JP#Capital#!Perspective!is!everything!

October 28, 2015

Equities S&P 500 surges to positive territory after recovering all the summer loses, breaking through its 200-day moving average Fixed Income ECB keeps rates unchanged with further easing measures likely into 2016. China cuts bank rates and the ‘triple R’ by 25 basis points Currencies The U.S dollar gained against the Euro fell as Draghi signals more stimulus Commodities Hard and soft commodities fell across the board, retreating 2.6% while WTI crude fell to $44.60

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 17,646.7 2.6 8.5 0.9Nasdaq 5,031.9 3.0 8.9 7.2S&P 500 2,075.2 2.1 8.2 2.5MSCI World 1,706.6 1.4 8.0 1.4Fixed Income

Total Return in USD (%)Yield WTD MTD YTD

U.S. 10- Year Treasury 2.08 -0.5 -0.1 2.1U.S. Corporate Master 3.34 0.0 0.9 0.8ML High Yield 7.47 0.6 2.8 0.2Commodities & Currencies

Total Return in USD (%)Level WTD MTD YTD

Gold Spot 1,165 -1.1 4.4 -1.7WTI Crude $/Barrel 44.6 -5.6 -1.1 -16.3

Current Prior Week End Prior Month End 2014 Year End EUR/USD 1.10 -2.91 -1.42 -8.93USD/JPY 121.5 1.7 1.3 1.4

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EQUITIES

Euro enigma

In August, the S&P 500 suffered a sizeable 11% fall, yet as we enter mid Q4, all loses have been erased, with the S&P back above 2,000 and surging through its 200- day moving average. On a forward 12-Mo. Price Earnings (P/E), the S&P 500 trades at a touch north of 16x with energy sector aloft at 29x; telecoms coming in the lowest at just over 12x. With a P/E of 12x, Financials look reasonable value relative to other sectors. If the Federal Reserve does go in December, the retail-banking scene should benefit with higher margin rates, yet may be offset with more write-downs in mortgage loans. On the flipside, if home prices keep on steadily rising, consumers may feel confident about mortgage applications, which in turn bid up home prices further.

Sentiment seems to be high in most regions (see Exhibit 1), yet valuations in the U.S look

Next- FX update: Euro plummets

Exhibit 1: Best in a bad neighborhood

Source: MS GIC

expensive. Earnings have also underwhelmed investors as everyone waits on the Federal reserves next move. In Japan, due to the lack of inflation, the Bank of Japan (BoJ) is likely to inject further stimulus to boost asset prices and the wealth effect, In the emerging markets of China and Brazil, earnings appear to be rising, yet economic growth is not appearing to follow. Rates have been declining in China to boost consumer spending, adding further pressure to an already devalued Renminbi. We continue to favor Europe equities, as the bond-buying program will continue for at least a year; we think longer if the U.S and Japan are anything to go buy. That should support multiple expansion causing indexes to track higher, even if inflation remains elusive.

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FOREIGN EXCHANGE

Euro resilience

Next- Commodities update: Steel struggling

Exhibit 2: Euro plummets

Source: Bloomberg data

GBP- Some important figures came out last week, with the all-important GDP figures. There was some good and bad news. The good being that there was a 0.5% growth rate, the bad being that this growth rate was expected to be 0.7%. This no doubt meant that the pound declined against the greenback and the euro. It is currently just under the $1.53 mark, and the Euro has been climbing against the pound to 0.723€ from its 0.719€ low point 2 weeks ago. EUR- However some even more important news came on October 21st with the ECB meeting, unfortunately there is not enough space to talk about what happened, but I will summarise it with this, Draghi fulfilled dovish fantasies. Indeed, we practically knew that the rates would remain the same, however he has confirmed that there would be no changes to the Quantitative Easing progam in the EU. Further to that he went on to say that growth in the Euro area is still more on a downside trend and that the degree of monetary policy accommodation is to be re-evaluated in the December meeting. The market reacted in a very dramatic way. The euro got absolutely annihilated against the greenback; it went from 1.1350 to the low 1.10 in a matter of two days. The FX traders effectively took the “shoot now, ask questions later” sort of approach. It is currently standing at 1.1033, and it is now expected to drop towards the 1.08 level by the end of the year. Even though that has changed a fair amount since two weeks ago, where we mentioned that the EUR/USD would end around the 1.11/1.12 area by year-end, we are still far from the parity that was predicted by many at the start of the year. A lot will depend on the December decisions, for both Draghi and Yellen.

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COMMODITIES

Exhibit 3: Output slows supporting prices

Next- Bond update: Spreads narrow

Steel in crisis!

Oil Prices have fallen to their six weeks low on Tuesday, as there are worries over persistent oversupply. Brent prices have closed just below the $47 mark on Tuesday, and the WTI prices were sitting just above the $43 price. We believe that the oil prices will probably not go any lower, and it should definitely not go as far as $20 a barrel. Countries like Saudi Arabia, Kuwait and Qatar are already feeling pressure after a year with low oil prices. They are feeling the losses in their budgets and will need to reconcile some solution. Effectively by the end of the year, we have to see some bull potential; otherwise things could get ugly quite quickly. Gold is currently at $1,172, just a few dollars below where it was sitting out when we wrote our last newsletter. However, we can come to the conclusion that gold is back on the rise, it reached a few weeks ago a $1,183 price tag, and this is due to a lower amount of supply. For example, if we take Q1 we had a global supply of 1,074 Tonnes, whereas in Q2 the supply decreased to 1,033 Tonnes. Adding on to that, European consumers have increased their demand for gold by 14% in Q2. Let’s not forget that a rate hike by year-end would most likely decrease the price of gold, however, if that does not happen, gold could definitely surpass the $1,200. Steel- The deputy head of the China Iron & Steel Association spoke on Wednesday, and it was not pretty. He effectively confirmed to everyone that there is a real crisis in the steel industry. He confirmed that there is a contraction in the supply of steel, but unfortunately that contraction is slower than the demand reduction. All in all, the oversupply of steel is only worsening. China’s mills (produces about 50% of worldwide output) are battling against oversupply and sinking prices as local consumption shrinks for the first time in a generation. Zhu stated “Many mills found their loans difficult to extend or were asked to pay higher interest.”

Source: Oil production

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FIXED INCOME

Last week, Mr Draghi did what he does best, that is talk markets into a move. With the European Central Bank’s (ECB) balance sheet growing each month by a clip of €60bn, yields are remaining low in both the core and periphery. French 10-year debt now sits at a low of 0.8%, even with sizeable gross external liabilities relative to its national output, or GDP. The main refinancing rate was left unchanged at 0.05, as did the negative deposit rate at -0.2. Inflation signs have been few and far between, with the quantitative easing (QE) program yet to show any real tangible results for the real economy. That said, the ECB President did say that the asset purchase program would continue beyond its deadline of September 2016 if the governing council see necessary. One would presume they would need to continue with the program for at least into the beginning of 2018. The real issues lay with governments and longer-term policies (commonly known as structural reforms).

Thinking QE is the magic wand is missing the entire point of the policy. A stimulant, whether energy drinks or economic policy is designed for a short-term boost. If the person continues to consume, their system becomes immune. The next time the economy lags behind, market participants understand the drug and react before the policy is announced, in turn defeating the point. On a more brighter note, housing in the U.S seems to be in a good place as shown with spreads in the High Yield (HY) market compressing, as investors snap up higher yielding assets, as central bank polices seem here to stay for a good while longer. The major housing indicators, Housing starts and completions/ sales have been trending up. With spreads until recently widening, we think this is a good opportunity to go long into the first quarter of 2016.

Exhibit 4: Tightening spreads

Housing hoopla

Source: Morgan Stanley GIC

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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 Markets appear to be rejoicing over renewed planned stimulus by the ECB and BoJ. We could see the USD/JPY track higher to 125 by year-end, as the LDP continue to fight lack luster price pressures. China, although acting on instability remains an area of caution. Unpredictably is the word when it comes to china. Time will tell whether the addition of the Yuan into the special drawing rights will calm investor sentiment towards the Chinese equity market. In the corporate sector, with rates likely staying low for longer, debt issuance could be in for a strong quarter. As liabilities decrease relative to historic levels, cash flow levels are freed up allowing for share buybacks or merging activity. Roughly 75% of corporates reporting Q3 earnings have beaten to the upside, beating forecasts on average by 3.2%. Top line growth however has failed to match, with just under half of U.S companies beating expectations.