Athena Wealth Management

September 2016

Investment Research Report

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Fig. 1 Equity Markets Comparisons

Summary

As the market expected, The Fed hold the rate unchanged

and hinted that the possibility for the rate hike is still existed

in this year. As the pace of rate hike become clearer, the

market focus will put on the US president election. The

equity markets fluctuated in September. The emerging

market was outperformed their developed peers. The MSCI

World rise 0.36% and MSCI emerging market index increased

1.09%. The best performed market should be Nadsaq and the

worst one was Thailand. OPEC is finally agreeing to cut oil

production. Under the agreement, OPEC oil production is

expected to be reduced to a range of 32.5 to 33 million

barrels of oil per day from 33.4 million. The oil price

rebound. As the US dollar keeps strong, the gold price

moderated below 1300 US dollar.

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Fig. 2 Hillary(Blue) and Trump(Red) Election Polls

We did believe the market is going to reflect to rate hike in the end of this year. The US dollar firmed at

the level of 95. The emerging market, expect the resource dominated countries, should be

underperformed among its developed peers. As the OPEC decided to cut the production, the oil price

should be supported at the level 45. The resource country likes Brazil and Russia should be benefited

from this. In the US president election, “Trump Risk” is still existed as the election poll is so closed

between two candidates. Meanwhile, the ECB and BOJ hinted that they will not extend, even minimize

the size of quantitative easing. We believe the global equity market could be pressure in the foreseeable

future. For the bond market, we hold neutral to negative view as the Fed, ECB and BOJ would pull back

their monetary policy.

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September interest rate meeting of the

BOJ made the market little bit upset with

holding off on deepening negative interest

rates or expanding asset purchases.

However, it made some modification of

existing easing planning through

introducing “QQE with yield curve

control” for “as long as it is necessary” to

achieve the 2% inflation target and to

maintain it in a stable manner.

The BOJ tried to target for 10-year bond

yields “will remain more or less at the

current level”, which is around 0%. The

use of such targeting is to change the

whole yield curve to be more steepening.

In historical concept, the flatten curve or

even reversed one means the local

economy is entering into recession stage.

Fig. 1 Japan’s CPI has been losing momentum

Fig. 2 The BOJ trying to reshape the yield curve

This Month’s Hot Topic:

The BOJ’s New QQE

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Fig. 3 Japan yield curve changing

Fig. 4 Abnormal of yen on 21st of September

Indeed, Japan's yield curve flattened

markedly after Abe’s 3 arrows and even flat

after the BOJ in January added negative

rates to QQE. This can be viewed as one side

effect of the negative rate policy but also

carry out net interest margins of banks

squeezed, which borrow short-term funds

to lend at longer-term rates. With such

issue to steepen the yield curve to may not

able to firstly improve Japanese economy

but it will improve bank profits in the

medium term due to increased net interest

margins.

Uncertainty is high for this new issue market

mostly reacted negative which can be

shown in current strong yen, particularly the

yen performed abnormal on the date of the

issue released. Once the target of 2% CPI

cannot be achieved, market will be much

more impatient for requesting “helicopter

money”.

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Fig.1 Deutsche Bank stock price

Fig.2 GBP/USD

Eurozone Market

Although, Deutsche Bank negotiated

to US Department of Justice to lower

the fine from 14 billion to 5.4 billion

US dollar, the investors found that the

fundamentals of European bank were

so weak. The negative interest rate

policy depressed the profitability of

the financial institution in Eurozone.

The risk on EU financial system is still

existed to threaten the markets in the

foreseeable future. We expect the

financial sector would underperform

to the whole market. Meanwhile, the

UK Prime Minister Theresa May

triggers Article 50 no later than

March in 2017.

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The risk of Hard Brexit had arisen. The GBP

against USD dropped below it historical low

in 1985. British financial-services companies

will get no special favors in Brexit

negotiations from Prime Minister Theresa

May. We hold negative view on UK financial

sector, but hold positive view on exports and

travelling related industries which could be

benefited from the weak GBP. The EU bond

yield, especially the sovereign bond and

investment grade corporate bond, may

increase further in short run, as the ECB

hinted that they will not extend more on the

easing policy.

Fig. 3 European sovereign bond yield curve –

current (green), a week ago (brown), a month ago (dot green)

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U.S. Market

The US Federal Reserve left interest rates

unchanged at its two-day meeting in

Washington, with the central bank

indicating it could still tighten monetary

policy before the end of the year. Currently,

the possibility of rate hike in December

meeting is more than 60%. The latest

payroll numbers showed a seasonally

adjusted (and then re-adjusted) 156,000

new jobs in September over August. This

was slightly less than supposedly expected,

but still robust. Meanwhile, The September

US ISM manufacturing index improved to

51.5 from 49.4 and registered a return to

growth after August’s contraction. The US

president election provides the

uncertainties to the markets.

Fig. 1 US ISM Manufacturing

PMI

Source: Tradingeconomics.com

Fig. 2 US Nonfarm payrolls

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Fig. 4 US Dollar Index

Fig. 3 S&P 500 index

We believe the equity and bond market

would start to reflect the change. The

S&P500 index tried to challenge the

historical high but failed finally. It should

dropped further rather than make a new

break through. We did see the “golden

ratio” 38.2% level, which is around 2050,

would be the next supporting point. On

the other hand, the US Treasury bond

yield curve is going to steepen indicated

the sign of normalization on monetary

policy. We did believe, as the higher rate

hike expectation, the longer term

Treasury bond price would be affected by

the interest rate risk more.

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Fig. 1 China property trend

Fig. 2 China property price compared with other cities

China Market

China's economy continues to face

significant headwinds as usually talks

but this month released data showed

much more improvement from the

rising consumer demand, probably

based on rising house prices.

Wealth effect of pricey homes can be

unable quantified by amount but it

surly underpins growth and consumer

spending. Retail sales rose from 10.2%

in July to 10.6% in August while August

import dramatically jumped from

negative territory growth to 1.5%.

Corporate profit finally has significant

increase. July's industrial profits were

up 11% year on year in July. Stronger

profits make corporate have more

capital, increasing the incentive to

invest and more capacity to repay debt.

Business confidence is well benefited

which Standard Chartered Plc’s Small

and Medium Enterprises Confidence

Index rose to 56 this month from 54.9

in August. Meanwhile, producer prices

are now returning to inflation territory,

with a reading of -0.8% year on year in

August, up from a low of -5.9% at the

end of 2015.

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Fig. 3 China Corporate profit and PPI

Fig. 4 China business sentiment

However, surging house values

pose risk for the financial system.

Authorities in several major cities

imposed even tightening measures

to keep a lid on frothy markets,

even though it will press the

upside trend in short-term, those

price gains prove unsustainable.

Once the adjustment appears,

China’s economy data will perform

less desirable as current.

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It would be the first time in eight years

that OPEC has announced for intention

of production cut. The oil price

depression has last for around two

years. With such announcement, the

overwhelming majority viewed this

surprise move as a sign of strength and

unity and oil price rebound nearly

50-level after the announcement.

Indeed, it is too early to make such

judgment. Even though 14 members

agreed to set a production target of

32.5-33.0mn barrels per day, “in order

to accelerate the ongoing drawdown of

the stock overhang and bring the

rebalancing forward”, such target is

only slightly below the 33.2mn

produced in August. Counting about

current oil production supply, it has

reached to the highest level in eight

years. The proposed cut is really small,

real hard to reduce oversupply in global

oil markets. Looks like the move is to

improve market sentiment instead of

restoring the balance.

Fig. 1 OPEC Production by each member countries

Fig. 2 OPEC production vs quota

Others-

The OPEC agreed to cut production but does deal

really deal?

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Meanwhile, key details such as

the implementation date,

duration, and how the cut will

be split among members

remain unclear. OPEC

members need to wait until

next regular meeting on 30th

November to start to discuss

the cut-off allocation, meaning

even all agree for the new

allocation the actual

implementation time will be in

2007. Another big challenging

in front of the OPEC is

whether members will truly

accomplish the quota. From

past history, the OPEC usually

produced more than they

quoted. Not to mention the

participation of Iran makes

negotiation much harder.

Fig. 3 Oil Price

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