First Market analysis of the New Year! This is exciting time, we had only a few days of trading in the New Year, and we already have a lot to talk about!

1. JP Capital
Perspective is everything
January 6, 2016
Data announcements
Jan 6: ISM manufacturing
Jan 6: FOMC December meeting minutes
Jan 6: Euro Zone PPI
Jan 7: Euro Zone retail sales
Jan 8: U.S employment report
Eurozone PMI rose to 54.3, rising at the fastest rate in recent months. Germany, France,
Italy, Spain and Ireland led the charge, boosting confidence in the Euro project
Market roundup
Source: Bloomberg, Spot returns. All data as of last Friday’s close. Past performance is no guarantee of future returns
Equities
Total Return in USD (%)
Level WTD MTD YTD
DJIA 17,425.0 -0.7 -1.5 0.2
Nasdaq 5,007.4 -0.8 -1.9 7.0
S&P 500 2,043.9 -0.8 -1.6 1.4
MSCI World 1,662.8 -0.6 -1.8 -0.9
Fixed Income
Total Return in USD (%)
Yield WTD MTD YTD
U.S. 10- Year Treasury 2.27 -0.2 -0.3 0.9
U.S. Corporate Master 3.68 -0.2 -0.9 -0.6
ML High Yield 8.76 0.4 -2.6 -4.6
Commodities & Currencies
Total Return in USD (%)
Level WTD MTD YTD
Gold Spot 1,061 -1.4 -0.3 -10.4
WTI Crude $/Barrel 37.0 -2.8 -11.1 -30.5
Current Prior Week End Prior Month End 2014 Year End
EUR/USD 1.07 -0.92 2.81 -10.22
USD/JPY 120.2 -0.2 -2.3 0.4

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EQUITIES
2016, picture the
scene
2016 will be a year of divergence. China kicked
off the year in a highly unstable fashion,
posing the same old questions of 2015. With
the Yuan weakening further, this will add
further pressure on the ASEAN region. If 2015
was a bad dream, EM are now waking up to a
worsening reality that looks set to stay for the
medium term. We are bullish on EM over the
long term, no surprises there, but not for the
next 12 months. There is too much uncertainty
and although the old adage of ‘be greedy when
others are fearful’ is true, EM has further to go
in our view.
The U.S Federal reserve gave the markets their
rate rise and with the minutes out this week,
we should get an insight into the trajectory of
future rate rises in the famous dot plot.
Turning closer to home, the Euro area has been
quietly performing well under the radar. With
all the attention in the back half of 2015 on
China and the United States, the Eurozone has
been posting some solid figures. However,
inflation remains low giving the ECB an
argument for further stimulus, however as we
have said all along, further lowering of rates
will not solve the Eurozone puzzle (10-yr bund
at 50bps). That said the latest manufacturing
data showed solid signs of improvement, with
Germany and France at the core leading the
way. The question then becomes, at least from
an investment point of view, will the Stoxx 600
post further gains in 2016? We feel the answer
to that is a resounding yes. Valuations in the
U.S are toppy, yet with a tightening
environment pending.
Next- FX update: Draghi’s dilemma
Exhibit 1: Eurozone PMI remains robust
Source: Markit
The Eurozone has less toppy valuations,
but has an accommodative environment.
The Stoxx 600 rose roughly 10% in 2015,
albeit with some immense volatility,
particularly in August when China sent
shockwaves throughout financial markets.
One has to bear in mind that the
weakening Euro would have erased some
of those gains but performance was
reasonable nonetheless. We feel European
equities have further upside alongside
Japan and the UK to a lesser extent (purely
from a low interest view from the BoE).
Markets haven’t bolted from the gates in
the New Year after some clarity from the
Fed in Q4. So far we’ve seen the exact
opposite, with the focus immediately on to
China, irrespective of key solid corporate
fundamentals. Equities look a decent
proposition, but if one can’t stomach large
volatility, cash looks a good play,
especially if the U.S sells off more,
optionality will be premium.
Source: Markit

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FOREIGN
EXCHANGE
Nice Yaun!
Next- Commodities update: Oil heads lower
Exhibit 2: Renminbi rates diverge in 4 standard deviation move
Yuan- No you are reading it right, this is the New Year issue! Unfortunately we are taking the same
characters as last year, and we are just re-writing stories about them! So what is going with China,
well we haven’t got enough space, and you probably not enough time to read all about it, but
effectively a lot of stuff. Here am just going to concentrate on the Yuan, and on something, which is
very interesting, the onshore and offshore spread. The Yuan sank to a five-year low after China’s
central bank signalled that it is becoming more tolerant of a depreciating currency as intervention
costs rise and economic growth slows. I think we could have told them that, before they started the
intervention, we are very much to the view that the markets should be left alone and let them adjust
to the economic situations. We can see the government intervention and how it is affecting the “real”
price of the Yuan (please note when I say “real” price I am not talking about the price without
inflation). Indeed, this can be easily seen by the spread between the onshore and offshore price of the
currency! The onshore price being higher as the government has more control over the currency,
effectively the offshore investors are plummeting the price of the Yuan, they are driving it down big
time! What this is doing is that it is affecting the “correct/real” price of the Yuan, the Yuan should be
a lot (and I mean a lot) lower than it should be, the market cannot correctly adjust itself when there is
such a divergence between the two prices. The offshore Yuan dropped beyond 6.70 per dollar for the
first time since September 2010, about two months after trading was first permitted in Hong Kong,
while the onshore rate was 6.5560 as of 5:05 p.m. in Shanghai. That is just too large of a spread (table
below puts it in perspective better).
Source: Bloomberg

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COMMODITIES
Next- Bond update: What hike?
Source: Bloomberg
Oil- Just like China with the currencies, oil is just not letting go of the front-page news. So, we all
know by now supply is outrageously large in comparison with its actual demand. So, why
suddenly the price is at the lowest since 2004? The thing is we were given a bit of hope on
Monday morning. Indeed, basically, there has been a break in the friendly relationship between
Saudi Arabia and Iran, so that led to an increase in the prices, Brent went up to $39. However,
investors then decided to think a little and realised that if there is a rift between the two most
powerful countries which are part of OPEC, they will unlikely find a “terrain d’entente”
regarding the supply issue, and so production will likely continue as it is, if not increase (yes they
could actually do that). In fact, Saudi Arabia has shown no signs of being prepared to lower
output to make room for Iran, and let’s not forget that Iran plans to increase production and
exports when sanctions related to its nuclear programme are lifted. That could happen by the
end of the first quarter! This is what we are saying, oil will not increase for a while, in other
words, it probably won’t go over $40 a barrel by the end of the first quarter, and it could go
lower if the relationship between the two OPEC countries does not improve.
Without making any predictions, there are a few things to look out for in the commodities
market this year. First of all, oil, this has to be the prime commodity to lookout for, mainly
because a lot of investors will base the health of economies and production depending on oil
prices. Secondly, gold, with an appreciating dollar, gold should depreciate, however, with stock
markets becoming more and more unstable, gold will have it’s role to play, and this can lead to
another safe haven period for gold! Lastly, copper, this is regarded as the commodity that
determines the global economic health, and with China being in trouble, it is likely to stay low
for a while.
Exhibit 3: Brent hits 11 year low on supply glut
Brent slide continues

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FIXED INCOME
FX traders find fixed income dull. Jon holds
this view too. The way I normally defend
bonds as an asset class is they are longer-term
barometers of confidence. A bond in isolation is
not particularly useful, but the spreads on
certain types of bonds allow investors to gauge
confidence or fear, long before the equity
market takes a hit. The chart above shows the
spread of junk bonds (CCC rated) and slightly
better rated bonds (BB) has widened
considerably over the last 12 months (the line
rising indicates a flight to safer havens, in this
case, to BB rated debt). The HY space has
around 25% of its weight in energy and wider
commodities so it’s no surprise with the oil
price at mid 30’s a barrel and copper and iron
ore at low levels, the debt service payments for
producers are not guaranteed. My view on
fixed income is similar to clothes shopping. If I
want something that will last, I go to a slightly
more expensive place. If it costs more, it will
likely have had more research and technology
gone into it, thus the selling price is higher. You
pay for quality. The opposite end of the
spectrum is the t-shirt from Primark. I’m not
concerned about it if it gets marked on from my
dog.
Exhibit 4: High yield takes a battering return
Secular stagnation
Source: Morgan Stanley
Fixed income works much the same way.
If you want quality, you go for
government bonds that will last the test
of time. If you want something more
short term but with slightly higher return,
high yield is your market. HY is impacted
much the same way as equities, so I view
the HY market as the way I look at stocks.
Coupon payments over the long term
have outperformed dividend payments
and are guaranteed. But the question
becomes, are bonds an attractive place to
invest now?
Many do not hold my yes view. I feel
rates will stay low (U.S treasuries to sit
around 2.5% for at least 2 years). Reason
being, inflation is non existent (secular
stagnation theme) and with rates so low
in Europe and Japan, money will flow
into the U.S, capping further rises in
yields. HY I feel will take a further hit as
China looks to steamroller everything in
its path, not batting an eyelid at the
consequences on the rest of the world.
Sit sight for some low action.

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JP Capital
Perspective is everything
Jonathan Taubert
FX and Commodities
Pete McCarthy
Equities and Fixed Income
JP Capital Team
Going forward Happy New Year to our JPC readers. We appreciate your reading and continued
feedback. The market expects the Fed to raise rates twice this year, with the Fed itself forecasting
four. They stated they are looking for ‘actual expected progress on their goals’. Goal number 1:
inflation. With oil prices falling further, inflation looks to be cool for now. The New York Fed
conducts a survey asking people what they expect inflation to be in 12 months time. That chart
has been falling since September, which begs the question: are we likely to get a rate cut over a
rate rise? Seems unthinkable right? Well, no one thought rates would be at 0.5% 8 years after
Lehman went bang. No one though yields would be lower at the end of 2014. No one thought
the Chinese Yuan would have such a detrimental impact on Asia. 2016 will be the year of
surprises. We feel the central banks which are pegged in some loose or rigid way to the Euro will
unpeg or remove such floors, just as the Swiss National Bank did this time last year.
We shall close on one final point. Equity markets have been in a bull market since the crisis due
to central bank policy, not blockbuster economic growth. Valuations have therefore become
detached from fundamentals meaning the chances of a validation are fairly low. Equity market
returns have been brought forward due to QE and low rates so we feel 2016 is about paying back
some of that return. Borrowing money for consumption now means sacrificing future
consumption. Bonds should therefore benefit in addition to a risk off sentiment from geo
politics.