
DJ Stoxx TMI
1000
1050
1100
1150
1200
1250
1300
1350
1400
Japan Topix
460
480
500
520
540
560
580
600
620
MSCI Asia ex JP
Citigold
FINANCIAL MARKET ANALYSIS | 29 September 2014


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Currency Forecast




Source: Bloomberg as of 26 September 2014



Short Rates and 10-Year Yield Forecasts




Source: Citi Research and Bloomberg as of 26 September 2014

\\










Last price
Currency 26-Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15
G10-US Dollar
Euro EURUSD 1.27 1.21 1.18 1.15 1.16 1.17
Japanese yen USDJPY 109.3 111 113 115 114 113
British Pound GBPUSD 1.63 1.59 1.58 1.58 1.58 1.59
Swiss Franc USDCHF 0.95 1.00 1.03 1.05 1.05 1.05
Australian Dollar AUDUSD 0.88 0.86 0.85 0.83 0.82 0.82
New Zealand NZDUSD 0.79 0.76 0.73 0.70 0.70 0.70
Canadian Dollar USDCAD 1.12 1.13 1.14 1.15 1.15 1.15
EM Asia
Chinese Renminbi USDCNY 6.13 6.10 6.07 6.04 6.03 6.02
Hong Kong USDHKD 7.76 7.75 7.75 7.75 7.75 7.75
Indonesian Rupiah USDIDR 12,048 12,200 12,200 12,190 12,110 12,030
Indian Rupee USDINR 61.16 61.7 62.1 62.4 62.5 62.7
Korean Won USDKRW 1044.30 1,047 1,044 1,039 1,024 1,010
Malaysian Ringgit USDMYR 3.26 3.27 3.29 3.30 3.32 3.33
Philippine Peso USDPHP 44.83 45.0 45.0 45.0 44.6 44.1
Singapore Dollar USDSGD 1.27 1.27 1.27 1.27 1.27 1.27
Thai Baht USDTHB 32.33 32.7 32.8 32.8 32.8 32.9
Taiwan Dollar USDTWD 30.30 30.2 30.2 30.1 30.0 29.9
EM Europe
Russian Ruble USDRUB 39.17 40.0 40.7 41.4 41.2 41.0
South African Rand USDZAR 11.23 11.30 11.40 11.49 11.41 11.33
EM Latam
Brazilian Real USDBRL 2.42 2.37 2.45 2.53 2.55 2.58
Mexican Peso USDMXN 13.45 13.3 13.3 13.2 13.1 13.0
Forecasts
Last price
26-Sep-14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
Short Rates (End of Period)
US 0.25 0.25 0.25 0.25 0.75 1.00 1.25
Japan 0.10 0.1 0.1 0.1 0.1 0.1 0.1
Euro Area 0.05 0.05 0.05 0.05 0.05 0.05 0.05
10-Year Yield (Period Average)
US 2.53 2.70 2.95 3.05 3.15 3.20 3.25
Japan 0.52 0.50 0.70 0.80 0.85 0.75 0.85
Euro Area 0.97 0.75 1.00 1.25 1.50 1.50 1.75
Forecasts
Weekl y Market Performance
(22 - 26 September 2014)
Market Performance (Year-To-Date)
(As of 26 September 2014)

Source: Bloomberg as of 26 September


Source: Bloomberg as of 26 September 2014


-3.6%
-2.8%
-2.7%
-2.6%
-2.2%
-2.2%
-2.0%
-1.8%
-1.8%
-1.4%
-1.4%
-1.1%
0.0%
0.2%
0.3%
0.4%
0.8%
2.1%
-10% 0% 10%
MSCI Latin America
UK FTSE 100
Taiwan TAIEX
HK Hang Seng
MSCI Emerging Europe
MSCI AsiaXJapan
MSCI AC World
China HSCEI
Europe Stoxx Europe 600
Citi High Yield
US S&P 500
Korea KOSPI
Japan TPX Index
Gold
Citi World Broad Inv Grade
Citi Global Emerging Mkt Sovereigns
China Shanghai Composite
Oil

-16.3%
-5.0%
-2.1%
-1.5%
1.0%
1.1%
1.6%
2.3%
2.6%
2.7%
3.1%
4.2%
4.3%
4.4%
5.4%
7.3%
8.6%
11.0%
-20% -10% 0% 10% 20%
MSCI Emerging Europe
Oil
China HSCEI
UK FTSE 100
Korea KOSPI
Gold
HK Hang Seng
Japan TPX Index
MSCI Latin America
MSCI AC World
Citi High Yield
MSCI AsiaXJapan
Europe Stoxx Europe 600
Taiwan TAIEX
Citi World Broad Inv Grade
US S&P 500
Citi Global Emerging Mkt Sovereigns
China Shanghai Composite
Citigold
FINANCIAL MARKET ANALYSIS | 29 September 2014


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World Market At Glance




Source: Bloomberg as of 26 September 2014



Last price 52-Week 52-Week
26-Sep-14 High Low 1 week 1 month 1 year Year-to-date
US / Global
MSCI World 419.75 434.24 376.18 -1.97% -2.76% 8.85% 2.74%
Dow Jones Industrial Averag 17113.15 17350.64 14719.43 -0.96% 0.04% 11.64% 3.24%
S&P 500 1982.85 2019.26 1646.47 -1.37% -0.86% 16.73% 7.28%
NASDAQ 4512.19 4610.57 3650.03 -1.48% -1.28% 19.14% 8.04%
Europe
MSCI Europe 461.65 506.61 441.34 -2.90% -4.18% 2.02% -4.29%
Stoxx Europe 600 342.30 350.85 304.45 -1.78% -0.19% 9.35% 4.28%
FTSE100 6649.39 6904.86 6316.91 -2.76% -2.54% 1.28% -1.48%
CAC40 4394.75 4598.65 4051.25 -1.49% 0.03% 4.97% 2.30%
DAX 9490.55 10050.98 8489.62 -3.15% -1.02% 9.54% -0.64%
Japan
NIKKEI225 16229.86 16374.14 13748.94 -0.56% 4.57% 9.67% -0.38%
Topix 1331.95 1346.43 1121.50 0.00% 3.65% 9.13% 2.28%
Emerging Markets
MSCI Emerging Market 1023.91 1104.31 913.65 -2.85% -5.87% 2.08% 2.12%
MSCI Latin America 3283.02 3720.81 2810.92 -3.60% -8.02% -2.59% 2.57%
MSCI Emerging Europe 167.63 214.02 155.88 -2.22% -7.07% -17.15% -16.28%
MSCI EM Middle East & Afric 306.54 354.90 295.28 -3.90% -8.07% -8.29% -6.66%
Brazil Bovespa 57212.38 62304.88 44904.83 -1.00% -4.36% 6.38% 11.08%
Russia RTS 1156.15 1521.05 1016.01 -1.20% -8.20% -20.36% -19.86%
Asia
MSCI Asia ex-Japan 574.71 608.06 508.53 -2.17% -4.71% 6.24% 4.22%
Australia S&P/ASX 200 5313.42 5679.50 5028.20 -2.20% -5.75% 0.36% -0.72%
China HSCEI (H-shares) 10584.29 11638.27 9159.76 -1.85% -4.85% 0.41% -2.14%
China Shanghai Composite 2347.72 2365.15 1974.38 0.78% 6.37% 8.90% 10.95%
Hong Kong Hang Seng 23678.41 25362.98 21137.61 -2.58% -5.57% 2.39% 1.60%
India Sensex30 26626.32 27354.99 19264.72 -1.71% 0.69% 33.84% 25.77%
Indonesia JCI 5132.56 5262.57 4109.31 -1.82% -0.27% 16.49% 20.08%
Malaysia KLCI 1840.50 1896.23 1759.66 -0.49% -1.15% 3.74% -1.42%
Korea KOSPI 2031.64 2093.08 1885.53 -1.08% -1.76% 1.21% 1.01%
Philippines PSE 7261.30 7413.62 5709.34 -0.36% 1.61% 13.33% 23.29%
Singapore STI 3292.21 3387.84 2953.01 -0.39% -0.93% 3.06% 3.94%
Taiwan TAIEX 8989.82 9593.68 8093.82 -2.71% -4.30% 9.84% 4.39%
Thailand SET 1600.16 1600.16 1205.44 0.96% 2.56% 12.31% 23.21%
Commodity
Oil 93.54 107.73 90.43 1.22% -0.34% -9.21% -4.96%
Gold spot 1218.38 1392.22 1182.52 0.22% -4.91% -7.98% 1.06%
Historical Returns (%)
Citigold
FINANCIAL MARKET ANALYSIS | 29 September 2014


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Disclaimer
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