JP#Capital#!Perspective!is!everything!

November 18, 2015

Equities S&P rises 1% for October, even amid a firm jobs report. European equities are up 13% this year on the back of a loose monetary stance by the ECB Fixed Income The 10-year Treasury yield rose to 2.33% on the back of a firm jobs report and expectations of Fed Funds rate hike Currencies The U.S dollar gains relative to the Euro to reach 1.07 as policy expectations diverge Commodities WTI crude fell 4.9% to finish the week at $44.29 while gold headed lower by 4.6% to $1,090 per ounce

Market roundup

Source: Bloomberg, Spot returns. All data as of last Friday’s close. Past performance is no guarantee of future returns

EquitiesTotal Return in USD (%)

Level WTD MTD YTD

DJIA 17,910.3 1.5 1.5 2.6Nasdaq 5,147.1 1.9 1.9 9.7S&P 500 2,099.2 1 1.0 3.8MSCI World 1,704.4 0.0 0.0 1.4Fixed Income

Total Return in USD (%)Yield WTD MTD YTD

U.S. 10- Year Treasury 2.33 -1.5 -1.5 0.2U.S. Corporate Master 3.55 -0.8 -0.8 -0.4ML High Yield 7.62 -0.4 -0.4 -0.2Commodities & Currencies

Total Return in USD (%)Level WTD MTD YTD

Gold Spot 1,090 -4.6 -4.6 -8.0WTI Crude $/Barrel 44.3 -4.9 -4.9 -16.9

Current Prior Week End Prior Month End 2014 Year End EUR/USD 1.07 1.10 1.10 1.21USD/JPY 123.1 120.6 120.6 119.8

First of all, we would like to pay our respect to the victims of the terrorist attacks that were carried out not only in Paris, but also in Beirut.

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EQUITIES

Divergence

The Euro was created after the World Wars to ensure peace across European nations. Little did they know a relatively innocent objective created the worst financial crisis known to man. The Greek saga is a continuing feat. The German stock market, the DAX, has returned, or rather not returned -18% in the last six months. The IBEX, Spain’s leading index was also down 13%, along with Italy’s FTSE MIB and France’s CAC down 4% and 7.5% respectively.

So the question is, where do we go from here?

In the past, bad economic data was great for the Eurozone’s bond and equity markets. As the economic data worsened, the ECB would step in and flood the market with liquidity, sending interest rates down and stock markets higher.

Next- FX update: Euro plummets

Exhibit 1: Fundamentals detach from valuations

Source: BoAML

You might say that is exactly the situation we find ourselves in today, just the 5 years later since we discovered what huge debts these countries had. As Christine Lagarde once said, ‘it is not until the tide goes out you realize who is swimming naked’. The difference between the past few years and heading into 2016, is that because fundamentals in the U.S have improved, investors want to see the same outcome in the Eurozone. Markets can rise through multiple expansion but to some extent that boat left long ago. We need some solid evidence to allow the fundamentals to catch up with the stock values. Promised real reforms plans have yet to be implemented, while the financial stability board (FSB) continues to work on the total loss absorbing capacity of banks (T-LAC). European equity markets will likely track higher in Q1 2016 as policy expectations diverge from the U.S, but in the U.S we continue to favor companies who are not dollar dependent, namely domestic credit card names like Mastercard and Capital one, possibly Delta as an airline play.

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FOREIGN EXCHANGE

USD in control of the currencies

Next- Commodities update: Oil heads lower

Exhibit 2: U.S Dollar bulls back in business

Source: Bloomberg data

EUR/USD- The EUR/USD has been a very interesting pair. At the start of the year, the majority of people believed that the pair would end up in parity by year end. A few months ago, most of the views changed and people then had the view that the pair would end the year at around 1.10. The views, not surprisingly has changed, again… What is the state now? Unfortunately (if you are long on the euro), it does not look that good. The ECB has announced that they will carry on with QE, and in addition, EU inflation and GDP figures are definitely not looking great. On the other side of the Atlantic, you have great figures coming out of the US. Employment figures are looking good, earning announcements so far have been very positive, resulting in an expected rate rise in December. All in all, we believe that the parity is unlikely for the end of the year, but we are probably looking at 1.04/1.03. Let’s not forget that QE will carry on for at least until September 2016, likely beyond as the state of the EU is not showing signs of immanent improvement. We are to the view that the parity will probably not happen until middle of the 1st quarter of 2016. USD/JPY- Japan is officially in recession. The rate is standing at 123.2, in comparison to a month ago where the Japanese Yen was much stronger standing at 119.50. In line with the Euro, we expect the U.S Dollar will continue creeping towards its 125 year high by the end of the year.

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COMMODITIES

Next- Bond update: Spreads narrow

Source: Bloomberg

Oil views have been contradictory of late. Maybe I am a bit pessimistic, I don’t know. However, a few months ago investors were about as bearish as you could be on oil. In fact by the end of August, we reached a point where Brent was at $43 a barrel; it subsequently rebounded. 2 weeks ago, the oil reached the $50 benchmark and the majority of the media and other investors were about as bullish as you could be; some even saying that we will reach $60 by the end of the year. It all seems that we are back to square one with Brent currently trading at $44 a barrel and today (Tuesday) it is down by 30 basis points. The state of oil has not changed in the last three months; there is still an overwhelming amount of supply relative to demand. Not only that but the global economic growth expectations by the IMF has been reduced. The greenback is pretty much as strong as it ever has been versus the major currency pairs. It is in a very strong position so it makes it more expensive for customers to buy the commodity, again less demand. What I found frustrating is that views change overnight because the price has gone up for three days in a row, which does not reflect the current fundamental state. We are to the view that oil will NOT surpass the $50 mark for a while and more importantly, it will not settle there for at least another 9-10 months. In fact, we would not be surprised and we have said it previously, if oil goes down to $30 or less. Goldman Sachs even had the view that $20 a barrel was possible. If Goldman mentions that $20 a barrel is possible, then it probably means that it is possible and so if a quick climb to $49 happens, bear in mind that the oversupply is still there. Hedge fund manager’s short position on oil has surged by 21% (see Exhibit 3).

Exhibit 3: Short positions at recent highs

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FIXED INCOME

Investors focused on the Bank of England’s rate decision last week as the Monetary Policy Committee (MPC) decided to leave rates unchanged and maintain the stock of assets it currently holds at £375bn. Some were expecting a rate rise given employment is now down to 5.5% and the housing market looks to be rising quickly. One thing to keep in mind is that a rate rise to cool house prices is very clunky because higher borrowing costs impact every sector, not just housing. Macro-prudential tools are more targeted measures and we will likely see more of those as we head into the expansion phase of the business cycle. As for the U.S, rate expectations have been moved out to the first quarter of 2016. A wobbly summer due to China’s destabilizing message and the impact it’s having on emerging markets were key reasons for the Fed to stick rather than twist. Even Mark Carney in his latest MPC statement sighted Emerging market

Exhibit 4: Yields tick up

Emerging market concerns

Source: BoAML

weakness were a reason to leave rates at the zero lower bound. China’s manufacturing sector looked to have slowed in the previous month however this negative mood was offset by higher than expected retail sales. Such data points towards a rebalancing in the Chinese economy and it is therefore unlikely we get a sharp slowdown in the second largest economy. The key risk we see heading into 2016 is not when the Fed raises rates; indeed the long run level will be circa 3%, much lower than historical Fed Funds rates. It is rather the lack of liquidity and adjustment of the market. That said, although monetary conditions have tightened considerably in the U.S, the ECB and the BoJ continue to embark on their quest for inflationary pressures, meaning the old strategy of playing multiple expansion will continue to work throughout 2016.

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JP#Capital#!Perspective!is!everything!

Jonathan Taubert FX and Commodities

Pete McCarthy Equities and Fixed Income

JP Capital Team

Going forward Third quarter U.S GDP grew 1.5% annualized, significantly slower than the previous 3.9% in Q2, with a drawdown in inventories the main catalyst. China continues to worry investors but were slightly reassured with solid retails results, up circa 10% year on year. Ironically, with the U.S economy healing faster than the E.U and Japanese economies respectively, equity markets may go higher in those struggling countries, at least over the short term. We don’t see this ground hog day happening many more times in the future because as a long-term investor, you need earnings coming through to support the price you have paid for the stock. In terms of Brexit, we see that is highly unlikely because unlike the Greek public not knowing what they are voting for in the referendum, the British people will vote for a continuation of the current status quo. On a final note liquidity in bond markets is something to keep in mind. Remember, liquidity is always there when you don’t need it. If the Fed goes in December, we could see a large re-pricing process in emerging market debt and Eurozone corporate bonds. We remain cautious on any bond related investment for that reason alone.