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1H Report | June 2017

GLOBAL ASSET ALLOCATION - JUNE 2017

CONTENTS

Overview 1

AssetAllocationStrategy 2

Equities 4

Global

Globalmarketsrallycontinuesin2Q17 4

Globalmarketvolatilitynosedives 4

UnitedStates

US:Techsectorsell-offholdsbackrally 4

FinancialsSector:Somereliefafteralull 5

Taxreformsremainuncertain;developmentonhealthcarereforms 5

Earnings:1Q17shine;2Q17likelytodisappoint 5

Europe

2Q17:amixedbagforEurope 5

Europeanbankingfirmsup 6

Europe:1Q17earningsbetterthanexpected 6

UnitedKingdom

PoliticalturmoilweighsonUKmarkets 6

Soft‘Brexit’:Financialsectortobearbrunt 7

Emergingmarket&others

India,SouthKorea,TurkeyshineamongEMs 7

MENAequities:amixedperformance 8

FixedIncome 9

MajorCentralBanks

FOMC:Ratehikeandbalancesheetplans 9

GCC’scentralbanksfollowtheFedratehike 9

Riskstoeconomicoutlookbroadlybalanced:ECB 9

RisingdissentatBankofEngland(BoE) 10

Centralbanksremaincautiousamidquiescentinflation 10

UnitedStates

US10-yeartreasurytouched2017low 10

US-Germanspreadshowsignsofnarrowing 10

Europe

EUbondsgainamidfadingpoliticalrisk 11

CONTENTS

UnitedKingdom

UKassetsweakenamidpoliticaldevelopments 11

Emergingmarket&others

Emergingdebtwitnessedmixedperformance 11

GCCbondyieldsendmixed 12

GCCcreditriskpremiumsincrease 12

Energyrelatedcorporatebondsunderpressure 12

Ratingsaction:Moreofdowngradesthanupgrades 13

Commodities 14

Oil&Gas

Norespiteforoil 14

RisingUScrudeoilproductionandrigcounts 14

OPECextendsproductioncutstillMarch2018 14

EIAandIEAoiloutlookfor2017and2018 14

Naturalgaspricesremainedflat 15

Preciousmetals

Preciousmetals:prefergold... 15

...whilepalladiumandplatinumcouldwitnesspricecorrections 16

Copper:abumpyride 16

Aluminium:graduallygainingmomentum 16

Currencies 17

USD:USDsoftensacrosstheboard 17

Euro:EurologsbestquarteragainstUSD 17

GBP:DownsideriskstoGBPcontinuetoexist 17

Emergingmarketcurrencies

EMcurrenciesfirmup 18

MXNgainsastheBanxicoextendsitstighteningcycle 18

PoliticalrisksareweighingontheBRL 18

TheTurkishlirasurgespostreferendum 18

RUBweakensamidstrecentoilpricedeclines 18

Charts 19

Tables 23

Glossary 28

Page | 1Mashreq Private Banking

ASSETCLASSVIEWSCHART

GLOBALASSETALLOCATION

Assetclass Sub-class View* Rationale

MainAssetClasses

Equities = StretchedvaluationsinUS;Better-than-expectedearningsandimprovingeconomicprospectsinEurope

FixedIncome = SlightlyhawkishFOMC,accommodativemonetarypolicyinEuropeandselectEMs

Commodities = Cautiousonoil;neutralongoldasasafehaven

Currencies = EURtostrengthenfurther;USDtostabilise

Equities

US = Stretchedvaluation;possiblenegativeearningssurprisesfor2Q17

Europeex-UK ▲ Robust1Q17earnings;improvingeconomicoutlook

UK = Soft‘Brexit’negotiations;weakeconomicgrowth

EMex-MENA ▲ Improvingfundamentals;attractivevaluations

MENA = WeakBrentoilprice

FixedIncome

USTreasuries = Fed’shawkishstanceamidstsofteninginflation

Euro(bunds) = ECBtoremainbroadlyaccommodativenotingsubduedcoreinflation;improvingeconomicprospects

UKGilts = Increasedchancesofratehikeandreductioninstimulus

USIG# ▲ Improvedcreditmetrics;softeninginflation

USHY# = Relativelytightspreads

EuropeIG ▲Accommodativemonetarypolicy;strongcorporatefundamentals

EMs# ▲PreferselectEMs-India,Indonesia,BrazilandMexicosovereigndebtgivenaccommodativemonetarypolicies

CommoditiesOil ▼

Ineffectivesupplycuts;risingUSoilproductionandrigcounts

PreciousMetals = Prefergoldasapartofportfolioduetoitssafehaven

appeal

Currencies

USD = DoubtsoverfutureratehikesbyFOMC

EUR ▲ Improvingeconomicprospects

GBP = Weakeconomicgrowth;ongoingsoft‘Brexit’negotiation

EMs# ▲PositiveonselectiveEMcurrenciessupportedbybettereconomicprospectsandreforms

*▲-Positive,=-Neutral,▼-Cautious#IG–Investmentgrade,HY–Highyield;EMs–EmergingMarkets

AlexandreSuarezDirector–InvestmentAdvisory

HazemFouad,CFASeniorInvestmentAdvisor

KashifArbabSeniorInvestmentAdvisor

KoushikVasudevan,CFAInvestmentAdvisor

VictoriaBaroudKhalilInvestmentAdvisor

WesamAlFarrajInvestmentAdvisor

NicolasVerez,CAIAInvestmentAdvisor

NadineSoubraInvestmentAdvisor

OmerMurad,CFAInvestmentAdvisor

RanaBesadaInvestmentAdvisor

AnshulShahInvestmentAdvisor

SanjeevRavindranInvestmentAdvisor

Contact:+97143632323

OverviewIn 2Q17, several political developments and changing tone of major central banks were the keymarket-movers.Onthepoliticalfront,theelectionsinFranceandUKdominatedtheheadlineswhiletheGulfwitnessedanacutepoliticalcrisisafterseveralGCCcountriesdecidedtocut-offdiplomatictieswithQatar.On theotherhand, investors remainedwatchfulof centralbankschanging theirstance.TheECBhintedatbeginningwithgradualreductionofitsstimulusprogram,whiletheBoEraisedprospects fora ratehike.Moreover, theUSFedretained itshawkishtonewhile raising itsinterestratesby25bpsatitsJunemeetingandlaidaplantograduallyunwinditbalancesheetassets.

Againstthesebackdrops,thefinancialmarketswitnessedoscillatingrisksentiments.Thegainsoftheequitymarkets,whichtouchedrecordhighsduring2Q17intheUS,werepartlyoffsettowardstheend.Simultaneously,theupbeatglobalbondmarketwithTreasuryyieldstouchingthelowestfortheyearsawasell-offbasedontighteningmonetarypolicybymajorCentralBanks.Inthecommoditymarkets, theconcernsovertheoil supplyglutcontinuedtoprevail resulting in furtherweakninginoilprices.Meanwhile, theeuro recorded itsbestquarter innearly sevenyearson thebackofimprovingeconomicprospects.



Shifting stance of major global central banks and regional political uncertainties largely dominated the global financial market

headlinesin2Q17.IntheUS,severaldevelopmentsonthepoliticalfrontincludingthefiringofformerFederalBureauofInvestigation

(FBI) director James Comey by the US President coupled with

tensionsintheNorthKoreanPeninsularegionledtoinvestors

takingrecoursetosafehavensatthestartofthequarter.Onthe

monetarypolicyfront,theFOMCvotedtoincreasetheinterest

ratesby25bpsatthe14th/15thJunemeetingdespitesoftening

inflation amidst low unemployment levels. In addition, the

FOMClaidaplanforunwinding its$4.5trillionbalancesheet

assets.Thesedevelopmentsledtoseveralglobalequityindices

touchingrecordhighsof2017.Simultaneously,USTreasuryyieldstouchedrecordlowsof2017amidstalternateboutsof‘risk-on’

and‘risk-off’sentimentssignallingthefadinggrowthandinflationprospects,andcasteddoubtsovertheFOMC’sratehiketrajectory.

InEurope,thepoliticaldevelopments inFranceandItaly,andashift intheEuropeanCentralBank’s(ECB)monetarypolicystance

largely influenced investor sentiments during 2Q17. The quarter commenced with elevated political uncertainty due to the tight

racebetweenthePro-EuropeanUnion (EmmanuelMacron)andEU-skeptic (Marine lePen)candidatesand thepossibilityofearly

electionsinItaly.However,thepoliticalrisksrecededwithvictoryofPro-EUcandidateEmmanuelMacroninbothPresidentialandthe

Parliamentaryelections,asreflectedincontractingspreadsbetween10-yearGermanbundandFrancesovereignbond.Ontheflip

side,thechangingtoneoftheECB‘sPresidentMarioDraghihintedtowardsmakingthemonetarypolicylessaccommodativewhile

statingthattheriskstoeconomicgrowthwere“broadlybalanced”.Further,Draghi’sincreasingconfidenceintheEuropeaneconomy

ledtoasell-offintheGermanbundsinJune.Subsequently,theEURgainedstrengthagainsttheUSdollaralongsidebroadlyimproving

macroeconomicprospects.Meanwhile,intheUK,thefailureofPrimeMinisterTheresaMaytosecureamajorityintheParliamentary

electionsheldon8thJuneandthebeginningofBrexitnegotiationsledtoweakeningofassetpricesanddepreciationoftheBritish

pound.On theotherhand, theBankof England (BoE)at themonetarypolicymeeting in Junewitnessedan increasednumber of

dissenters(voted5-3),thoughthemonetarypolicywasleftunchanged.Inaddition,theBoEGovernorMarkCarneyalsosaidthatthe

removalofthemonetarypolicyislikelytobecome“necessary”,albeitgradualandlimitedinscope.

IntheMiddleEast,thepoliticaluncertaintyescalatedsince5thJuneafter

Saudi Arabia, the UAE, Egypt and Bahrain along with other countries

in the region snapped their diplomatic ties with Qatar by accusing it

of destabilising the region with its support for Islamist groups. These

countries issued a joint statement that along with suspension of

diplomatic ties, theywouldalsocutoff land,seaandair travel toand

from Qatar. Besides, oil prices fell sharply owing to global supply glut concerns.

Againstthesebackdrops,belowistheassetallocationstrategyoutlinedfor3Q17:

• Equities:Equitymarketsretreatedabitafterscalingrecordhighsin2Q17.Thetechnologysectorsell-offintheUSwasamajor

factorcontributingtothemovement.ThevaluationsintheUSappearstretched,andanegativeearningssurprisecouldtriggera

correctioninourview.InEurope,thegrowthinequitiesfollowingreducedpoliticaluncertaintywasoffsetbytheECBPresident’s

hawkishcommentary.Overall,weremainneutralonequities,whileweconfirmourpositiveoutlookforEurope(ex-UK)andEMs

(ex-MENA).

• FixedIncome:Despitesofteninginflationarypressuresandmoderatejobgains,theFOMCretaineditshawkishstance.However,

wemaintainaneutralstanceonUSratesnotingtheslowingpaceofUSeconomicrecovery.WealsoremainneutralonEuropean

ratesexpectingECBtobroadlyremainaccommodative.Oncorporatebonds,weholdafavourableviewonUSIGsecuritieson

strongcorporateearningsandflatteryieldcurve.AmongtheEMs,wepreferincreasingexposureinIndia,IndonesiaandMexico.

• Commodities:Globally,risingoversupplyconcernscontinuetodragoilpricesdown.Further,theOPEC’sproductioncutextension

tillMarch2018didnotproviderespitetooilprices.WecontinuetoremaincautiousonoilandexpectBrentoilpricestohover

between$45-50/barrel.Amongpreciousmetals,wemaintainourneutralstanceongold,andcontinuetopreferitasasafe-haven

forportfoliodiversificationpurposes.

• Currencies:TheUSdollarindexslipped6.4%in1H17,closetoanine-monthlow,asTrumpadministration’spro-growthagenda

wasunabletogarnersupport.WeareneutralontheUSDamidstrisingdoubtsover futureratehikesbytheFOMC.Theeuro

recordeditsbestquarterinnearlysevenyears,liftedbyincreasingexpectationsfromtheECBtoscalebackitsmonetarystimulus.

Weexpect theeuroappreciatedueto improvingeconomicprospects inEurope.EMcurrenciescontinuedtobroadlyfirmup.

Hence,weremainpositiveonselectiveEMcurrencies.

ASSETALLOCATIONSTRATEGY

FOMCvotedtoincreasetheinterestrates…..despitesofteninginflationamidstlowunemploymentlevels.

Oilpricesfellsharplyowingtoglobalsupplyglutconcerns.



Quarterly Report | June 2017

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Asset Allocation Strategy

•

Asset Allocation Strategic Tactical*

Source: Mashreq Bank *No change since March

BLOATED BALANCE SHEETS OF MAJOR GLOBAL CENTRAL BANKS

• The Fed began to purchase bonds in 2008 while the ECB commenced its quantitative easing program at the start of 2015. Over the period of two years, the ECB’s balance sheet has expanded from $2.4 trillion to more than $4.7 trillion, surpassing the size of the Fed’s balance sheet assets at $4.5 trillion. Moreover, while the Fed has laid a plan to begin normalising its balance sheet, the ECB continues to purchase assets though has reduced the size from €80 billion to €60 billion a month since April 2017. Evidently, the ECB’s balance sheet will continue to increase further till the end-of this year. Looking deeper into the balance sheet, we note that the ECB mainly has been purchasing bonds from the countries with weaker balance sheet mainly Italy, Spain, and Portugal along with providing support to the stronger economies like Germany and France. Hence, when the ECB reaches a state to eventually unwind the balance sheet it may prove to be critical given the disproportion in economic growth and varying inflation dynamics among the individual countries.

• On the other hand, the BOJ’s assets total assets stand at approximately $4.5 trillion. Moreover, the BoJ has signalled to continue with its asset purchase expansion at ¥80 trillion annually. However, this may prove to be difficult given the limited supply.

• People’s Bank of China’s (PBoC) balance sheet assets at $5 trillion have stabilised at present. Notably, unlike the other major central banks of the developed nations China’s balance sheet assets are composed of several complicated factors including capital inflows and trade surpluses. Hence, its holdings are affected by foreign exchange purchases, monetary policy tools, fiscal policy, seasonal factors and financial reforms.

Major Central Bank Balance Sheets (in $ trillion)

Source: Bloomberg

WHAT ARE THE IMPLICATIONS FOR INVESTORS?

The expansion in the balance sheet assets of the major central banks is unprecedented. In the event of unwinding of the assets, it would to be very critical for the banks to establish a gradual process. As a failure to do so, the markets could witness a likely repeat of the upheaval similar to that of 2013 US ‘Taper Tantrum’ which had seen a sharp spike in the yields disrupting the bond markets globally.

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Asset Allocation Strategy

•

Asset Allocation Strategic Tactical*

Source: Mashreq Bank *No change since March

BLOATED BALANCE SHEETS OF MAJOR GLOBAL CENTRAL BANKS

• The Fed began to purchase bonds in 2008 while the ECB commenced its quantitative easing program at the start of 2015. Over the period of two years, the ECB’s balance sheet has expanded from $2.4 trillion to more than $4.7 trillion, surpassing the size of the Fed’s balance sheet assets at $4.5 trillion. Moreover, while the Fed has laid a plan to begin normalising its balance sheet, the ECB continues to purchase assets though has reduced the size from €80 billion to €60 billion a month since April 2017. Evidently, the ECB’s balance sheet will continue to increase further till the end-of this year. Looking deeper into the balance sheet, we note that the ECB mainly has been purchasing bonds from the countries with weaker balance sheet mainly Italy, Spain, and Portugal along with providing support to the stronger economies like Germany and France. Hence, when the ECB reaches a state to eventually unwind the balance sheet it may prove to be critical given the disproportion in economic growth and varying inflation dynamics among the individual countries.

• On the other hand, the BOJ’s assets total assets stand at approximately $4.5 trillion. Moreover, the BoJ has signalled to continue with its asset purchase expansion at ¥80 trillion annually. However, this may prove to be difficult given the limited supply.

• People’s Bank of China’s (PBoC) balance sheet assets at $5 trillion have stabilised at present. Notably, unlike the other major central banks of the developed nations China’s balance sheet assets are composed of several complicated factors including capital inflows and trade surpluses. Hence, its holdings are affected by foreign exchange purchases, monetary policy tools, fiscal policy, seasonal factors and financial reforms.

Major Central Bank Balance Sheets (in $ trillion)

Source: Bloomberg


The expansion in the balance sheet assets of the major central banks is unprecedented. In the event of unwinding of the assets, it would to be very critical for the banks to establish a gradual process. As a failure to do so, the markets could witness a likely repeat of the upheaval similar to that of 2013 US ‘Taper Tantrum’ which had seen a sharp spike in the yields disrupting the bond markets globally.

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4.5 4.7 5.0

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US Fed BOJ ECB China

ASSETALLOCATIONSTRATEGYQuarterly Report | March 2017

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Asset Allocation

Strategic Tactical

Source: Mashreq Bank

EM EQUITIES HAVE OUTPERFORMED DM EQUITIES DURING THE LAST TWO RATE HIKE CYCLES

A closer look at the last three cycles in which the Fed effected rate action, EMs largely fared better than DMs, especially during periods of interest rate hikes.

• As depicted in the chart below, EMs outshone DMs during the rate hike cycle of June 2004 to June 2006, when the Fed raised the benchmark rate from 1.00% to 5.25%. The MSCI Emerging Market Index gained 67%, whereas the MSCI World Index witnessed an increase of 22%.

• Both DMs and EMs equities declined broadly in-line with each other during the falling interest rate cycle. During the period when the Fed commenced interest rate cut between July 2007 and December 2008 (from 5.25% to 0.25%), although the MSCI Emerging Market Index plunged 47%, it was not significantly different from the MSCI World Index, which fell 43%.

• Similarly, EMs have outperformed DMs in the recent rate hike cycle (from 0.25% to 1.00%) which commenced in December 2015 (the first hike in about ten years), as the MSCI Emerging Market Index recorded gain of 23%, while the MSCI World Index rose 13%.

First Rate Cycle* Second Rate Cycle# Third Rate Cycle†

Source: Bloomberg Rebased as of *30th June 2004, #2nd July 2007, †15th December 2015


The correlation between EM equities and the Fed funds rate hike appear to be stronger as compared to DM equities. Given that the current Fed rate hike cycle is still in its early stages (since the Fed estimates eight more rate hikes till 2019), we believe a case can be made for investment in EMs equities as a medium-term return enhancer, rather than solely as a portfolio diversifier.

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Equities

GLOBAL MARKETS RALLY CONTINUES IN 2Q17

Global markets continued their rally which it embarked upon following Trump’s victory as US President last year. In 1H17, the global growth was led by the US in anticipation of Trump’s pro-growth agenda with fiscal policy and tax reforms as well as financial sector reforms. After an eventful 1Q17, both developed and emerging market equities climbed in 2Q17. Major MSCI indices reached their 52-week highs during the quarter, while the MSCI World and the MSCI US indices recorded all-time highs in June 2017. The rally in the US equities was underpinned by better-than-expected 1Q17 corporate earnings coupled with a strong performance in the technology sector (amidst structural growth). The five biggest technology stocks dubbed as FAANG (Facebook, Amazon, Apple, Netflix and Google) rose as high as 25-30% since the start of 2017. Further, investor belief that the Fed would be cautious on the rate hike (indicating a relatively low interest rate environment) also helped indices to trade higher. Accordingly, the financial stocks gained momentum during the quarter. Equity markets in Europe (ex-UK), too, recorded decent gains benefiting from Emmanuel Macron’s victory as French President in Europe. His victory allayed fears of a populist movement threatening the unification of Euro.

Exhibit 1: Major MSCI Indices

Source: Bloomberg Rebased as of 31st March 2017

Emerging market equities continue to outperform developed markets, reflected in a 17.2% gain in the MSCI EM index in 1H17 against a 9.4% rise in the MSCI World Index. EM equities benefitted from improved global economic outlook, rising commodity prices and relatively cheap valuations. Notably, South Korean, Turkish and Indian equity indices rose on the back of improved political prospects and economic reforms. However,

receding oil prices weighed on Russia and MENA equities in 2Q17.

GLOBAL MARKET VOLATILITY NOSEDIVES

The stability in markets following impressive 1Q17 corporate earnings and favourable political factors like Emmanuel Macron’s victory in French Presidential elections resulted in a decline in US stock market volatility at its lowest level since 1993 in May. However, the market experienced some jitters when the news of US President Donald Trump asking the former FBI director James Comey to drop investigation related to former national security advisor Michael Flynn’s role in dealing with Russian officials emerged. However, it did not escalate into a serious crisis, and normalcy soon returned to the market. The VIX index averaged just 11.4 in 2Q17 as compared to 11.7 in 1Q17 and 15.8 in 2016.

The European counterpart of volatility measure, the V2X index, too, witnessed a quiet front, with a slightly higher average reading of 16.3 as compared to 15.5 in 1Q17 and 23.6 in 2016. The higher average volatility in 2Q17 was primarily due to increased volatility prior to the French Presidential elections in April.

Exhibit 2: Volatility indices of S&P 500, Stoxx 600 and EMs

Source: Bloomberg

US: TECH SECTOR SELL-OFF HOLDS BACK RALLY

Stock market indices in the US continued to climb upwards in 2Q17. The S&P 500 index reached its new all-time high on 19th June, while Nasdaq Composite index made all-time high on 9th June. The rally, which had began following the unexpected win of presidential candidate Donald Trump in November 2016, has almost been unabated since then. The stock market indices have also been unaffected by rate hikes carried out by the Fed, with the latest being done in June. Overall the S&P 500 and Nasdaq Composite indices have grown by 2.7% and 4.1%

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VIX Index V2X Index JPMVXYEM Index

Equity markets retreated a bit after scaling record highs in 2Q17. The technology sector sell-off in the US was a major factor contributing to the movement. The valuations in the US appear stretched, and a negative earnings surprise could trigger a correction in our view. In Europe, the growth in equities following reduced political uncertainty was offset by the ECB President’s hawkish commentary. Overall, we remain neutral on equities, while we confirm our positive outlook for Europe (ex-UK) and EMs (ex-MENA).

EQUITIES

Equitymarketsretreatedabitafterscalingrecordhighsin2Q17.Thetechnologysectorsell-offintheUSwasamajorfactor

contributingtothemovement.ThevaluationsintheUSappearstretched,andanegativeearningssurprisecouldtrigger

acorrectioninourview.InEurope,thegrowthinequitiesfollowingreducedpoliticaluncertaintywasoffsetbytheECB

President’shawkishcommentary.Overall,weremainneutralonequities,whileweconfirmourpositiveoutlookforEurope

(ex-UK)andEMs(ex-MENA).




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respectively in 2Q17, while they have grown by 8.2% and 14.1% in 1H17 respectively.

The cornerstone of this rally has been the surge in information technology (IT) stocks, which have grown by approximately 18% since the start of 2017. The IT sector has the highest share in the S&P 500 index (23%). The technology sector’s rally has been largely driven by big names such as Google, Facebook, Amazon, Netflix and Apple, which have gained between 25-30%. This meteoric rally seems to have receded in June as the valuations had jumped raising concerns of a bubble. The technology sector further slipped in late-June when the news of European Union regulators slapping an antitrust fine of $2.7 bn on Google emerged. Google allegedly provided illegal advantages to another Google product in its shopping comparison service. The S&P 500 Information Technology index retreated by 3.1% in June.

FINANCIALS SECTOR: SOME RELIEF AFTER A LULL

Since the start of Donald Trump’s Presidency, the financials sector stocks witnessed a rally on the back of the Republican agenda of loose financial regulations and fiscal stimulation, which would have increased long-term interest rates, thereby pushing up the profitability of banks. However, the policy setbacks experienced by the government dented investor hopes leading to a hold back of the rally in financial sector stocks. With the Fed raising the interest rates by 25 bps in June, the financial sector stocks witnessed some relief. The S&P 500 Financial index rose by 3.5% in anticipation of rate hike in the quarter. However, with banks expecting a drop in trading revenues after a quarter of relatively low volatility, we remain cautious over the performance of the financial sector over a medium-term horizon. We continue to rely on the financials sector as the lead indicator and believe that any further divergence between financials and other indices might lead to a correction in the markets as valuations appear stretched.

TAX REFORMS REMAIN UNCERTAIN; DEVELOPMENT ON HEALTHCARE REFORMS

Trump administration announced much-awaited tax reforms on lowering its corporate tax rate to 15% (from 35%) in April. There has been no progress so far; however, the Republicans vowed to complete the tax reforms in 2017. Given the fiscal deficit concerns, the enactment of the proposed tax reforms appears to be challenging. On the healthcare policy front, the Trump administration amended the draft bill, which was viewed as a positive development for the overall healthcare sector. Accordingly, the S&P 500 Healthcare index gained 3.2% in June. However, after much hope, the improved version

of the healthcare bill was delayed by the Senate in the last week of June due to lack of support, thereby continuing an uncertain outlook for one of the key sectors.

EARNINGS: 1Q17 SHINE; 2Q17 LIKELY TO DISAPPOINT

US indices had also been pushed up by strong corporate sector growth in 1Q17, with 76.0% of the companies in the S&P 500 index reporting earnings above expectations. The earnings growth of 15.3% in 1Q17 was the highest since 3Q11. According to Thomson Reuters’ report, the earnings momentum is expected to slowdown in 2Q17 at 6.6% (from 8.7% at the start of 2Q17) due to a scale-back of expected earnings from the energy sector with oil prices falling below the $50 mark. The S&P 500 index is currently trading at a 12-month forward P/E ratio of 18.4x, higher than the 10-year average of 17.1x. We believe that the current valuation of S&P 500 is stretched, and any negative earnings surprise in 2Q17 results could trigger a correction.

Exhibit 3: Top four S&P 500 subsectors price movement

Source: Bloomberg Rebased as of 30th December 2016

2Q17: A MIXED BAG FOR EUROPE

The second quarter brought good news for Europe with the result of French presidential elections, where centrist candidate Emmanuel Macron defeated far-right candidate Marine Le Pen by a better than expected margin (66.1% vs. 33.9%). Widely seen as a pro-Euro person, his election also allayed the fears of a populist movement beginning to engulf Europe. Expectedly, equity indices in Europe surged high in 2Q17. The Germany’s benchmark DAX hit an all-time high on 20th June, while the Stoxx 600 index recorded a 52-week high on 15th May. European indices had rallied in the first half of the quarter amidst reduced political concerns. It was further fortified with positive economic data where the Eurozone PMI data showed economic activity continued to expand rapidly. The unemployment levels, too, hovered at their lowest levels in almost 8 years and inflation climbed to ECB’s target levels. The Euro, too, surged to its 6-month high against US dollar in May. However, the rally receded in June as

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EQUITIES




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investors exercised caution over both global and local factors. The decline in technology stocks in the US, snap election’s outcome in the UK and decline in oil prices weighed on the broad markets. Inflation in Europe dropped more than expected in May. The ECB maintained its accommodative monetary policy at its June meet, which allowed for further extension of QE ‘if needed’. However the ECB President Mario Draghi’s statement that the factors curbing inflation would be short-lived, gave an impression that the central bank may wind down their quantitative easing program by 2017-end. The prospects of a less accommodative policy weighed on equity markets. Accordingly, the Stoxx 600 index closed the quarter on a flat note, while the DAX index reported a marginal gain of 0.4% in 2Q17.

Exhibit 4: Market volatility vis-a-vis Stoxx 600 Index in 2Q17

Source: Bloomberg

EUROPEAN BANKING FIRMS UP

Banking stocks in Europe rose in June when Italy rescued two of its failing banks (Banca Popalare di Vicenza SpA and Veneto Banca SpA). Earlier, the ECB was set to wind down these two banks after confirming they were likely to fail. Italian banks have been on ECB’s radar for the past few months, with European authorities still engaged in talks with Banca Monte Dei Paschi, worlds’ oldest and Italy’s fourth largest bank over its capitalisation plan. However, the Italian government intervened to place these banks under government support. Two Italian banks – Banca Popalare di Vicenza SpA and Veneto Banca SpA – have received state support of €17.0 bn. The good assets of these banks will be bought by the second largest Italian bank, Intesa for a token amount of €1.0 with the help of a government fund of €5.2 bn and a further €12.0 bn to acquire rest of the assets.

EUROPE: 1Q17 EARNINGS BETTER THAN EXPECTED

Till June-end, 282 out of 600 companies in the Stoxx 600 index had reported their 1Q17 earnings, according to a Thompson Reuters’ report. Of these, 62.1% of the companies had reported their earnings above expectations. Typically 49.5% of the companies reported

earnings above expectations in any quarter, indicating 1Q17 was a better than an average quarter for Europe. In terms of sectors, almost all of them delivered solid earnings barring a few like utilities, telecom and consumer non-cyclicals. With another strong earnings forecast in 2Q17, Europe is expected to perform well over the medium term. However, a correction in the US markets could pose headwinds. Germany goes into elections in September, and even though Chancellor Angela Merkel might have to fight to regain her position, there is no anti-euro movement involved.

Exhibit 5: Sectorial earnings of Stoxx 600 companies

Source: Thomson Reuters

POLITICAL TURMOIL WEIGHS ON UK MARKETS

British Prime Minister Theresa May in April, had called for a snap election in June in the hope of securing a better majority for the Conservative Party to have an upper hand in the forthcoming ‘Brexit’ negotiations. Initially, the polls suggested consistent leads for the Conservatives over the Labour Party. However, in the closing weeks, this lead began to diminish alarmingly, and in the ensuing election the Conservatives actually lost 13 seats. This result has important ramifications on the ongoing ‘Brexit’ negotiations. UK will now no longer be able to champion for the ‘hard Brexit’ stance it took prior to the election. This was already evident when UK took a softer approach in the first round of negotiations held on 19th June.

The FTSE 100 index was the top performing index in the developed markets, supported by a weaker pound in May. As the election polls pointed to an uncertain result for the ruling party, the GBP started falling resulting in the FTSE 100 index scaling new highs. The index achieved its all-time high on 2nd June. Since 70% of the companies in the FTSE 100 index report their revenue outside the UK, it results in an inverse relation with the GBP movement. Higher inflation in the UK, too, provided tailwinds to equity markets. However, the markets have gradually lost steam after the election result. Decreasing oil prices and the pound regaining some lost ground, too, hindered its run. As a result, the FTSE 100 index delivered just a 0.4% gain in 2Q17.

386.0

14.8

10.0

15.0

20.0

25.0

30.0

360.0

370.0

380.0

390.0

400.0


Stoxx 600 index V2X Index (RHS)

0%

25%

50%

75%

100%

Above Match Below

EQUITIES




7 | P a g e

SOFT ‘BREXIT’: FINANCIAL SECTOR TO BEAR BRUNT

The UK election’s verdict means that the ruling party will have to go back and bargain hard with its lawmakers over the provisions of ‘Brexit’. The financial sector is likely to be at the forefront to bear the brunt of ‘Brexit’, as firms will have to incur extra costs to shift their operations out of the UK to continue their operations in Europe. With a comparatively reduced political uncertainty, the GBP might be set to gain some lost ground, which will have a negative impact on the equities. Accordingly, we maintain our neutral stance on UK equities.

Exhibit 6: FTSE 100 and GBP movement over past year

Source: Bloomberg

INDIA, SOUTH KOREA, TURKEY SHINE AMONG EMS

Among EMs, South Korea and Turkey registered significant gains during 2Q17, while Brazil and Russia disappointed.

The South Korea’s KOSPI index spiked 10.3% in 2Q17 and also recorded an all-time high during June. The rally was attributable to buying by foreign and institutional investors on expectations of policy reforms, following the regime change and alleviating geopolitical concerns emanating from its tumultuous neighbour, North Korea. The newly-elected president, Moon Jae-in’s administration took corrective action for corruption and governance issues after May 2017. Hence, investor confidence in the economy got a boost. Meanwhile, the central bank of South Korea estimated the economy growth to witness gradual improvement amidst an upturn in manufacturing and services activities. However, we remain neutral on South Korean equities, amidst geopolitical concerns.

Turkey’s Borsa Istanbul 100 index inched up 13.3% in 2Q17 and 28.5% in 1H17, due to fading political uncertainty following the outcome of the Turkish referendum held on 16th April. The referendum was held to decide on expanding the Presidential powers, where 51% voters supported the constitutional reform that includes adoption of a Presidential system of government. Further, the tight monetary policy adopted by the central

bank of Turkey and better economic data (GDP grew by 5% in 1Q17) boosted investor confidence in the economy.

India’s benchmark, Sensex continued its rally during the quarter and touched an all-time high on 22nd June amidst a series of market-friendly steps taken by India’s security market regulator, Securities and Exchange Board of India (SEBI). The regulator relaxed entry norms, rationalised ‘fit and proper’ criteria and simplified other requirements for overseas investors.

The markets edged up during June, buoyed by the Reserve Bank of India’s (RBI) status quo on policy rates and a revised estimate of a good monsoon. The RBI left key lending rates unchanged on 7th June quoting risks to inflation due to farm loan waivers offered by a few states. However, the central bank slashed the Statutory Liquidity Ratio (SLR) or the percentage of deposits that banks have to park in government securities, by 50bps to 20%, to raise lending capacity of banks to support economic growth. In India, the corporate earnings growth is expected to be strong as Bloomberg estimates a Sensex EPS growth of 16% in FY18. At 2Q17-end, Sensex was trading at 17.86x 2017E consensus earnings, as against a 10-year average PE of 18.52x, which is reasonable in robust earnings growth and a low interest rate environment. Hence, we remain positive on Indian equity.

Persistent decline in crude oil prices weighed on Russian indices. Accordingly, Russia’s MICEX index plunged 6.4%, in 2Q17 and 15.8% in 1H17. Moreover, optimism that US President would improve battered relations with Russia faded following a scandal over Russia’s alleged involvement in manipulating the US elections. Further, Russian indices headed south after the US Senate’s indication of expanding sanctions against Kremlin. Going forward, we anticipate a weak outlook for oil which will negatively impact Russian equities over the short-term.

Exhibit 7: Global Equity Benchmarks

Source: Bloomberg Rebased as of 31st March 2017

Brazil’s benchmark, IBOV index, fell 3.5% in 2Q17. The decline during 2Q17 was attributable to emergence of corruption concerns involving President Michel Temer.

7,313

1.30

1.10

1.18

1.25

1.33

1.40

6,200

6,550

6,900

7,250

7,600

30-Jun-16 31-Aug-16 31-Oct-16 31-Dec-16 28-Feb-17 30-Apr-17 30-Jun-17

FTSE 100 Index GBP/USD (RHS)

103

97

101

111

104

95

99

104

108

112


DFM Stoxx 600 FTSE 100 MSCI China BSE Sensex

EQUITIES




8 | P a g e

We believe that reduced external vulnerabilities, rising global trade, attractive valuations and stable commodity prices should support EM currencies, which also bodes well for EM equities. Overall, we remain positive on EM equities as they seem to benefit from the improving EM growth prospects, better corporate earnings and reasonable valuations.

MENA EQUITIES: A MIXED PERFORMANCE

MENA equities continued to experience weakness during 2Q17 with majority of the equity indices barring Egypt, Saudi Arabia and Morocco concluding the quarter with negative returns. The weak performance was driven by an almost 9% decline in Brent oil prices. OPEC and non-OPEC members’ 25th May Vienna meet did not provide any respite to oil prices. Investors were expecting deeper production cuts in addition to production cut extensions; however, members kept their target production cut unchanged. Russia, Saudi Arabia and other nations involved in the deal met their targeted cuts, but an unexpected rise in the US output (rising rig counts) has countered their efforts to curb supply glut and dampened the outlook for oil prices. Meanwhile, the World Bank in its June report sharply reduced the GDP growth forecast for the MENA region to 2.1% in 2017 (vs. 3.2% in 2016) as the adverse impact of OPEC production cuts on oil exporters outweighs modestly improving conditions of oil importers.

Exhibit 8: Qatar Benchmark Equity Index

Source: Bloomberg

Qatar’s DSM index was the top loser, down 13.5% in 1H17 and by as much as 16.0% in 2Q17 itself. The drastic decline was primarily driven by severed diplomatic ties by other regional countries. On 5th June, Saudi Arabia, the

UAE, Egypt and Bahrain along with other countries in the region snapped their diplomatic ties with Qatar by accusing it of destabilising the region with its support for Islamist groups. These countries also issued a joint statement that along with suspension of diplomatic ties, they would also cut off land, sea and air travel to and from Qatar. Accordingly, S&P downgraded Qatar’s credit ratings and placed its outlook on CreditWatch with negative implications, while Fitch placed Qatar’s sovereign credit rating on Rating Watch Negative (RWN).

Muscat’s MSM30 index lost 11.6% in 2Q17 as investor sentiment was affected by continued volatility in oil prices, increase in corporate income tax (from 12% to 15%), and fees for several government services. Dubai’s DFM index fell 6.3% in 2Q17, amidst low oil prices during the quarter.

Egypt’s EGX30 index was the top performer during 2Q17. The index also reached an all-time high in June. Egypt’s benchmark index rose 11.6% in 2Q17, largely driven by the IMF’s vote of confidence on Egypt’s economic reform programme. The IMF also reached a staff-level agreement on a second payment of $1.25 bn that would be available to Egypt, following an approval by the IMF’s Executive Board.

Saudi Arabia’s Tadawul index reported subdued performance during the first two months of 2Q17; however, it clocked a gain of 8.1% in June and ended the quarter with a gain of 6.6%. The rally in June was led by the announcement of the MSCI adding Saudi Arabia in its watch list for a potential upgrade in 2018, coupled with the Kingdom of Saudi Arabia (KSA) ruler King Salman’s appointment of his son Mohammad bin Salman, as crown prince, and restoration of benefits to state employees (which were removed in September 2016). The MSCI’s decision to consider Saudi Arabia’s inclusion in the EM indices could bring significant inflows to Saudi equities and substantially improve liquidity, in our view. Overall, we believe that the low oil prices would serve as a catalyst for the performance of MENA equities. Hence, we are cautious on MENA equities.

MSCI Global Indices

Close# 1 Month ! 3 Month ! YTD ! Y/Y ! 10 Year Avg. PE* BEst PE* View

MSCI Indices

MSCI AC WI Index 465 2.18% 3.77% 10.25% 16.48% 17.19x 16.46x =

MSCI World Index 1,916 2.03% 3.65% 9.43% 15.92% 17.89x 17.13x =

MSCI Emerging Market Index 1,011 3.36% 4.73% 17.23% 21.18% 13.57x 12.47x ▲

MSCI EAFE Index^ 1,883 2.70% 5.44% 11.83% 17.08% 19.90x 15.22x =

Source: Bloomberg; # as of end-June,*BEst PE- Bloomberg estimated 12-month forward price-to-earnings ratio, ^EAFE Index represents Europe, Australia & Far East

9,030

8,500

9,125

9,750

10,375

11,000

3-Apr 19-Apr 5-May 21-May 6-Jun 22-Jun

EQUITIES




9 | P a g e

Fixed Income

FOMC: RATE HIKE AND BALANCE SHEET PLANS

As widely expected, the FOMC raised its federal fund target rate 25 bps at its two-day (June 14 and 15) meeting to 1.00-1.25%. In explaining the decision, the FOMC stated that the economic activity has been rising moderately and job gains though moderated have been solid with the falling unemployment rate (at 4.3% in May). The FOMC also put forth an addendum laying a plan to gradually reduce reinvestments from its portfolio (balance sheet unwinding) provided that the economy evolves broadly as anticipated. The plan includes allowing $6 bn in Treasuries and $4 bn in mortgage-backed securities to mature every month and eventually increase the limits until it reaches $30 bn and $20 bn a month respectively.

On the macro front, the core rate of inflation decelerated for the fourth straight month at 1.7%y/y (May), falling short of expectations. However, the Fed viewed the softening as transitory while revising its near-term inflation outlook to be at 1.7% at the end of 2017, down from its previous forecast of 1.9%. Moreover, US retail sales recorded the biggest drop since January 2016 for May falling 0.3%m/m with declining purchases of motor vehicles and discretionary spending. Evidently, the US economic recovery appears to have slowed down as job creation and retail sales have cooled and inflationary pressures have softened casting doubts over the aggressive rate hike trajectory of the FOMC. The market implied probability that the Federal Reserve will raise the federal fund rate at its September FOMC meeting stood low at 16% while that for December meeting stood at 46%, as per the Bloomberg survey as of 30th June. We expect a further slowdown in economic activity given the low rate of investment and low productivity.

GCC’S CENTRAL BANKS FOLLOW THE FED RATE HIKE

Post the US Federal Reserve rate hike, the central banks of GCC regions also revised some of their key rates by 25 bps except Kuwait. Kuwait maintained status-quo on its rates indicating limited economic growth in the country due to the prolonged low oil price environment.

Exhibit 9: GCC- Key benchmark rates

Country Particulars Previous (%) Current (%)

UAE Repo Rate 1.25 1.50

Bahrain

Overnight Deposit Rate 1.00 1.25

One-month deposit rate 1.75 2.15

One-week deposit rate 1.25 1.50

Kuwait Discount Rate 2.75 2.75

Qatar

Reserve requirement 4.50 4.50

Deposit Interest rate 1.25 1.50

Saudi Arabia Reverse Repo rate 1.00 1.25

Repo Rate 2.00 2.00

Source: GCC Central Banks

Exhibit 10: GCC 3M-Interbank Offer Rates vs. 3M-LIBOR (%)

Source: Bloomberg

Noticeably, the 3-month Qatar Interbank Offered Rate (QIBOR) widened a sharp 49 bps, finishing at 2.44% at the end of 2Q17 over 1Q17-end. Accordingly, the spread between QIBOR and London Interbank Offered Rate (LIBOR) also widened considerably to 115bps at June-end from 80bps at March-end. The increase in the risk premium was primarily since 5th June on the back of elevated political turmoil after the select GCC countries severed ties with Qatar. Meanwhile, the 3-month Emirates Interbank Offered Rate (EIBOR) and the 3-month Saudi Arabian Interbank Offered Rate (SAIBOR) finished 5 bps wider each at 2Q17-end to close at 1.51% and 1.78% respectively over 1Q17-end.

RISKS TO ECONOMIC OUTLOOK BROADLY BALANCED: ECB

The European Central Bank (ECB) at its two-day meeting ending 8th June, held its interest rate steady at 0% indicating that the “interest rates would remain at present levels for an extended period of time”. The ECB also stated it will extend its quantitative easing (QE) programme, if needed. Further, the ECB cut down its inflation forecast to 1.5% for 2017 from its March

1.78

1.51

2.44

1.30

0.5

1.0

1.5

2.0

2.5

1-Jan 15-Feb 1-Apr 16-May 30-Jun

3M- SAIBOR (%) 3M- EIBOR (%)

3M- QIBOR (%) 3M-LIBOR (%)

Despite softening inflationary pressures and moderate job gains, the FOMC retained its hawkish stance. However, we maintain a neutral stance on US rates noting the slowing pace of US economic recovery. We also remain neutral on European rates expecting ECB to broadly remain accommodative. On corporate bonds, we hold a favourable view on US IG securities on strong corporate earnings and flatter yield curve. Among the EMs, we prefer increasing exposure in India, Indonesia and Mexico.

FIXEDINCOME

Despite softening inflationary pressures and moderate job gains, the FOMC retained its hawkish stance. However, we

maintain a neutral stance on US rates noting the slowing pace of US economic recovery. We also remain neutral on

EuropeanratesexpectingECBtobroadlyremainaccommodative.Oncorporatebonds,weholdafavourableviewonUS

IGsecuritiesonstrongcorporateearningsandflatteryieldcurve.AmongtheEMs,wepreferincreasingexposureinIndia,

Indonesia and Mexico.




10 | P a g e

projection of 1.7%. On a positive note, the ECB revised its economic growth forecast upwards to 1.9% in 2017 against its March forecast of 1.8% noting that the risks to economic growth remained “broadly balanced”.

At the ECB’s annual forum in Portugal on 27th June, the ECB President Mario Draghi in his speech hinted that the central bank can accompany the economic recovery by adjusting the parameters of its policy instruments while keeping its policy stance broadly unchanged. However, we believe that the re-emerging concerns over dipping oil prices could weigh on the inflation aspect, thus convincing the ECB to maintain an accommodative policy throughout 2017. Accordingly, we maintain our neutral stance on German bund.

RISING DISSENT AT BANK OF ENGLAND (BOE)

At the 14th June Monetary Policy committee (MPC) meeting instead of one member voting for the rate rise, surprisingly the dissent increased to three. As a result, the committee voted 5-3 leaving the rates unchanged at 0.25% and banks’ quantitative easing program at £435 bn citing slow growth despite a significant rise in inflation which stood at 2.9% in April, above the 2% target owing to the currency depreciation. Further, Mark Carney, Governor of BoE at the ECB forum in Portugal on 28th June said that “some removal of monetary stimulus is likely to become necessary if trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional”. The mixed signals from the MPC led to perplexed markets and strong British pound against the US dollar, which stood above the critical $1.30 mark.

CENTRAL BANKS REMAIN CAUTIOUS AMID QUIESCENT INFLATION

On the monetary policy front, the major central banks have been treading cautiously partly because of low inflation. Although the headline rate of inflation has risen this year, driven largely by higher oil prices, core inflation (excluding the volatility food and energy) reflects a different picture. Apart from the inflation aspect, the most prominent reason behind the slow approach of the central banks has been the high risk of a sudden spike in bond yields. A speedy withdrawal of the stimulus programme could trigger a tumult in the debt market, especially in countries with large public-debt burdens. Accordingly, the major central banks such as European Central Bank (ECB), Bank of Japan (BOJ), Bank of England (BOE) and People’s Bank of China (PBoC) continue to hold a steady monetary policy stance. In contrast, the broadly improving economic fundamentals in the US have provided the FOMC adequate room for gradually raising rates and rolling-off the balance sheet assets.

US 10-YEAR TREASURY TOUCHED 2017 LOW

The US 10-year Treasury benchmark yield finished 8bps tighter at 2.30% in 2Q17. The demand for 10-year note spiked after the Federal Reserve announced its second quarter point rate hike on 14th June wherein the Fed also revised its inflation forecast downwards for 2017. Notably, the yield touched this year’s lowest at 2.12% on the same day. Accordingly, the Treasury yield curve has continued to flatten through 1H17 with 2-10 year Treasury yield spread narrowing sharply and touching this year’s lowest at 80 bps before ending at 92 bps at June-end. We keep our neutral stance unchanged on the US rates considering the softening inflationary pressures.

Exhibit 11: 2-10 year US government bond yield spread

Source: Bloomberg

US-GERMAN SPREAD SHOW SIGNS OF NARROWING

The record high spread between 10-year Treasury notes and 10-year German bunds showed signs of narrowing in 2Q17. The 10-year treasury-bund spread narrowed approximately 40 bps since the beginning of 2017 to 184bps at the end of 2Q17, its lowest level since November 2016. The spread narrowing continues with rise in the US treasury yield and the German yields rising at even faster rate suggesting underperformance of the German markets on the back of increasingly confident tone of the ECB towards paring the stimulus. Here, it may be noted that at present the German yields is more dependent upon the quantitative easing (QE) rather than Germany’s economic performance. The changing dynamics are attributable to the tapering of the stimulus program (from €80 billion to €60 billion) which commenced in April 2017.

Exhibit 12: 10-Year Benchmark Bond Yields: US & Germany

Source: Bloomberg

126

92

60

80

100

120

140


bp

s

184

160

180

200

220

240


bp

s

FIXEDINCOME




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EU BONDS GAIN AMID FADING POLITICAL RISK

The improving economic prospects and fading political risks led to increased demand for the sovereign bonds across the European bond market. In France, the victory of pro-EU Emmanuel Macron in the French Presidential election and his majority in parliamentary election raised investor demand for French debt. Consequently, the 10-year French government bond yield finished 15bps, tighter at 0.81% towards the end of 2Q17. Meanwhile, the safe-haven 10-year German bund yield widened 14bps to 0.47%. Accordingly, the German-France 10-year spread narrowed remarkably to 34 bps at the end of 2Q17 since February’s peak of 79 bps.

Exhibit 13: Italy and German:10:year government bond yield spread

Source: Bloomberg

On the other hand, the waning likelihood of early general elections in Italy led to tightening spread between Germany and Italian 10-year sovereign bond yields to 169 bps, the tightest since January 2017. The Italian 10-year sovereign bonds yield ended 16 bps tighter to 2.16% at the end of 2Q17. However, we maintain our neutral view on Eurozone bonds including Germany and France, as we broadly expect the ECB to remain accommodative noting the weak core inflation.

UK ASSETS WEAKEN AMID POLITICAL DEVELOPMENTS

The changing political state of affairs in the UK resulted in the 10-year UK Gilt yield 12bps wider for the quarter, closing at 1.26%. The assets in the UK began to weaken largely during the month of June after the PM Theresa May failed to secure majority in the parliamentary elections held on 8th June. Moreover, the hawkish statements from the central banks chiefs of ECB and BOE at the annual forum in Portugal triggered a global sell-off in the bond markets since 27th June. Hence, we change our stance from positive to neutral with a downward bias on the UK gilts considering the Bank of England governor Mark Carney’s hint over possibility of reduction in the stimulus and increased chances of rate hike.

EMERGING DEBT WITNESSED MIXED PERFORMANCE

Exhibit 14: Sovereign benchmark yields- 10year : EMs

Source: Bloomberg

Among the key emerging markets (EMs) in 2Q17, the 10-year benchmark yields recorded mixed performance. The 10-year government yields in China and Brazil widened 28 bps and 47 bps respectively to 3.57% and 10.54% in 2Q17. However, both witnessed a trend reversal in June tightening 7bps and 16bps respectively. The reversal in Chinese yields was mainly due to the easing tightening liquidity fears among investors after the People’s Bank of China (PBoC) ensured a prudent monetary policy with a stable supply of liquidity. On the other hand, the slowing economic recovery and falling inflation have raised market expectations of increasing pace of a rate cut by Banco central do Brasil (BCB), thereby pushing yields lower in June. Meanwhile, the 10-year sovereign bond yields in Russia ended 11bps wider at 4.28% at the end of 2Q17, due to sliding oil prices and US sanctions clouding the economic outlook and increased supply risks. Notably, $3 bn raised by Russia in 10-year and 30-year sovereign debt on 20th June was oversubscribed 2x. Further, supply risks loom on Russian debt as the Russian government intends to sell $4 bn in new bonds to replace its existing debt by 2017-end.

In contrast, Turkey’s 10-year government yields tightened 40bps to 10.53%, outpacing Mexico which tightened 23bps to 6.80% in 2Q17. However, the yields witnessed some widening during June after official data showed an economic expansion of 5% in 1Q17 owing to increased government spending and rising exports. The central bank in Turkey also kept its interest rate unchanged on 15th June hinting at an end of the tightening cycle. In contrast, the Mexican yields witnessed a significant tightening of 20bps since 21st June after Banco de Mexico raised its benchmark rate by 25 bps to 7.00%, as widely expected and also suggested the end of rate hikes. Further, the high yielding ‘A’ rated sovereign debt and cheaper Mexican peso among the emerging market currencies also induced demand for Mexican bonds. In Asia, Indonesia and India 10-year government yields contracted 21bps and 17bps respectively, settling at 6.83% and 6.51% on the back of improving fundamentals in India and Indonesia’s rating upgrade to investment grade by S&P. Broadly, the

213

169

145

160

175

190

205

220


bp

s

3.6

10.5

6.7

0.00

3.00

6.00

9.00

12.00


%

China Brazil India Turkey Mexico

FIXEDINCOME




12 | P a g e

emerging markets have exhibited economic resilience along with stable domestic currencies. We thus remain selective and prefer India, Indonesia, Brazil and Mexico sovereign debt.

GCC BOND YIELDS END MIXED

GCC markets witnessed mixed movement in sovereign benchmark yields during 2Q17. The 10-year sovereign yields of Saudi Arabia and Abu Dhabi tightened 24bps and 18bps, respectively settling at 3.32% and 2.90% for the quarter ending-June. Meanwhile, 10-year yields of Qatar and Oman widened 31bps each, closing at 3.58% and 4.91% respectively. Likewise, the 10-year benchmark yields in Bahrain also widened 23bps to 6.15%. Broadly, the fixed income assets of GCC regions weakened in 2Q17 mainly on account of weakening oil prices, rate hikes by central banks of some GCC regions, following the Federal Reserve rate hike on 14th June, increased supply risks (+$30bn:1H17) and credit rating downgrades of some countries. Besides, some GCC countries severing ties with Qatar on 5th June and S&P downgrading the country’s credit rating together caused a significant spike in Qatar yields. Meanwhile, the Egypt 10-year government bond yield widened 110bps finishing at 18.21% in 2Q17, due to increased supply risks and a 200bps rate hike by its central bank on 22nd May, supported by stronger economic growth and falling unemployment rate. We believe that the GCC bond markets would continue to remain weak in anticipation of low oil prices.

GCC CREDIT RISK PREMIUMS INCREASE

Credit default swaps (CDS) or cost of insuring risk widened materially in the GCC region on the back of risk-off sentiments. Five-year CDS of Qatar widened sharply by 64bps, followed by Egypt (55 bps), Bahrain (33 bps), Abu Dhabi (20bps) and Saudi Arabia (13 bps) in 2Q17. The widening CDS spread in Qatar was mainly on account of other GCC countries snapping ties with Qatar on 5th June, which also resulted in a sovereign rating downgrade. Meanwhile, a significant 200 bps rate hike by the central bank of Egypt led to rising borrowing costs and wider CDS spreads in Egypt. On the other hand, the sliding oil prices resulted in increased risk premiums in Saudi Arabia, Abu Dhabi and Bahrain.

Exhibit 15: 5-year CDS spread Movement

Source: Bloomberg

ENERGY RELATED CORPORATE BONDS UNDER PRESSURE

Globally, corporate credit spreads ended tight in 2Q17, underpinned by low market volatility and broadly improving corporate credit metrics on the back of better-than-expected 1Q17 earnings. In the US, High Yield (HY) Optionally Adjusted Spreads (OAS) compressed a sharp 18bps to +376 bps, while US Investment Grade (IG) spreads narrowed 12 bps to settle at +112 bps during the quarter. Notably, on 20th June the US HY debt spread came under immense pressure which resulted in a sharp widening due to the slide in WTI oil prices to below $43/barrel, the lowest since November 2016. However, the effect of falling oil prices was short-lived and was contained mostly in the energy sector, which widened nearly 92 bps to +540 bps in 2Q17.

Exhibit 16: USD High Yield (HY) OAS

Source: Bloomberg

Meanwhile, the USD EM index and USD UAE Liquid index ended the quarter virtually flat at +271 bps and +133 bps respectively. In the Eurozone, the risk premium demanded by investors fell sharply after the landslide victory of Pro-EU, Emmanuel Macron in the French Presidential election in April/May and securing majority in the parliamentary elections in June. Accordingly, the EUR HY OAS narrowed sharply by 42 bps to +261 bps, outpacing the US; while EUR IG contracted 4 bps to +88 bps in 2Q17. We maintain our positive stance on US IG on improved credit metrics. Also, we hold a positive stance on European IG on strong corporate fundamentals and continued monetary stimulus by the European central bank.

Exhibit 17: Global Corporate Credit –OAS, bps (3M- Change)

Source: Bloomberg

127 61

132

400

254

0

110

220

330

440


bp

s

Saudi Arabia Qatar Abu Dhabi Dubai Egypt Bahrain

540

376

300

375

450

525

600


bp

s

Energy ALL Sectors

-12

-18

-4

-42

0

-1

-55 -40 -25 -10 5

US IG Corp

US HY Corp

EUR IG Corp

EUR HY Corp

USD EM Index

USD UAE Liquid Index

FIXEDINCOME




13 | P a g e

RATINGS ACTION: MORE OF DOWNGRADES THAN UPGRADES

Fitch revised Portugal’s outlook to ‘Positive’ from ‘Stable’ on 16th June noting the government’s tighter fiscal policy while maintaining stability within the parliamentary majority. The rating agency expects Portugal’s fiscal deficit to reduce to 1.4% of GDP in 2018 from 2% in 2016 and 4.4% in 2015. Meanwhile, Greece also managed to get its outlook revised to ‘Positive’ from ‘Stable’ by Moody’s in June in addition to one notch upgrade in its long-term issuer rating to ‘Caa2’. The stabilising economy and improving fiscal prospects were the key drivers for Greece’s revised ratings.

South Africa’s credit rating was downgraded one notch by Moody’s to ‘Baa3’ and the outlook remained unchanged at

‘Negative’. South Africa’s credit rating was kept under review by the agency after the sacking of ex-Finance Minister Pravin Gordhan in April. The rating agency mentioned poor economic growth and political infighting as two major contributors for the rating downgrade.

In the Middle East, Fitch rating agency kept Qatar’s economy on ‘Negative Watch’ noting the heightened

economic and political risks stemming from an ongoing diplomatic spat between Qatar and its neighbouring countries. Fitch also changed the Kingdom of Bahrain’s outlook to ‘Negative’ from ‘Stable’ in June citing Bahrain government’s inadequate steps to tackle high deficit and elevated debt levels. Likewise, S&P also changed Bahrain’s outlook to ‘Negative’ from ‘Stable’ stating weakening external and fiscal positions. S&P also kept the Qatar’s outlook on ‘Negative Watch’ due to increased diplomatic tensions.

Exhibit 18: Credit rating action

Country Rating Agency

Date Current Rating

Previous Rating

Bahrain S&P 2-June-17 BB-/Negative BB-/Stable

Fitch 12-June-17 BB+/Negative BB+/Stable

Qatar S&P 7-June-17

AA-/Negative Watch AA/Negative

Fitch 12-June-17 AA/Negative Watch

AA/Stable

South Africa Moody’s 9-June-17 Baa3/Negative Baa2/Negative Watch

Portugal Fitch 16-June-17 BB+/Positive BB+/Stable

Greece Moody’s 23-June-17 Caa2/Positive Caa3/Stable

Source: Credit rating agency

Sovereign Yields

Sovereign Yield Price* 1M (In bps) 3M (In bps) YTD (In bps) Y/Y (In bps)

US Treasury 2.30% 100 10 -8 -14 83

UK Gilt 1.26% 129 21 12 2 39

German Bund 0.47% 98 16 14 26 60

Japan Bond 0.09% 100 4 2 4.00 30

France Bond 0.81% 102 8 -15 13 63

Source: Bloomberg, *as of end-June 2017

FIXEDINCOME




14 | P a g e

Commodities

NO RESPITE FOR OIL

In-line with our expectation, crude oil prices (Brent and WTI) continued to tumble in 2Q17 and closed at $48.2 and $46.0 per barrel with a decline of 8.5% and 9.0% respectively. Notably, oil prices erased all its early-2017 gains and receded to the lowest levels of 2017 on 21st June. Oil entered the bear market as it registered a loss of more than 20% since the January-high, needed to qualify for the bear market. Interestingly, US crude oil stockpiles continue to contract since the beginning of 2Q17 primarily due to the declining US oil imports, which served as a catalyst for rising oil prices. Further, the production outages in Libya helped oil prices rally in early-2Q17. However, oil prices started falling after the OPEC’s meeting held in Vienna on 25th May, as OPEC and non-OPEC members’ production cut extension till March 2018 were already priced-in by the markets and investors were expecting deeper production cut guidance from the meeting. The OPEC’s decision to keep its production cut target unchanged at 1.8 mn barrels per day (MMbpd) clouded the outlook of the commodity.

Exhibit 19: Brent and WTI price movement

Source: Bloomberg

RISING US CRUDE OIL PRODUCTION AND RIG COUNTS

Oil companies in the US are continuously adding more oil rigs. The Baker Hughes US crude oil rig count increased to 758 in 2Q (+96 v/s. end-March). Further, US crude oil production continued to rise in 2Q17. According to the US Energy Information Administration (EIA) report, oil production in the US rose 0.6% to 9.3 MMbpd (as on 23rd June) since 31st March. On the contrary, US oil inventories contracted since the beginning of 2Q17 to 510 mn barrels as of 23rd June (-5% since 31st March). These narrowing stockpiles were primarily driven by declining US crude oil

imports. However, US oil inventories continue to remain elevated as compared to the two-year average of 481 mn barrels. Hence, the rising production with elevated stockpiles and rig counts continue to maintain downside risks for oil prices.

Exhibit 20: US stockpiles and rig count

Source: Bloomberg

OPEC EXTENDS PRODUCTION CUTS TILL MARCH 2018

On 26th May, in Vienna meeting, OPEC and non-OPEC members extended the oil production cuts till March 2018. However, in the last two months, the OPEC production levels have increased primarily due production cut exempt countries like Libya and Nigeria. Notably, according to Bloomberg survey, OPEC production increased 260,000 barrels per day from May with almost 50% increase was from these two countries. Further, Libya’s out is currently at a four-year high (above 1 MMbpd). Hence, the OPEC’s efforts are being neutralised by these countries.

Exhibit 21: OPEC production details since January 2017

Source: Bloomberg

EIA AND IEA OIL OUTLOOK FOR 2017 AND 2018

All the major energy agencies such as the International Energy Agency (IEA) and the Energy Information

48.2

46.0

40

44

48

52

56

60


$ /

bar

rel

Brent WTI

510

758

450

550

650

750

850

475

494

513

531

550

6-Jan 3-Feb 3-Mar 31-Mar 28-Apr 26-May 23-Jun

mm

bar

rels

US Crude Oil stocks Baker Hughes US Crude Oil Rig Count (RHS)

0

2,500

5,000

7,500

10,000

mn

bar

rels

/day

Jan-17 Feb-17 Mar-17 Apr-17 May-17

Globally, rising oversupply concerns continue to drag oil prices down. Further, the OPEC’s production cut extension till March 2018 did not provide any respite to oil prices. Hence, we continue to remain cautious on oil and expect Brent oil prices to hover between $45-50/barrel. Among the precious metals, we maintain our neutral stance on gold, and continue to prefer it as a safe haven for portfolio diversification purposes.

COMMODITIES

Globally,risingoversupplyconcernscontinuetodragoilpricesdown.Further,theOPEC’sproductioncutextensiontillMarch

2018didnotprovideanyrespitetooilprices.Hence,wecontinuetoremaincautiousonoilandexpectBrentoilpricesto

hoverbetween50-45$/barrel.Amongthepreciousmetals,wemaintainourneutralstanceongold,andcontinuetopreferit

asasafehavenforportfoliodiversificationpurposes.




15 | P a g e

Administration (EIA) forecasted a gradual increase in supply and demand for 2017 and 2018. Further, the EIA

believes that the global oil supply is likely to lag behind demand in 2018. However, almost all energy agencies’ forecast indicates that the demand-supply gap of oil is likely to contract at a slower pace in 2017.

Exhibit 22: Forecasted oil supply and demand

(in MMbpd) 2017 2018 2017 2018

Supply Demand

OPEC Supply OECD Demand

IEA NA NA 46.9 46.9

EIA 39.2 39.9 47.1 47.5

Non-OPEC Supply Non-OECD Demand

IEA 58.3 59.7 50.9 52.3

EIA 59.1 60.3 51.3 52.6

Total Supply Total Demand

IEA 97.8 99.3 NA NA

EIA 98.3 100.2 98.5 100.1

Source: IEA, EIA

Thus, we remain cautious on crude oil prices. We believe that the oil production cuts by OPEC and non-OPEC members are likely to narrow global oil inventories in 2H17. However, the output cuts by the world's big exporters may not be adequate enough to alleviate lingering fears of a global oil glut due to continuous supply from the US, Nigeria and Libya. Also, according to EIA forecast, in 2017 and 2018, oil supply from the US is likely to grow by 3% and 9%, respectively from the production levels in 2016. Hence, we expect Brent oil prices to remain range-bound between $45-50/barrel.

NATURAL GAS PRICES REMAINED FLAT

The NYMEX Henry Hub Natural Gas price witnessed significant volatility during 2Q17 and closed at $2.9/MMBtu (Mn British Thermal Units). Diminishing demand in the US (down 8% v/s. March-end) in addition to rising supply (2% v/s. March-end) led the price movement during the quarter. Notably, the temperature in major parts of the US was warmer than seasonal norms in the first few weeks of the quarter, which resulted in a significant decline in natural gas demand and built up in inventories.

On the supply side, market and dry natural gas production remained stable over the same period. According to the Energy Information Administration (EIA), US natural gas inventories increased 37% during the quarter due to high net injections into working gas storage, which stood at 2,816 billion cubic feet (Bcf) as of 23rd June. This represents an increase of 765 Bcf as compared to 2,061 Bcf at the end of 1Q17. US natural gas inventories now stand at 16%, higher than its 5-year average. Moreover,

the rig count continues to increase with a 11% growth from end-1Q17 to 183.

Exhibit 23: Natural gas price movement

Source: Bloomberg

Going ahead, we believe that rising natural gas inventories and rig counts will maintain downside risks for natural gas prices. Further, natural gas demand is highly dependent on the weather conditions in the US, which is likely to remain moderate in the coming weeks. Hence, we continue to maintain our neutral view on the commodity and expect prices to remain range-bound.

PRECIOUS METALS: PREFER GOLD...

So far, 2017 has been a fruitful year for precious metals. Although gold prices reported a 0.6% decline in 2Q17, prices were up 8% in 1H17 and stood at $1,242/oz at the end of June. The heightened political risks drove the rally in gold prices. Even the metal achieved a 7-month high in the beginning of June. Notably, the recent month rally was primarily driven by key political and economic events in the US and Europe. The shift in the political risks from the Eurozone to the US, coupled with UK election and weaker dollar supported gold prices. On the demand side, physical demand of gold in the two major gold consumer countries (India and China) remained robust in recent months. We continue to believe that gold has a safe haven appeal and should be part of the diversified portfolio. On the other hand, silver remained far behind from the gold rally and concluded the quarter at $16.6 per kg with a 9% decline.

Exhibit 24: Gold prices and DXY movement

Source: Bloomberg

2.9

2.5

2.9

3.3

3.6

4.0


$ /

MM

Btu

1,241

96 94

97

99

102

104

1,100

1,163

1,225

1,288

1,350


$/o

z

Gold DXY Currency (RHS)

COMMODITIES




16 | P a g e

...WHILE PALLADIUM AND PLATINUM COULD WITNESS PRICE CORRECTIONS

Other precious metals – platinum and palladium continue to remain bullish in 2017. Both the metals reported 7% and 24% gains in 1H17. Normally, these two metals moved in tandem as they are closely correlated. However, at the moment, palladium is trading at multi-year highs while platinum remains far behind. This significant jump in palladium is primarily driven by the recovery after prices fell in December 2016. Further, the robust performance in the automotive sector globally keeps palladium demand strong. Going forward, the world’s largest platinum refiners Johnson Mathhey and Metals Focus expect platinum oversupply in the markets. However, all major institutions expect supply deficit for platinum. Further, the markets expect demand from the automotive industry to fall considerably in 2017. Hence, we remain cautious on these precious metals and expect near-term price corrections.

Exhibit 25: Platinum and palladium price movement

Source: Bloomberg

COPPER: A BUMPY RIDE

Copper prices on the London Metal Exchange concluded 2Q17 in the positive territory at $5,927 per tonne with a 2% gain, although the performance remained choppy during the quarter. In early-2Q17, the base metal erased all the gains of 1Q17. The prices remained under pressure primarily due to investors dumping riskier assets amidst political turmoil in the US. However, the worker strikes at key copper mines and supply disruptions from Indonesia in the quarter added to the recent rally in copper prices. Copper regained strength in late-June and closed the quarter at its strongest levels since March. The recovery was led by a surprise rise in China's Purchasing Managers'

Index (PMI), which rose to 51.7 in June, the 11th consecutive close above the 50-level, indicating expansion in the world's biggest manufacturing sector.

Exhibit 26: Copper and aluminium price movement

Source: Bloomberg

ALUMINIUM: GRADUALLY GAINING MOMENTUM

Aluminium prices on the London Metal Exchange showed gradual improvement in the first half of 2017. Metal prices closed at $1,914 per tonne with a 12.3% growth in 1H17. China’s decision to curtail aluminium production from November 2017 onwards till February 2018 to lower pollution levels resulted in a 14% rally in 1Q17. China’s Aluminium Corporation of China Limited iterated the same at the recent World Aluminium Conference held on 3-5th May. However, prices fell by 2.0% in 2Q17 primarily due to rising supply from China. Notably, China’s primary aluminium production increased 11% y/y to 13.72 mn tonnes during the first five months of 2017. Resultantly, the country exported 460,000 tonnes of aluminium in May (+30,000 from April 2017). The production cuts from China could be the prime driver for Aluminium prices; however we are neutral on the metal in near term as the China’s aluminium production has continued to remain elevated (Exhibit: 26).

Exhibit 27: Monthly aluminium output global v/s. China

Month Total (‘000 metrics tonnes) China (‘000 metric tonnes)

May-17 5,145 2,825

Apr-17 5,026 2,766

Mar-17 5,042 2,707

Feb-17 4,646 2,534

Jan-17 5,268 2,950

Source: International Aluminium Institute

926

844

600

750

900

1,050

1,200


$ /

oz

Platinum Palladium

5,931

1,914

5125

5375

5625

5875

6125

1,600

1,700

1,800

1,900

2,000


$/t

on

$ /

ton

Aluminum Copper

COMMODITIES




17 | P a g e

Currencies

USD SOFTENS ACROSS THE BOARD

The USD continued to underperform in 2Q17 against most G-10 peers, except the New Zealand dollar (NZD), Japanese yen (JPY) and Australian dollar (AUD). The USD gained support in mid-June after the market priced in a Fed interest rate hike at its June meeting anticipating one more rate hike down the line. However, the USD remained under pressure in 2Q17 amidst fears that investigations into President Donald Trump sharing classified intelligence with Russia could hamper the delivery of stimulus measures. The US dollar index, the gauge of dollar strength against a trade weighted basket of six major currencies, weakened 4.7% during the quarter and settled at 95.628. Notably, US dollar index has positive correlation with US-Germany government bond spread. (Exhibit: 28). We are neutral on the USD amidst rising doubts over future rate hikes by the FOMC.

Exhibit 28: US-German Government bond spread vs. DYX

Source: Bloomberg

EURO LOGS BEST QUARTER AGAINST USD

Among key G-10 currency pairs, the euro outperformed in 2Q17 and appreciated 7.0% against the USD. The gains in EUR were supported by improving economic outlook (on the back of a recovery in exports and solid domestic demand) and diminishing political risks, which have led to a large inflow of capital into the Eurozone. The euro recorded its best quarter in nearly seven years, supported by increasing expectations from the ECB to wind back its expansive quantitative easing (QE) program. The gains in the euro were further supported by several key developments, including Emmanuel Macron’s French Presidential win on 7th May, followed by majority in French Parliamentary elections held in June, intensifying the US political turmoil and German chancellor Angela

Merkel’s comment that the ‘euro is too weak’. Accordingly, the EUR closed at the quarter’s peak level of 1.1426 at the end of 2Q17. We expect euro to continue to rally due to improving economic prospects in Europe. However, we remain concerned over the possible return of political risks, on the back of upcoming elections in Germany (September) and Austria (October).

Exhibit 29: G-10 Currencies (q/q Change)

Source: Bloomberg

DOWNSIDE RISKS TO GBP CONTINUE TO EXIST

The British pound (GBP) remained volatile during 2Q17 but settled 4.5% higher against the USD at 1.3025 at the end of 2Q17, as chances of a ‘soft Brexit’ which is considered more GBP-friendly have increased. The reason ’soft Brexit’ is considered more GBP-friendly because the economic impact of it would be lower. However, in the long-term, the actual implementation of the ‘Brexit’ and the future relationship of the UK with other EU countries will determine the sterling exchange rate. The Pound fell to a seven-week low after the Conservative Party lost its parliamentary majority in the UK general elections held in early June 2017, but recovered at the end of 2Q17 against the dollar, after a top BOE official’s statement that he expects to vote for a rate hike later this year (possibly at the August meeting). We believe some downside risk for sterling remains in place, due to weak growth rates (GDP increased by just 0.2% in 1Q17). We believe that the sterling to remain sensitive to soft ‘Brexit’ news and volatility is expected to remain high.

181

95.628

92

95

98

101

104

160

185

210

235

260


Spre

ads

(bp

s)

US - German Govt. Bond Spread US Dollar Index (RHS)

-4.32% -5.71%

-2.52%

-2.83%

0.63%

0.42%

4.47%

4.82%

7.05%

-8% -4% 0% 4% 8%

USD/CHF

USD/SEK

USD/NOK

USD/CAD

USD/AUD

USD/JPY

GBP/USD

USD/NZD

EUR/USD

The US dollar index slipped 6.4% in 1H17, close to a nine-month low, as Trump administration’s pro-growth agenda was unable to garner support. We are neutral on the USD amidst rising doubts over future rate hikes by the FOMC. The euro recorded its best quarter in nearly seven years, lifted by increasing expectations from the ECB to scale back its monetary stimulus. We expect the euro appreciate due to improving economic prospects in Europe. EM currencies continued to broadly firm up. Hence, we remain positive on selective EM currencies.

CURRENCIES

TheUSdollarindexslipped%6.4in1H17,closetoanine-monthlow,asTrumpadministration’spro-growthagendawas

unabletogarnersupport.WeareneutralontheUSDamidstrisingdoubtsoverfutureratehikesbytheFOMC.Theeuro

recordeditsbestquarterinnearlysevenyears,liftedbyincreasingexpectationsfromtheECBtoscalebackitsmonetary

stimulus. We expect the euro appreciate due to improving economic prospects in Europe. EM currencies continued to

broadlyfirmup.Hence,weremainpositiveonselectiveEMcurrencies.




18 | P a g e

Exhibit 30: EMs currencies vs. USD (q/q change)

Source: Bloomberg

EM CURRENCIES FIRM UP

Major EM currencies firmed up against the USD in 2Q17. Mexican peso (MXN), Turkish lira (TRY), South African rand (ZAR) were among the top performers, appreciating 3.18%, 3.63% and 1.58% to settle at 18.1203, 3.5207 and 13.0744, respectively. Notably, the Chinese yuan (CNY) and the Indian rupee (INR) also appreciated 1.57% and 0.52% respectively to close the quarter at 6.7809 and 64.5813 respectively. However, the Brazilian real and Russian rouble depreciated by 5.00% and 4.93% respectively in 2Q17. We remain positive on INR due to better balance sheet scenario of the country and economic prospects. We expect the ZAR to remain resilient despite the prevailing domestic political risks.

MXN GAINS AS THE BANXICO EXTENDS ITS TIGHTENING CYCLE

Despite increasingly hostile rhetoric and anti-migrant policies coming out of the Trump administration, the MXN led the pack in this year’s rally in EM currencies that had fallen around the time of US Presidential elections. MXN spiked more than 12% in 1H17 vs. the USD, due to Banco de México’s (Banxico) aggressive monetary policy of raising its benchmark interest rate for the seventh consecutive time in June 2017 to 7.00% and its special $20 bn FX hedging program announced in Feb-2017 to curb excessive volatility in the currency markets. Despite Bank of Mexico's revised GDP forecast (1.5-2.5% for 2017 vs. 1.3-2.3% earlier), we change our stance on MXN from positive to neutral as policymakers hinted that the central bank is done with interest rate hikes for the near-term.

POLITICAL RISKS ARE WEIGHING ON THE BRL

The Brazilian real (BRL) was the worst performer among key EMs, plunging 5.00% to settle at 3.3082 at the end of 2Q17. BRL depreciated in May after the media reports revealed bribery claims on Brazilian President Michel Temer, putting the implementation of key economic reforms at risk. The current political turmoil might result in Temer stepping down as President, which would mean

political standstill and Presidential elections. Even if Michel Temer remains in office, his bargaining power in negotiating further reforms has probably weakened. Going forward, we think political risks will from time to time result in substantial downside risk for BRL. However, it is likely that the central bank may use various measures (including a rate cut in its policy meeting scheduled on 25th/26th July) to prevent the BRL from depreciating further. The central bank has cautiously cut its key Selic rate by 100bps to 10.25% on 31st May to ease the pressure on BRL. Notably, the Brazilian central bank lowered its annual inflation target rate for the first time in a decade to 4.25% in 2019 and 4.00% in the following year, from 4.50% at present. We believe that the credibility the central bank has built up in recent years regarding the fight against inflation (the inflation rate continued falling in May and reached a 10-year low of 3.6% against the central bank’s target of 4.5%) should prevent the BRL from depreciating sharply and sustainably.

THE TURKISH LIRA SURGES POST REFERENDUM

The Turkish lira (TRY) surged 3.63% during 2Q17 to 3.5207 against dollar following a ‘yes’ victory in the referendum held on 16th April and stabilising economy since the end of last year. The Turkish lira surged after a slim majority (51.3%) voted in favour of amendments to the constitution, which granted President Recep Tayyip Erdogan sweeping powers in the Turkish politics. TRY has hit its strongest level of the year on 27th April after the country’s central bank kept its three main rates on hold but opted to raise its liquidity lending rate by 50bps surprising markets with a dose of monetary tightening. We think that the central bank's determined actions to tighten monetary policy and the government's further structural reforms would determine the position of the Turkish lira in 2H17.

RUB WEAKENS AMIDST RECENT OIL PRICE DECLINES

The Russian rouble (RUB) fell 1.21% to close at 56.9280 during April 2017, as the Central Bank of Russia (CBR) cut its key interest rate by 50bps. However, the Russian rouble reversed the trend in May 2017 by appreciating 0.55% against the USD. The Central Bank of Russia lowered its key interest rate again in mid-June 2017 by 25bps to 9%, while flagging inflationary risks in the medium-term, which supported rouble to some extent. However, during the later part of June, oil prices declined among others on rising US production, which has considerably weakened RUB at the end of 2Q17. The Russian rouble fell 4.93% during 2Q17 to close at 58.8720 against the US dollar.

-1.58%

-1.57%

-3.18%

-3.63%

4.93%

5.00%

-0.52%

-6% -4% -2% 0% 2% 4% 6%

USD/ZAR

USD/CNY

USD/MXN

USD/TRY

USD/RUB

USD/BRL

USD/INR

CURRENCIES



CHARTS


19 | P a g e

Charts

Exhibit 31: US-GDP growth

Source: Bloomberg, GDP- Gross Domestic Product

Exhibit 33: US-Unemployment rate

Source: Bloomberg

Exhibit 35: US-Foreign exchange reserve

Source: Bloomberg

Exhibit 32: US-CPI and PPI

Source: Bloomberg, CPI- Consumer Price Index, PPI- Producer Price Index

Exhibit 34: US-Average hourly earnings

Source: Bloomberg

Exhibit 36: US-Current account balance & Fiscal deficit as % of GDP

Source: Bloomberg

2.0

2.6

2.0

0.9 0.8

1.4

3.5

2.1

1.4

0.0

0.9

1.8

2.7

3.6

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

%

4.7

4.9 4.9 4.9 4.9

4.8

4.6

4.7

4.8

4.7

4.5

4.4

4.3

4.0

4.3

4.5

4.8

5.0

May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17

%

40

40

39 39

40 40 40

41 41 40

42 41 41

38

39

40

41

42

3-Feb 3-Mar 24-Mar 7-Apr 5-May 2-Jun 16-Jun

USD

bn

1.9

2.4

0.0

0.8

1.5

2.3

3.0

May-16 Aug-16 Nov-16 Feb-17 May-17

%

CPI PPI

0.2

0.0

0.1

0.2

0.3

0.4


%

-2.4

-3.4

-4

-3.5

-3

-2.5

-2

-1.5

-1

-0.5

0

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

%

Current Account Balance % of GDP Fiscal Deficit % of GDP




20 | P a g e

Exhibit 37: US-Retail sales

Source: Bloomberg

Exhibit 38: US-Industrial output

Source: Bloomberg

0.5

0

0.3

0.6

0.9

1.2

Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17

%

1.1

-0.3

0.1

0.5

0.9

1.3


%

CHARTSQuarterly Report | June 2017

20 | P a g e


Source: Bloomberg


Source: Bloomberg

0.5

0

0.3

0.6

0.9

1.2


%

1.1

-0.3

0.1

0.5

0.9

1.3


%


20 | P a g e


Source: Bloomberg


Source: Bloomberg

0.5

0

0.3

0.6

0.9

1.2


%

1.1

-0.3

0.1

0.5

0.9

1.3


%


21 | P a g e

Charts

Exhibit 39: Eurozone-GDP growth


Exhibit 41: Eurozone-Unemployment rate

Source: Bloomberg

Exhibit 43: UK-CPI and PPI

Source: Bloomberg

Exhibit 40: Eurozone-CPI and PPI


Exhibit 42: UK-GDP growth

Source: Bloomberg

Exhibit 44: UK-Unemployment rate

Source: Bloomberg

1.8

2.0 1.9

2.0

1.7 1.6

1.8 1.8 1.9

0.0

0.5

1.0

1.5

2.0

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

%

9.3 9.2

9.5

9.8

10.1

10.4

Apr-16 Jul-16 Oct-16 Jan-17 Apr-17

%

2.9

3.6

-1.5

0.0

1.5

3.0

4.5


%

CPI PPI

1.4

4.3

-5.0

-2.5

0.0

2.5

5.0


%

CPI PPI

2.8

2.4

1.8 1.7

1.6 1.7

2.0 1.9

2.0

0.0

0.8

1.5

2.3

3.0

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

%

4.6

4.4

4.6

4.8

5.0

5.2


%



CHARTS


21 | P a g e

Charts

Exhibit 39: Eurozone-GDP growth


Exhibit 41: Eurozone-Unemployment rate

Source: Bloomberg

Exhibit 43: UK-CPI and PPI

Source: Bloomberg

Exhibit 40: Eurozone-CPI and PPI


Exhibit 42: UK-GDP growth

Source: Bloomberg

Exhibit 44: UK-Unemployment rate

Source: Bloomberg

1.8

2.0 1.9

2.0

1.7 1.6

1.8 1.8 1.9

0.0

0.5

1.0

1.5

2.0

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

%

9.3 9.2

9.5

9.8

10.1

10.4


%

2.9

3.6

-1.5

0.0

1.5

3.0

4.5


%

CPI PPI

1.4

4.3

-5.0

-2.5

0.0

2.5

5.0


%

CPI PPI

2.8

2.4

1.8 1.7

1.6 1.7

2.0 1.9

2.0

0.0

0.8

1.5

2.3

3.0

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

%

4.6

4.4

4.6

4.8

5.0

5.2


%


22 | P a g e

Exhibit 46: UK-Debt as % of GDP

Source: Bloomberg

Exhibit 45: UK-Current account balance as % of GDP

Source: Bloomberg

92.2

60

70

80

90

100

2010 2011 2012 2013 2014 2015 2016

%

-4.36

-5.4

-5.1

-4.8

-4.5

-4.2

Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

%


23 | P a g e

Charts

Exhibit 47: BRICS nations-GDP growth

Source: Bloomberg

Exhibit 49: BRICS nations-PPI

Source: Bloomberg

Exhibit 51: European equity indices

Source: Bloomberg

Exhibit 48: BRICS nations-CPI

Source: Bloomberg

Exhibit 50: BRICS key interest rates

Source: Central banks’ website

Exhibit 52: MENA equity indices

Source: Bloomberg, majority of MENA equity indices were closed after 23rd June

-0.35

0.5

6.1

6.9

1.0

-10

-5

0

5

10

Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

%

Brazil Russia India China South Africa

2.12

-0.50

2.17

5.50

4.80

-6

-2

3

8

13

May-16 Sep-16 Jan-17 May-17

%


99.86

99.53

100.09

99.96

96

99

102

105

108


UK Europe Germany France

0.31

0.40

2.18

1.50

5.40

0

2

4

6

8


%


10.25 9.75

6.25

4.85

7.00

2

5

7

10

12


%

86.91

106.06

99.59 97.46

103.09

96.21

96.61

82

89

96

103

110


Qatar Saudi Arabia Abu Dhabi Dubai Egypt Kuwait Bahrain


22 | P a g e

Exhibit 46: UK-Debt as % of GDP

Source: Bloomberg

Exhibit 45: UK-Current account balance as % of GDP

Source: Bloomberg

92.2

60

70

80

90

100

2010 2011 2012 2013 2014 2015 2016

%

-4.36

-5.4

-5.1

-4.8

-4.5

-4.2

Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

%


23 | P a g e

Charts


Source: Bloomberg


Source: Bloomberg


Source: Bloomberg


Source: Bloomberg





-0.35

0.5

6.1

6.9

1.0

-10

-5

0

5

10


%


2.12

-0.50

2.17

5.50

4.80

-6

-2

3

8

13


%


99.86

99.53

100.09

99.96

96

99

102

105

108



0.31

0.40

2.18

1.50

5.40

0

2

4

6

8


%


10.25 9.75

6.25

4.85

7.00

2

5

7

10

12


%

86.91

106.06

99.59 97.46

103.09

96.21

96.61

82

89

96

103

110




23 | P a g e

Charts


Source: Bloomberg


Source: Bloomberg


Source: Bloomberg


Source: Bloomberg





-0.35

0.5

6.1

6.9

1.0

-10

-5

0

5

10


%


2.12

-0.50

2.17

5.50

4.80

-6

-2

3

8

13


%


99.86

99.53

100.09

99.96

96

99

102

105

108



0.31

0.40

2.18

1.50

5.40

0

2

4

6

8


%


10.25 9.75

6.25

4.85

7.00

2

5

7

10

12


%

86.91

106.06

99.59 97.46

103.09

96.21

96.61

82

89

96

103

110





CHARTS


23 | P a g e

Charts


Source: Bloomberg


Source: Bloomberg


Source: Bloomberg


Source: Bloomberg





-0.35

0.5

6.1

6.9

1.0

-10

-5

0

5

10


%


2.12

-0.50

2.17

5.50

4.80

-6

-2

3

8

13


%


99.86

99.53

100.09

99.96

96

99

102

105

108



0.31

0.40

2.18

1.50

5.40

0

2

4

6

8


%


10.25 9.75

6.25

4.85

7.00

2

5

7

10

12


%

86.91

106.06

99.59 97.46

103.09

96.21

96.61

82

89

96

103

110




24 | P a g e

Exhibit 53: LATAM equity indices

Source: Bloomberg

Exhibit 54: EM equity indices

Source: Bloomberg

103

97

99

107

90

95

100

105

110


Mexico Brazil Chile Colombia

99

111

104

107

105

94

106

90

96

103

109

115


Shanghai South Korea India Vietnam Indonesia Russia Taiwan



TABLESQuarterly Report | June 2017

25 | P a g e

Key forecasts

End of June 2017

12-month forward estimates (Bloomberg)

Change

S&P 500 Index 2,423 2,630 ▲+8.54%

Stoxx Europe 600 Index 379 407 ▲+7.39%

FTSE 100 Index 7,313 7,961 ▲+8.86%

10-Year US Treasury (Yield) 2.30% 2.45% ▼+15bps

10-Year UK Gilt (Yield) 1.26% 1.28% ▼+02bps

10-Year German Bund (Yield) 0.47% 0.58% ▼+11bps

Brent ($/bbl) 48.2 51.8 ▲+7.47%

WTI ($/bbl) 46.0 48.6 ▲+5.65%

Gold ($/oz) 1,242 1,279 ▲+2.98%

Silver ($/kg) 16.6 17.5 ▲+5.42%

GBP/EUR 1.1399 1.1371 ▲-0.25%

GBP/USD 1.3025 1.3017 ▲-0.06%

EUR/USD 1.1426 1.1448 ▼+0.19%

USD/JPY 112.3900 109.5827 ▲-2.50%

Source: Bloomberg

Global Equity Indices

June-end 1 Month ! 3 Month ! YTD ! Y/Y ! 10-Year Avg. PE

Best PE

Developed Markets Indices

S&P 500 Index 2,423 1.64% 2.74% 8.24% 15.46% 17.10x 18.40x

Stoxx Europe 600 Index 379 -1.99% 0.02% 4.97% 15.00% 19.48x 15.79x

FTSE 100 Index 7,313 1.51% 0.41% 2.38% 12.43% 23.52x 14.75x

DAX Index 12,325 -0.91% 0.55% 7.35% 27.32% 18.16x 14.03x

CAC 40 Index 5,121 -2.78% 0.68% 5.31% 20.84% 17.63x 15.56x

Nikkei Index 20,033 4.36% 5.53% 4.81% 28.62% 20.77x 16.75x

ASX 200 Index 5,721 -3.42% -2.57% 0.98% 9.33% 21.31x 16.38x

Emerging Markets Indices ex MENA

Hang Seng Index 25,765 4.67% 6.20% 17.11% 23.90% 12.56x 12.25x

Shanghai Composite Index 3,192 1.20% -0.93% 2.86% 8.97% 18.50x 13.59x

Korea Stock Exchange Index 2,392 8.45% 10.35% 18.03% 21.39% 16.92x 9.55x

BSE Sensex 30,922 3.35% 3.38% 16.13% 14.53% 18.52x 17.86x

Taiwan SE Index 10,395 5.30% 5.95% 12.34% 19.94% 22.55x 13.72x

Ibovespa Brasil Index 62,900 -3.83% -3.54% 4.44% 22.07% NM* 12.14x

Micex Index 1,880 -6.80% -6.43% -15.82% -0.61% 8.02x 6.36x

JSE Africa All Share Index 51,611 -4.10% -1.61% 1.89% -1.16% 17.29x 14.96x

MENA Indices

Abu Dhabi Securities Market Index 4,425 -2.91% -3.15% -2.66% 0.19% 13.19x 12.08x

Dubai Financial Market Index 3,392 -1.41% -6.32% -3.93% 3.69% 20.24x 10.12x

Egyptian Exchange 13,396 7.74% 11.64% 8.51% 92.95% 29.28x 11.09x

Tadawul All Share Index 7,426 6.03% 6.59% 2.99% 14.23% 16.74x 13.97x

Qatar Exchange 9,030 -10.68% -16.01% -13.47% -8.58% 12.70x 13.55x

Kuwait Stock Exchange 6,763 -0.45% 0.34% 17.65% 25.83% NM* NA

Bahrain Bourse 1,310 -1.92% -2.54% 7.34% 17.16% 46.09x NA

Muscat Securities 5,188 -7.42% -11.62% -11.49% -11.44% 11.91x 10.31x

Source: Bloomberg, * NM denotes not meaningful


25 | P a g e

Key forecasts

End of June 2017

12-month forward estimates (Bloomberg)

Change

S&P 500 Index 2,423 2,630 ▲+8.54%

Stoxx Europe 600 Index 379 407 ▲+7.39%

FTSE 100 Index 7,313 7,961 ▲+8.86%

10-Year US Treasury (Yield) 2.30% 2.45% ▼+15bps

10-Year UK Gilt (Yield) 1.26% 1.28% ▼+02bps

10-Year German Bund (Yield) 0.47% 0.58% ▼+11bps

Brent ($/bbl) 48.2 51.8 ▲+7.47%

WTI ($/bbl) 46.0 48.6 ▲+5.65%

Gold ($/oz) 1,242 1,279 ▲+2.98%

Silver ($/kg) 16.6 17.5 ▲+5.42%

GBP/EUR 1.1399 1.1371 ▲-0.25%

GBP/USD 1.3025 1.3017 ▲-0.06%

EUR/USD 1.1426 1.1448 ▼+0.19%

USD/JPY 112.3900 109.5827 ▲-2.50%

Source: Bloomberg

Global Equity Indices

June-end 1 Month ! 3 Month ! YTD ! Y/Y ! 10-Year Avg. PE

Best PE

Developed Markets Indices

S&P 500 Index 2,423 1.64% 2.74% 8.24% 15.46% 17.10x 18.40x

Stoxx Europe 600 Index 379 -1.99% 0.02% 4.97% 15.00% 19.48x 15.79x

FTSE 100 Index 7,313 1.51% 0.41% 2.38% 12.43% 23.52x 14.75x

DAX Index 12,325 -0.91% 0.55% 7.35% 27.32% 18.16x 14.03x

CAC 40 Index 5,121 -2.78% 0.68% 5.31% 20.84% 17.63x 15.56x

Nikkei Index 20,033 4.36% 5.53% 4.81% 28.62% 20.77x 16.75x

ASX 200 Index 5,721 -3.42% -2.57% 0.98% 9.33% 21.31x 16.38x

Emerging Markets Indices ex MENA

Hang Seng Index 25,765 4.67% 6.20% 17.11% 23.90% 12.56x 12.25x

Shanghai Composite Index 3,192 1.20% -0.93% 2.86% 8.97% 18.50x 13.59x

Korea Stock Exchange Index 2,392 8.45% 10.35% 18.03% 21.39% 16.92x 9.55x

BSE Sensex 30,922 3.35% 3.38% 16.13% 14.53% 18.52x 17.86x

Taiwan SE Index 10,395 5.30% 5.95% 12.34% 19.94% 22.55x 13.72x

Ibovespa Brasil Index 62,900 -3.83% -3.54% 4.44% 22.07% NM* 12.14x

Micex Index 1,880 -6.80% -6.43% -15.82% -0.61% 8.02x 6.36x

JSE Africa All Share Index 51,611 -4.10% -1.61% 1.89% -1.16% 17.29x 14.96x

MENA Indices

Abu Dhabi Securities Market Index 4,425 -2.91% -3.15% -2.66% 0.19% 13.19x 12.08x

Dubai Financial Market Index 3,392 -1.41% -6.32% -3.93% 3.69% 20.24x 10.12x

Egyptian Exchange 13,396 7.74% 11.64% 8.51% 92.95% 29.28x 11.09x

Tadawul All Share Index 7,426 6.03% 6.59% 2.99% 14.23% 16.74x 13.97x

Qatar Exchange 9,030 -10.68% -16.01% -13.47% -8.58% 12.70x 13.55x

Kuwait Stock Exchange 6,763 -0.45% 0.34% 17.65% 25.83% NM* NA

Bahrain Bourse 1,310 -1.92% -2.54% 7.34% 17.16% 46.09x NA

Muscat Securities 5,188 -7.42% -11.62% -11.49% -11.44% 11.91x 10.31x

Source: Bloomberg, * NM denotes not meaningful




27 | P a g e

Tables

Corporate Credit Total Returns

Close 1 Month ! 3 Month ! YTD ! Y/Y !

US IG Corp 149 0.41% 2.63% 3.80% 2.19%

US HY Corp 178 0.07% 2.12% 5.06% 12.56%

EUR IG Corp 138 -0.58% 0.22% 0.26% 0.67%

EUR HY Corp 179 0.81% 1.62% 3.21% 8.63%

USD EM Index 164 -0.14% 1.81% 5.46% 5.95%

USD UAE Liquid Index 116 -0.15% 1.06% 2.68% 2.86%

Source: Bloomberg

Commodity Performance


Brent ($/bbl) 48 -3.69% -8.50% -12.96% -0.39%

WTI ($/bbl) 46 -4.72% -9.01% -14.30% -4.74%

Natural Gas ($/MMBtu) 3 12.06% -5.03% -20.05% 44.59%

Gold ($/oz) 1,242 -2.15% -0.61% 8.20% -6.07%

Silver ($/kg) 17 -4.01% -8.94% 4.42% -11.13%

Platinum ($/oz) 965 1.54% 1.51% 6.82% 2.00%

Palladium ($/oz) 844 3.05% 5.68% 23.97% 47.84%

Aluminum ($/ton) 1,914 -0.64% -1.98% 12.29% 16.46%

Copper ($/ton) 5,927 4.76% 1.91% 7.31% 22.46%

Source: Bloomberg

G-10 Currencies Performance


EUR/USD 1.1426 2.1% 7.0% 8.6% 2.9%

USD/CHF 0.9579 -1.7% -4.3% -6.0% -1.9%

USD/JPY 112.3900 1.4% 0.4% -3.9% 8.9%

GBP/USD 1.3025 1.3% 4.5% 5.6% -2.1%

USD/AUD 0.7689 3.0% 0.6% 6.7% 3.2%

USD/NZD 0.7333 3.4% 4.8% 5.8% 2.8%

USD/CAD 1.2964 -3.7% -2.8% -3.5% 0.3%

USD/SEK 8.4322 -3.4% -5.7% -7.4% -0.3%

USD/NOK 8.3465 -1.0% -2.5% -3.4% -0.2%

Source: Bloomberg




28 | P a g e

EM Currencies Performance


USD/CNY 6.7809 -1.09% -1.6% -2.4% 2.0%

USD/INR 64.5813 -0.13% -0.5% -4.9% -4.4%

USD/TRY 3.5207 -0.79% -3.6% -0.1% 22.3%

USD/BRL 3.3082 1.54% 5.0% 1.6% 3.0%

USD/MXN 18.1203 -3.09% -3.2% -12.6% -0.9%

USD/ZAR 13.0744 -0.44% -1.6% -4.8% -11.2%

USD/RUB 58.8720 4.07% 4.9% -4.3% -7.8%

Source: Bloomberg


30 | P a g e

Economic events*

Date Critical Events What to watch out for / Anticipated action

5-Jul-17 FOMC Minutes (June meeting) More guidance on trimming the Fed's balance sheet

4-Jul-17 RBA Cash Rate Target Status quo on the interest rates; more guidance on the recovery of Australian economy is expected

6-Jul-17 ECB accounts (June meeting) Focus will remain on the corporate bond buying program (CSPP) and QE tapering

by 07-Jul-17 Italy: Renzi seeks final approval of new electoral law in both houses

Probability of passing the law is very meagre

20-Jul-17 ECB monetary policy decision and press conference Status quo and more clarity on QE

20-Jul-17 BOJ Policy decision Likely to continue monetary stimulus; rates should remain steady

21-Jul-17 Greece Sovereign Debt to be rated by S&P -

26-Jul-17

FOMC monetary policy decision (no press conference) Status quo

by 27-Jul-17 Greece: IMF’s Lagarde hopes to complete process of bailout participation with IMF board

Probably IMF would not participate in Greece bailout after this meeting

Source: Bloomberg, *Table covers select economic events




29 | P a g e

Tables

Upcoming Indicators*

Date of Release Country/Region Indicator Period Bloomberg Survey Last

3-Jul-17 Eurozone Unemployment Rate May 9.30% 9.30%

4-Jul-17 Eurozone PPI YoY May 3.50% 4.30%

6-Jul-17 United States Initial Jobless Claims 1-Jul-17 NA 244k

6-Jul-17 United States Trade Balance May -$46.2 bn -$47.6 bn

7-Jul-17 United Kingdom Industrial Production MoM May 0.30% 0.20%

7-Jul-17 United Kingdom Trade Balance May -Â£2,500 -Â£2,050

7-Jul-17 United States Unemployment Rate June 4.30% 4.30%

7-Jul-17 United States Average Hourly Earnings MoM June 0.30% 0.20%

7-Jul-17 China Foreign Reserves June $3062.0 bn $3053.6 bn

10-Jul-17 Japan Trade Balance BoP Basis May NA Â¥553.6 bn

10-Jul-17 China CPI YoY June 1.50% 1.50%

10-Jul-17 China PPI YoY June 5.40% 5.50%

12-Jul-17 Japan PPI YoY June NA 2.10%

12-Jul-17 United Kingdom Claimant Count Rate June NA 2.30%

12-Jul-17 United Kingdom Jobless Claims Change June NA 7.3k

12-Jul-17 United Kingdom Average Weekly Earnings 3M/YoY May NA 2.10%

12-Jul-17 United Kingdom Weekly Earnings ex Bonus 3M/YoY May NA 1.70%

13-Jul-17 United States PPI Final Demand MoM June -0.10% 0.00%

13-Jul-17 China Trade Balance June $43.14 bn $40.81 bn

14-Jul-17 Japan Industrial Production YoY May F NA 6.80%

14-Jul-17 Eurozone Trade Balance SA May NA 19.6 bn

14-Jul-17 United States CPI YoY June NA 1.90%

14-Jul-17 United States Industrial Production MoM June 0.30% 0.00%

17-Jul-17 China Retail Sales YoY June NA 10.70%

17-Jul-17 China Industrial Production YoY June NA 6.50%

17-Jul-17 China GDP YoY 2Q17 NA 6.90%

18-Jul-17 United Kingdom CPI Core YoY June NA 2.60%

18-Jul-17 Eurozone CPI YoY June F NA 1.40%

28-Jul-17 Japan Jobless Rate June NA 3.10%

28-Jul-17 United States GDP Annualised QoQ 2Q17 A NA 1.40%

28-Jul-17 United States Core PCE QoQ 2Q17 A NA 2.00%

Source: Bloomberg, *Table covers select economic indicators, #F: First estimate, T: Third estimate



GLOSSARY

Best: BloombergEstimatedratio–ConsensusestimatesfromvariousanalystscontributingtoBloomberg;

Credit spread: Thedifferenceinyieldbetweentwobondsofsimilarmaturity;

DM: DevelopedMarkets–Groupofcountriesthataremostdevelopedintermsoftheireconomyandcapitalmarkets;

Duration: Ameasureofpricesensitivityrelatedtoaninterestratechange;

DXY: DollarIndex–measuresthevalueofUSDrelativetoabasketofforeigncurrencies;

EPS: Earningpershare-calculatedbydividingthecompany›snetincomewithitstotalnumberofoutstandingshares;

FOMC: FederalOpenMarketCommittee-USFed’scommitteewhichtakeskeydecisionsoninterestratesandtheUS’moneysupplygrowth;

HY: HighYield–HighreturnbondwithalowcreditratingthanIGbonds;

IG: InvestmentGrade–AnIGbondhasarelativelylowriskofdefault,solowriskwithlowreturns;

Maturity date: Thedateonwhichprincipalamountofthebondwillbepaidtotheinvestors;

PE Ratio: PricetoEarningsRatio-measureofthecompany’ssharepricewithrespecttoitsEPS;

YTM: Yieldtomaturity–Thetotalinterestrateearnedbyaninvestor,whobuysandholdsthebonduntilmaturity;

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