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Weekly Market Update | 27 October 2014
WEEKLY MARKET UPDATE
27 October 2014
Earnings Encourage Equities


Early sign of easing concerns in Europe
Citi Economic Surprise Index
After seeing global sell-offs in recent weeks, the equity markets managed to
rebound sharply last week, supported by earnings reports beating
expectations and improving sentiment in Europe.
CESIUSD Index

CESICNY Index
60
30
0
In the US, of the 191 companies in the S&P 500 that have reported 3Q14
earnings, through 23 Oct 2014, 133 have topped estimates and 34 had
missed. Financials and Materials are leading the way in terms of beating
estimates thus far.
-30
-60
-90
Jul-14

CESIEUR Index
We have argued that the recent global equity corrections should be viewed
as technical ones. The sharp rebounds in equities support our views that
the market is reacting to oversold conditions.
Finally in Europe, the ECB and EBA announced the results of their
Comprehensive Assessment (CA). The end of the CA and recent ECB
easing measures may modestly support financial conditions in coming
months, but ECB QE is still needed to boost demand in Citi’s view.
Aug-14
Sep-14
Source: Bloomberg as of 24 October 2014
Pause in bond rallies or change in
directions?
Accumulated 3-month Bond Index Returns
World Govt Bonds Index
HY Index (local ccy)
Global EMD Index
2%
0%
Performance



Equity markets rallied last week and have recovered some of the severe
loss experienced since mid September. The MSCI AC World index went up
almost 3% this week led by Japanese equities.
The Dow Jones and S&P 500 index gained 2.59% and 4.12% respectively
last week. European equity markets also finished higher with the Stoxx
Europe 600 Index up 2.66%. Finally, Japanese equities saw sharp
rebounds with the Nikkei and Topix gaining 5.22% and 5.53% respectively.
-2%
-4%
-6%
-8%
Jul-14
Aug-14
Sep-14
Source: Bloomberg as of 24 October 2014
Sharp rebounds after oversold conditions
Accumulated 3-month Equity Index Returns
EM equities underperformed DM counterparties with Brazil (Bovespa: 6.79%) and Russia (Russia: -3.38%) dragging down their regional
benchmark MSCI Latin America (-3.57%) and MSCI Emerging Europe (2.02%) respectively while MSCI Asia ex Japan held up relatively well
(+1.86%). Within Asia, all the markets finished in the positive territory
except onshore China (Shanghai Composite: -1.66%).
MSCI World
Jul-14
MSCI EM
Aug-14
MSCI Asia
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
-12%
Sep-14
Asset Allocation




Equities — Despite the recent volatility, we believe global growth
fundamentals have changed very little. With market corrections historically
occurring three times as frequently as economic recessions, the selloff likely
represents a buying opportunity.
Credit — We remain more constructive about euro-denominated High Yield
issuers vs. US, and still favour Single-B rated credits.
Rates — Divergent central banks’ policies will dominate rate markets with the
US/UK potential hikes while Eurozone and Japan remain anchored; Favour
duration exposure in Euro Govt Bonds.
Commodities — A stronger US dollar is a headwind for commodities overall,
whilst individual supply/demand fundamentals pull in different directions.
Source: Bloomberg as of 24 October 2014
Week Ahead Key Data and Event
Date
Country
Period
Survey
Prior
27-Oct
EC
M3 Money Supply YoY
Data & Event
Sep
2.2%
2.0%
Citi Fct
2.4%
28-Oct
JN
Retail Sales YoY
Sep
0.8%
1.2%
-0.6%
28-Oct
US
Durable Goods Orders
Sep
0.50%
28-Oct
US
Consumer Confidence Index
Oct
87
86
89
29-Oct
JN
Industrial Production MoM
Sep P
2.2%
-1.9%
1.9%
30-Oct
EC
Economic Confidence
Oct
99.7
99.9
99.3
30-Oct
US
Initial Jobless Claims
Oct 25
283K
283K
290K
30-Oct
US
GDP Annualized QoQ
3Q A
3.0%
4.6%
3.3%
31-Oct
EC
CPI Estimate YoY
Oct
0.40%
0.30%
0.40%
31-Oct
US
Chicago Purchasing Manager
Oct
60
61
59
31-Oct
US
Univ. of Michigan Confidence
Oct F
86.4
86.4
87.0
1-Nov
CH
Manufacturing PMI
Oct
51.1
51.1
50.7
-18.20% -1.70%
Source: Bloomberg as of 24 October 2014
Page 1
Weekly Market Update | 27 October 2014
Drivers and Risk By Market
United States



Driver: US hiring intentions, capital spending surveys, unemployment claims and
3Q14 EPS thus far, suggest that equities should be owned and bought. Barring
some exogenous development, the traditional lead indicators are supportive of both
US GDP growth and further earnings upside, sustaining stock indices, especially in
what may prove to be an extended period of low bond yields.
Risk: Greater anxiety about terrorism, Ebola and possibly the US mid-term election
outcomes could pose as risks.
Implication: Thus, while markets have recaptured a fairly good chunk of the decline
with the S&P 500 around 1,950 again, we still envision 2,000 by year-end and 2,100
by mid next year.
End-2014 Target: 2000
Mid-2015 Target: 2100
2050
2000
1950
1900
1850
1800
1750
1700
1650
Source: Bloomberg as of 24 October 2014
Europe



Driver: The year-on-year growth rate for 12m forward earnings had turned positive
for the first time since 2011. The current reporting season shows roughly 60% of
companies are beating estimates on earnings/sales, which is also encouraging.
S&P 500
1600
End-2014 Target: 370
Mid-2015 Target: 385
360
350
340
Risk: European disinflation trends are disconcerting amidst seeming disagreements
between the ECB and the Bundesbank on policy initiatives, while periphery debt
has experienced a spike in yields.
330
Implication: We see the recent market pull-back as an opportunity and in particular
view the underperformance of Cyclicals vs Defensives as opportunity to re-look at
European Financials.
290
320
310
300
DJ Stoxx TMI
Source: Bloomberg as of 24 October 2014
Japan

Driver: Citi analysts continue to favour Japanese equities on the back of 1) we
anticipate upward revisions to company guidance; 2) valuations look more
appealing; 3) we think potential additional easing measures by the BOJ could
include an increase in ETF purchases.
End-2014 Target: 1390
Mid-2015 Target: 1470
1400
1350
1300


Risk: We expect the government to go ahead with the next consumption tax hike in
autumn 2015. Tax hike could negatively impact on households’ real income,
dampening consumer spending.
1250
Implication: We still think the yen may weaken relative to the dollar medium term
due to factors like a US economic recovery, and believe sectors with high exposure
to overseas demand hold promise. With expectations for additional easing by the
BoJ mounting as well, we believe the financial sector could outperform. This would
also likely be true if PM Abe puts a priority on ending deflation and decides to
postpone the second consumption tax hike.
1050
1200
1150
1100
Japan Topix
1000
Source: Bloomberg as of 24 October 2014
Asia

Driver: As global equities sold off, Citi’s sentiment indicators for EM plunged into
despair territory for three consecutive weeks, triggering buy signals across the
board. The last time buy signals were triggered for EM was in mid-2013 when the
Fed hinted QE tapering. That buy signal itself generated average 12M returns of
15%; 6M returns of 6%.
End-2014 Target: 610
Mid-2015 Target: 680
620
600
580
560
540


Risk: The biggest risk for EM is another global recession, as this would lead to
weakening trade flows and capital outflow rather than inflows. The asset side of the
Asia CB balance sheet is showing the strongest growth rate in two years. Even in
Lat Am, there is some pick up but in EMEA, the liquidity picture is rolling over again.
Implication: Within Asia, Citi analysts prefer CA surplus/commodity consumer
countries as they are likely to be beneficiaries of weaker commodity prices and
stronger US growth.
520
500
480
MSCI Asia ex JP
460
Source: Bloomberg as of 24 October 2014
Page 2
Weekly Market Update | 27 October 2014
Currency Forecast
Currency 24-Oct-14
Weekly Market Performance
Forecasts
Last price
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
1.19
1.16
1.14
1.13
1.12
G10-US Dollar
Euro
Japanese yen
(20 – 24 October 2014)
(04/07/2014~04/11/2014)
EURUSD
1.27
USDJPY
108.2
112
114
116
117
5.5%
Japan TPX Index
4.1%
118
US S&P 500
3.1%
MSCI AC World
British Pound
GBPUSD
1.61
1.55
1.52
1.50
1.48
1.47
Swiss Franc
USDCHF
0.95
1.02
1.05
1.06
1.08
1.10
Australian Dollar
AUDUSD
0.88
0.83
0.81
0.79
0.78
0.77
New Zealand
NZDUSD
0.79
0.74
0.72
0.70
0.68
0.65
1.5%
China HSCEI
Canadian Dollar
USDCAD
1.12
1.17
1.18
1.18
1.19
1.19
1.3%
Korea KOSPI
2.7%
EM Asia
Chinese Renminbi
USDCNY
6.12
6.07
6.05
6.03
6.03
6.02
Hong Kong
USDHKD
7.76
7.75
7.75
7.75
7.75
7.75
Indonesian Rupiah
USDIDR
12069
12,057
12,170
12,170
12,130
12,090
Indian Rupee
USDINR
#N/A N/A
61.9
62.3
62.5
62.6
62.7
Korean Won
Malaysian Ringgit
USDKRW
USDMYR
1057.50
3.28
1,055
3.28
1,059
3.30
1,054
1,046
3.31
3.33
USDPHP
44.81
45.0
45.0
44.9
44.8
44.7
USDSGD
1.28
1.29
1.30
1.31
1.31
1.32
Thai Baht
USDTHB
32.41
32.8
32.8
32.8
32.9
32.9
Taiwan Dollar
USDTWD
30.40
30.2
30.1
30.0
29.9
29.8
Taiwan TAIEX
1.2%
UK FTSE 100
1.2%
HK Hang Seng
1.0%
Citi High Yield
Citi Global Emerging Mkt Sovereigns
-0.1%
Citi World Broad Inv Grade
-0.6%
Gold
-1.7%
3.34
Singapore Dollar
MSCI AsiaXJapan
1.6%
0.2%
1,038
Philippine Peso
Europe Stoxx Europe 600
1.9%
China Shanghai Composite
-2.0%
MSCI Emerging Europe
-2.1%
Oil
-3.6%
MSCI Latin America
-10%
0%
10%
Source: Bloomberg as of 24 October 2014
EM Europe
Russian Ruble
USDRUB
41.81
43.4
44.6
45.1
45.3
2.5
South African Rand
USDZAR
10.93
11.26
11.37
11.40
11.40
0.00
Market Performance (Year-To-Date)
EM Latam
Brazilian Real
USDBRL
2.47
2.60
2.64
2.67
2.70
2.73
Mexican Peso
USDMXN
13.56
13.4
13.3
13.2
13.2
13.1
(As of 24 October 2014)
9.0%
Source: Citi Research and Bloomberg as of 24 October 2014
8.8%
US S&P 500
6.2%
Citi World Broad Inv Grade
2.1%
1.4%
Forecasts
Last price
24-Oct-14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
US
0.25
0.25
0.25
0.25
0.75
1.00
1.25
Japan
0.1
0.1
0.1
0.1
0.1
0.1
0.1
Euro Area
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Citi High Yield
Gold
MSCI AsiaXJapan
0.4%
Taiwan TAIEX
0.2%
MSCI AC World
0.0%
Short Rates (End of Period)
China Shanghai Composite
6.3%
4.4%
Short Rates and 10-Year Yield Forecasts
Citi Global Emerging Mkt Sovereigns
-0.3%
HK Hang Seng
Europe Stoxx Europe 600
-3.9%
China HSCEI
-4.3%
Korea KOSPI
-4.6%
Japan TPX Index
10-Year Yield (Period Average)
-5.0%
MSCI Latin America
US
2.27
2.70
2.95
3.05
3.15
3.20
3.25
-5.3%
UK FTSE 100
Japan
0.47
0.50
0.70
0.80
0.85
0.75
0.85
Euro Area
0.89
0.75
1.00
1.25
1.50
1.50
1.75
Source: Citi Research and Bloomberg as of 24 October 2014
-17.7%
-22.3%
Oil
MSCI Emerging Europe
-30% -20% -10% 0% 10% 20%
Source: Bloomberg as of 24 October 2014
Page 3
Weekly Market Update | 27 October 2014
World Market At Glance
Historical Returns (%)
Last price
52-Week
52-Week
24-Oct-14
High
Low
1 week
1 month
1 year
Year-to-date
US / Global
MSCI World
409.23
434.24
382.57
3.08%
-3.42%
2.80%
0.17%
DJIA
16805.41
17350.64
15340.69
2.59%
-2.35%
8.36%
1.38%
S&P 500
NASDAQ
1964.58
4483.72
2019.26
4610.57
1737.92
3855.07
4.12%
5.29%
-1.69%
-1.57%
12.13%
14.12%
6.29%
7.35%
MSCI Europe
439.86
506.61
411.49
1.74%
-6.10%
-7.18%
-8.81%
Stoxx Europe 600
327.17
350.85
302.48
2.66%
-4.99%
2.12%
-0.33%
FTSE100
6388.73
6904.86
6072.68
1.24%
-4.73%
-4.83%
-5.34%
CAC40
4128.90
4598.65
3789.11
2.37%
-6.45%
-3.43%
-3.89%
DAX
8987.80
10050.98
8354.97
1.55%
-6.98%
0.08%
-5.91%
NIKKEI225
15291.64
16374.14
13885.11
5.22%
-5.42%
5.56%
-6.14%
Topix
1242.32
1346.43
1121.50
5.53%
-6.32%
3.24%
-4.60%
MSCI Emerging Market
984.38
1104.31
913.65
0.78%
-4.92%
-4.51%
-1.83%
MSCI Latin America
3042.20
3720.81
2810.92
-3.57%
-8.07%
-11.12%
-4.96%
MSCI Emerging Europe
155.56
212.29
154.35
-2.02%
-9.51%
-26.21%
-22.31%
-9.13%
Europe
Japan
Emerging Markets
MSCI EMEA
298.42
350.22
289.31
1.28%
-4.41%
-14.69%
Brazil Bovespa
51940.73
62304.88
44904.83
-6.79%
-8.59%
-5.35%
0.84%
Russia RTS
1036.68
1504.93
1016.01
-3.38%
-12.83%
-30.60%
-28.14%
1.44%
Asia
MSCI Asia ex-Japan
559.41
608.06
508.53
1.86%
-3.54%
0.91%
Australia S&P/ASX 200
5412.25
5679.50
5028.20
2.67%
0.68%
0.73%
1.12%
China HSCEI (H-shares)
10391.64
11638.27
9159.76
1.54%
-3.03%
0.67%
-3.92%
China Shanghai Composite
2302.28
2391.35
1974.38
-1.66%
-1.76%
6.37%
8.80%
Hong Kong Hang Seng
23302.20
25362.98
21137.61
1.21%
-2.59%
2.04%
-0.02%
India Sensex30
26851.05
27354.99
19963.12
2.84%
0.40%
29.56%
26.83%
Indonesia JCI
5073.07
5262.57
4109.31
0.88%
-1.95%
10.41%
18.69%
Malaysia KLCI
1818.86
1896.23
1766.22
1.71%
-1.15%
-0.00%
-2.58%
Korea KOSPI
1925.69
2093.08
1885.53
1.32%
-5.40%
-5.91%
-4.26%
Philippines PSE
7103.55
7413.62
5709.34
1.43%
-3.42%
7.89%
20.61%
Singapore STI
3222.55
3387.84
2953.01
1.73%
-2.13%
0.14%
1.74%
Taiwan TAIEX
8646.01
9593.68
8093.82
1.56%
-4.97%
2.76%
0.40%
Thailand SET
1539.91
1602.21
1205.44
0.73%
-3.27%
5.02%
18.57%
81.01
107.73
79.78
-2.10%
-12.70%
-16.58%
-17.69%
1230.90
1392.22
1182.52
-0.60%
1.14%
-8.60%
2.09%
Commodity
Oil
Gold spot
Source: Citi Research and Bloomberg as of 24 October 2014
Page 4
Weekly Market Update | 27 October 2014
Disclaimer
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