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FOR INSTITUTIONAL/WHOLESALE OR PROFESSIONAL CLIENT USE ONLY | NOT FOR RETAIL DISTRIBUTION
GIM Solutions-GMAG –
Weekly Strategy Report
6th April 2015

First quarter of 2015 in review
-
Economic and policy
divergence has boosted USD
and the geographic dispersion
of equity performance
-
Oil prices due to stay low
-
Emerging markets remain on
the sidelines
This document is produced by the Global
Strategy Team within GIM Solutions-GMAG.
For further information please contact:
Editor: Patrik Schöwitz
 [email protected]
Michael Albrecht
John Bilton
Michael Hood
Beth Li
Jonathan Lowe
Benjamin Mandel
David Shairp
Chart of the Week
Our COTW shows consensus US GDP
growth forecasts for the quarter and
year as they evolved over the course of
the first quarter. While the trajectory of
downgrades for the first quarter of 2015
looks similar to that of the first quarter of
2014, the level remains higher,
indicating a more sanguine outlook this
time around. In both cases, there is little
conviction that a weak first quarter will
torpedo annual growth. We are inclined
to agree that, despite the negative tenor
of recent data, the US economy is
poised for a year of above-trend growth.
Comparing the first quarter of 2015 with that of 2014 is tempting but misleading. In
both cases, the prospect of US rate hikes took root, high hopes for US growth were
dashed, the S&P moved sideways, the euro area exceeded low expectations and
emerging markets were sluggish. However, underlying those similarities are some
stark differences. The Federal Open Market Committee (FOMC) has ostensibly
committed to raising rates in or around September, quantitative easing (QE) efforts
in Europe and Japan are in full throttle, the US labour market has added 1.3 million
jobs since November, the US dollar has surged, and a supply glut has cut oil prices
in half. These differences confirm our view of developed market recoveries gaining
traction, with the US at the vanguard, and our generally positive view of risk assets.
G4 monetary policy: the other shoe drops. Two major innovations in the first
quarter have bolstered our conviction that monetary policy will continue to diverge
across developed markets. First, the European Central Bank (ECB) entered the
realm of QE with gusto. Purchasing about 60% of gross issuance of eurozone
sovereign debt has had a profound effect on markets, pushing down sovereign
yields—including bringing the German 10-year bond yield within spitting distance of
zero—and compressing euro area credit spreads, catapulting equities, and
tamping down the long end of other G4 yield curves. Meanwhile, on the other side
of the pond, the Federal Reserve (the Fed) has moved diligently, if glacially,
towards lifting the fed funds rate off of zero. While futures markets remain sceptical
on both the timing and pace of US policy normalisation relative to the FOMC’s
communication, we expect a September rate hike to put a bookend on steady
progress in the US economic recovery.
All in all, the combination of two behemoths moving in opposite directions has
made among the biggest splashes in financial markets of all the QE experiments
thus far. The continued efficacy (read: credibility) of the ECB project and the
political will to mobilise US policy rates should both continue to support duration
and cause the US yield curve to flatten in the second quarter.
E.T. on FX. An alien arriving on planet earth whose only communication with the
world was reading FOMC and ECB governing council communiqués might have
surmised that the US dollar would strengthen relative to the euro in the first
quarter. It would be correct. So much was obvious to the Swiss National Bank
when it dropped its Swiss franc per euro floor in January. Perhaps less obvious to
the observer would be the fact that monetary policy would be such a dominant
driver of global currency changes over that period. The broad (trade-weighted)
dollar appreciated 5% over the first quarter compared to an 8% depreciation in the
euro. Currencies that saw more muted developments in policy were flatter. The
Japanese yen was up by 3%, slightly offsetting the sharp decline in the latter half of
Déjà vu? Not quite.
Consensus forecasts of U.S. GDP growth (percent)
3.5
2015 annual
3.0
2014 annual
2.5
Q1 2015
2.0
Q1 2014
1.5
1-Jan
31-Mar
Sources: Bloomberg, daily data, as at 2 April 2015
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FOR INSTITUTIONAL/WHOLESALE OR PROFESSIONAL CLIENT USE ONLY | NOT FOR RETAIL DISTRIBUTION
GIM Solutions-GMAG
Weekly Strategy Report
Miscellaneous Musings



Across our opportunity set, risk
assets continued to perform well in
the first quarter, though geographic
contributions shifted.
Moderate global growth and active
central bank policy should continue
to foster an environment that is
friendly for equities in the current
quarter.
Moreover, in spite of the evolving
stance of U.S. monetary policy, we
continue to expect support for
duration and flatter yield curves.
F irs t
F o u rt h
T o ta l re tu rn s
q u a rt e r
q u a rt e r
(U S D u n l e ss n o te d )
of 2015 of 2014
G lo b a l E q u it ie s
2.4%
G lo b a l IG C re d it
2.1%
1.6%
-8 . 2 %
-2 7 . 7 %
G S C I C o m m o d it ie s
0.5%
U . S . E q u it y (S & P )
1.0%
4.9%
U K E q u it y (F TS E )
-0 . 7 %
-4 . 2 %
E u ro p e e x U K E q u it y
5.6%
-4 . 2 %
Ja p a n E q u it y (To p ix )
10.0%
6.3%
P a c ific e x -Ja p a n E q u it y
3.0%
-1 . 5 %
E M E q u it y (M S C I)
2.2%
-4 . 4 %
U . S . 5 -y r
1.7%
1.1%
U . S . 3 0 -y r
5.1%
10.1%
G e rm a n B u n d s (E U R )
2.6%
3.0%
E u ro p e rip h e ry b o n d s (E U R )
5.1%
2.7%
U K G ilt s (G B P )
1.5%
5.4%
U . S . IG c re d it
2.2%
1.8%
U . S . h ig h y ie ld
2.5%
-1 . 0 %
E M Debt
2.1%
-1 . 6 %
U S D t ra d e w e ig h t e d
5.1%
5.3%
E U R t ra d e w e ig h t e d
-8 . 3 %
0.2%
G B P t ra d e w e ig h t e d
2.2%
0.0%
JP Y t ra d e w e ig h t e d
3.1%
-6 . 0 %
2014 when the Bank of Japan (BoJ) extended its QE programme. The pound
ticked up by 2%, with expectations gradually coalescing around an early 2016 rate
hike. What pearls of wisdom would our alien offer for the coming quarter? It would
caution that the Fed’s increasing data dependence introduces greater volatility at
the short end of the yield curve and, as a result, into the value of the US dollar. But,
ultimately, the view that US policy rates will outpace the anaemic fed funds futures
curve implies continued support for the US dollar throughout 2015.
FX on growth and earnings. US economic data largely disappointed in the first
quarter as weather, unusually high personal savings rates and some payback for
strength in late 2014 conspired against growth. Meanwhile, the cyclical recovery in
continental Europe and the perception that political contagion from Greece will not
be catastrophic have produced equally sizeable upside surprises. Innovations in
FX, in turn, play an important incremental role in this story, notably in Japan where
the yen’s depreciation has bolstered the cyclical upswing in exports and corporate
profits. In the US, where expected 2015 S&P earnings revised down considerably
since the beginning of the year, US dollar strength accounts for roughly a third of
the decline. The geographic distribution of equity performance in the first quarter
follows this script closely. More or less flat S&P performance contrasts sharply with
stellar performance of Europe (ex UK) and Japanese equities.
Crude oil finds a floor, but may test it again midyear. After declining by over
40% in the fourth quarter of 2014, crude oil prices bottomed out and have been
cycling around USD 50 per barrel. While the stability was welcomed by high yield
credit markets, where oil companies constitute a large share of issuance and the
spread relative to investment grade credits narrowed, it may have sounded a note
of caution for US. consumers that savings at the pump may in fact be more
temporary than they thought. Going into mid year, several factors suggest that oil
prices will remain subdued. First is the surprising fact that the halving of US shale
oil rigs will merely cause output to level off. In other words, the oversupply coming
from US production will stabilise, but not decline. Second, as US crude inventories
approach capacity and exports struggle to keep up, prices will likely bear the brunt
of the adjustment. If so, it will revive familiar concerns about the viability of
marginal US energy producers and related equities and high yield credits. With any
luck, though, it persuades US consumers to loosen their purse strings.
Emerging markets still on the sidelines. Subdued commodity prices entrench
one of many challenges faced by emerging market economies. Monetary easing
gathered pace in the first quarter as countries continued to grapple with slower
growth and capital outflows. China is front and centre in this narrative, having
conspicuously cut its deposit rate in response to GDP growth tracking well below
the official 7% target. And the fact that the renminbi is tethered to a rocket means
that exports will not help meaningfully. All told, nascent monetary easing in
emerging markets is still outweighed by deeper cyclical and structural challenges,
supporting our underweight exposure to emerging market equities and cautious
approach to emerging market debt.
Benjamin Mandel
All data sourced from JPMAM, Bloomberg, and Datastream, unless stated otherwise.
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time of going to print and are subject to change. Reliance upon information in this material is at the sole discretion of the recipient. Any
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