2015 Q2

Global Markets Overview

Introduction

Due to disappointing figures for the US economy and far lower growth over the first quarter than
expected, investors are anticipating the Fed raising interest rates by less. Consequently, the dollar
has stopped rising and has recently been correcting upwards. And as, at the same time,
corporate profits have been surprisingly good, considering the drastic downward adjustment of
the outlook, the S&P 500 and the Nasdaq have risen to new all-time highs. European equity prices
have been falling recently, though, as a result of such factors as changing perceptions of how
long the ECB will continue its extremely loose monetary policy, a (temporary) rise in the euro and
the mounting tensions surrounding Greece. The Asian markets are benefiting. Not only is the
postponement of an interest-rate hike by the Fed and a weaker dollar positive for Asian
companies that have borrowed a lot in dollars, but Asian equities are also benefiting from a looser
monetary policy in China.

Equities
A number of these developments are of a temporary nature, though, in our view. The weaker
figures for the US economy will make way for far stronger figures over the coming quarters in our
view (see our recent reports). Fears of overly-low inflation will then turn into fears of rising inflation.
That will rapidly increase speculation that the Fed will raise interest rates more quickly, resulting in
upward pressure on interest rates and a further rise in the dollar. That is not a positive outlook for
US equities. There has been a build-up in inventories, though. This had a positive effect on growth
in the first quarter, but the figures over the next few weeks to months could be negatively
influenced as soon as companies start reducing their inventories. In other words, the dollar could
remain under downward pressure in the coming weeks, but US equity prices could be subject to
upward pressure before the trend reverses.
The recent fall in European equity prices is, in our view, a correction to the sharp rise in recent
months. As long as the tensions surrounding Greece persist and the euro appreciates in relation to
the dollar, that correction could continue for a while. On balance, however, we expect rising
prices in the coming months, as the ECB is not planning to taper its current quantitative easing for
the time being, despite growth picking up. Historically, the combination of rallying growth and a
looser monetary policy constitute the most positive background for equity prices. Furthermore, the
tensions surrounding Greece could mount further in the coming weeks, but the scenario in which
Greece remains within the EMU (possibly after a referendum in Greece) is the most likely, in our
opinion. Should it come to a Grexit, then we envisage the ECB temporarily opening the liquidity
taps even further to prevent contagion of other EMU countries. The latter is positive for equity prices,
although they could fall fairly sharply in the direct run-up to a Grexit, especially in the weaker EMU
countries

Chart-technically, the short-term picture for the DAX 30 has deteriorated with the recent fall below
support at 11,600. From the resulting completed downsloping bearish head-and-shoulders pattern,
we can calculate a price target of a minimum of 10,800 - as long as the aforementioned 11,600
level acts as resistance in a rally - and the VDAX Volatility Index will rise further . In this scenario,
though, the long-term uptrend remains intact as long as the German index is moving above the
former breakout level at around 10,000.

We are also seeing topping-out contours in other EMU stock indices, such as the Euro Stoxx 50 Index (such as
forming lower highs on a weekly basis). As long as the Euro Stoxx 50 Index remains at least above the mid2014 highs (3,325) in the event of a further correction, the medium-term uptrend remains intact. Incidentally,
we are still seeing offensive behaviour in the relative price movements within the EMU (small caps
outperforming large caps)
In Great Britain, investors will be eagerly awaiting the results of the British elections, to see what the
consequences will be for government policy. Investors do not like uncertainty, while recent polls point to an
extremely divided result, so what kind of government can be formed is uncertain. This does not necessarily
have to be negative for the British equity market, as the same uncertainty could weaken the pound, which
is positive. Moreover, British equity prices are benefiting from the loose monetary policy worldwide and from
rallying growth in the EMU. Incidentally, we feel the upside potential for British equity prices is, nonetheless,
limited. A weaker pound and the good economic outlook will, ultimately, lead to the Bank of England being
the first major central bank to raise interest rates after the Fed, probably in the first half of next year, something
that investors will already be discounting in the coming quarters. On balance, we envisage Asian equity
prices continuing to benefit from the Bank of Japan's loose policy and the Chinese central bank's looser
policy. Other central banks in the region could also keep their monetary policy loose or loosen it further, due
to the growth slowdown in China and the deflationary effect of the fall in commodity prices. That will change
as soon as the Fed starting raising interest rates. To prevent the dollar then appreciating in relation to their
own currencies and dollar debts therefore weighing more heavily, many central banks will therefore have to
implement a (slightly) less loose monetary policy. As long as the weaker data from the US continue, though,
this is not yet an issue.

On the other hand, with the continuing enormous rises in the Chinese Shanghai Composite Index
over the past few weeks, the index has reached extremely overbought conditions. Such an
acceleration/steepening in the price development is often seen at the end of a trend. The fact
that the index has now over-anticipated is reflected by, for example, the deviation from the 200day moving average - now some 56% - which, historically, was only higher just before the peak of
the bubble. Although such powerful trends can often last longer than many think, in our view,
investors should be prepared for a highly significant price correction towards the support zone at
just over 3,000

Bonds
The outlook for bonds remains fairly positive, particularly in countries where the central bank is
buying more (government) bonds than are being issued. Other factors such as the worldwide
savings surplus, low inflation and the moderate growth outlook worldwide are also keeping
longterm interest rates under downward pressure and bond prices under upward pressure. As a
result of the extremely low yields on government bonds, more and more investors are being forced
to invest in equities or higher-yield corporate bonds, which is pushing up the prices of these assets.
There are, however, increasing signs indicating that the long-term uptrend in bond prices is
coming to an end or that, at least, a temporary rise in interest rates is imminent:

Due to years of fiscal and monetary stimuli, there is hardly any remaining reserve capacity
in the US and the UK, while lower productivity growth means the economy can not grow
as rapidly without causing inflation (in economic terms, potential growth is considerably
lower). If the economy in these countries continues to rally and commodity prices do not
fall any further, then it is only a question of time before inflation starts rising.

With such low yields on government bonds, it is almost certain that investors will suffer losses
in real terms. For people close to retirement age, too, investing in bonds is therefore no
longer attractive. The low yields will also cause major problems for many insurers and
pension funds, which increases the pressure to allow such investors to invest less in bonds.

The above factors will cause the most upward pressure on interest rates in the US and Great Britain,
in our view, so investing in bonds that benefit from rising inflation (TIPS) is therefore more attractive
than investing in 'ordinary' government bonds. In the EMU and Japan, we foresee the effect of
quantitative easing dominating, for the time being, keeping interest rates under downward
pressure in those countries, on balance. In other words, government bonds in the US and Great
Britain are the most susceptible to a fall. On balance, Japanese and European government bonds
will rise further, in our opinion, although a further correction first would not be surprising, due to the
sharp fall over the past few months. Chart-technically, the trend in yields on 10-year German Bunds
continues pointing sharply downwards, as long as the next resistance level at around 0.55% is not
exceeded.
Despite the positive return on US high-yield bonds, this asset class remains unattractive. The narrow
credit spread not only offers too little protection against the risk of more defaults, but their liquidity
has also decreased considerably, due to stricter regulations. Investors are not being compensated
for the high rise in liquidity risks, either. Although we aim to continue underweighting corporate
bonds, we are slightly more positive on European corporate bonds, due to the ECB's continuing
loose monetary policy and the rallying economy.
Chart-technically, the narrowing of the US high-yield spread since early 2015 can still be
interpreted as a corrective movement within a medium-term uptrend (this will change if there is a
fall below 3.50%).

Gold & Commodities

Gold and commodities could both benefit from the looser monetary policy worldwide. For
commodities, in particular, it is positive that the Chinese central bank will now be stimulating the
economy more and the Fed will be tightening monetary policy more slowly, as a result of the
weaker data on the US economy. Oil prices also rose above a major resistance level in April (see
our recent Market to Watch report), so from a technical point of view we can expect more upside
potential for oil prices. An increase in oil consumption in the US, in particular, and a probable sharp
decline in shale oil production in the US are fundamental reasons why oil prices could rise further.