Monthly Market Review MARKET INSIGHTS August 2019 Whatever it takes More central banks joining the easing camp In most superhero movies, we know that the villains will be defeated in the end and their evil plan foiled. The audience buy tickets to find out “how?” and “at what cost?”. There is no doubt that global growth momentum is slowing. The global Purchasing Managers’ Index eased to 49.3 in July. The 2Q U.S. GDP number was better than expected, but this shows the divergence in strong consumption and weak corporate spending. China’s economic growth also decelerated in 2Q, to 6.2%, as investment remained subdued. There are some tentative signs of improvement in June’s data, such as pick ups in fixed asset investment and retail sales. Yet, it is too early to call a turnaround. The latest salvo from U.S. President Donald Trump to impose a 10% tariff on another USD 300billion worth of Chinese exports on 1 September is likely to renew downward pressure on corporate sentiment and global growth momentum. Given the threat from global growth, the Federal Reserve (Fed) delivered its first rate cut since the global financial crisis in its July Federal Open Market Committee meeting. It delivered a 25bps rate cut, as expected, and moved forward the end of asset reduction to August from October. However, Fed Chairman Jerome Powell’s comment that this is not the start of a rate cutting cycle disappointed the market. We believe the Fed’s reluctance to commit to more aggressive easing is justified by strong consumption, but could be tested by renewed trade tensions. Meanwhile, the European Central Bank’s President Mario Draghi sees the euro area’s outlook as “getting worse and worse” and hinted that more stimulus could be on its way to achieve its inflation target. There are few conventional tools available to the Bank of Japan to ease monetary policy, but it remains determined to support the economy if the global environment jeopardizes Japan’s recovery. Beyond the big three central banks, other central banks around the world are also engaging in monetary easing, especially in Asia and emerging markets (EM). In July, Australia, Indonesia, Russia, South Korea and Turkey were amongst the 11 central banks that opted to cut rates. A more dovish position by the Fed certainly helped. Despite a stronger U.S. dollar in July against major currencies, high yield EM currencies (Brazil, India, Indonesia, Turkey) gained against the U.S. dollar, permitting their central banks to loosen monetary policy.
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MARKET INSIGHTS Monthly Market Review...pillar to growth. The story is similar in the U.S., with 2Q GDP expanded at 2.1% annualized. Strong personal and government spending offset
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Monthly Market Review
MARKET INSIGHTS
August 2019
Whatever it takes
More central banks joining the easing camp
In most superhero movies, we know that the villains will be defeated in the end and their evil plan foiled. The audience buy tickets to find out “how?” and “at what cost?”.
There is no doubt that global growth momentum is slowing. The global Purchasing Managers’ Index eased to 49.3 in July. The 2Q U.S. GDP number was better than expected, but this shows the divergence in strong consumption and weak corporate spending. China’s economic growth also decelerated in 2Q, to 6.2%, as investment remained subdued. There are some tentative signs of improvement in June’s data, such as pick ups in fixed asset investment and retail sales. Yet, it is too early to call a turnaround. The latest salvo from U.S. President Donald Trump to impose a 10% tariff on another USD 300billion worth of Chinese exports on 1 September is likely to renew downward pressure on corporate sentiment and global growth momentum.
Given the threat from global growth, the Federal Reserve (Fed) delivered its first rate cut since the global financial crisis in its July Federal Open Market Committee meeting. It delivered a 25bps rate cut, as expected, and moved forward the end of asset reduction to August from October. However, Fed Chairman Jerome Powell’s comment that this is not the start of a rate cutting cycle disappointed the market. We believe the Fed’s reluctance to commit to more aggressive easing is justified by strong consumption, but could be tested by renewed trade tensions.
Meanwhile, the European Central Bank’s President Mario Draghi sees the euro area’s outlook as “getting worse and worse” and hinted that more stimulus could be on its way to achieve its inflation target. There are few conventional tools available to the Bank of Japan to ease monetary policy, but it remains determined to support the economy if the global environment jeopardizes Japan’s recovery.
Beyond the big three central banks, other central banks around the world are also engaging in monetary easing, especially in Asia and emerging markets (EM). In July, Australia, Indonesia, Russia, South Korea and Turkey were amongst the 11 central banks that opted to cut rates. A more dovish position by the Fed certainly helped. Despite a stronger U.S. dollar in July against major currencies, high yield EM currencies (Brazil, India, Indonesia, Turkey) gained against the U.S. dollar, permitting their central banks to loosen monetary policy.
2
Paying for the privilege to lend
As a result of the latest round of monetary easing, bond yields, especially in Europe, are falling below zero again. This also spread to selected corporate debt in the region. 34% of developed market government bonds now have negative yields. Investors are paying the German or Japanese governments to give them a 10-year loan. While this may seem bizarre, this is the investment landscape that investors may have to accommodate in the medium term. This would imply that investors would have to continue to seek carry by either taking on higher credit risk with high yield corporate debt, or they can shift to EM fixed income, earning additional yield by taking on EM currency risks in local currency papers. Given the rich valuation in some fixed income assets, active management to manage risks becomes critical.
2Q earnings beat expectations, but the 2020 outlook seems too optimistic
We are now 70% of the way through the 2Q U.S. earnings report season, and overall earnings per share (EPS) growth still managed to grow by 2.0% (as of July 31). 76% of companies managed to beat EPS expectations. Health care has been a huge contributor to headline EPS growth, while financials, utilities and communication services also made modest contributions. However, revenue growth has been offset by profit margin contraction. This leaves share buybacks as the key driver to EPS growth. We believe that the current market expectation for low single digit EPS growth in 2019 is realistic. However, double digit earnings growth for 2020 seems too optimistic given the easing growth momentum and potential profit margin pressure facing U.S. companies. This could be a factor pushing back on U.S. equities to reach new highs in months to come.
Back to shopping in an expensive mall
Back in 2017, we noted that both equities and fixed income were richly valued. We compared this to shopping for a birthday present in a high-end shopping mall. There are still some good deals, but you need to know where to look. Many investors feel the same now, and they are struggling to decide on the next step.
In equities, value stocks have underperformed in recent years, but some of them do provide high dividends. In fixed income, investors have been cautious over EM fixed income given the strong U.S. dollar environment in recent years. Given the U.S. dollar’s rich valuation, structural deficits in its current account and fiscal position and President Trump’s dislike for a strong U.S. dollar, the greenback’s upside is likely to be limited. This would create an opportunity in EM fixed income.
MONTHLY MARKET REVIEW
MONTHLY MARKET REVIEW | AUGUST 2019
3J.P. MORGAN ASSET MANAGEMENT
MONTHLY MARKET REVIEW | AUGUST 2019
Global economy:
• The Fed delivered its first rate cut since the GlobalFinancial Crisis as expected. The fed funds target rate hasbeen cut by 25bps to 2.0%-2.25%, and the end of assetreduction has also been brought forward to August fromOctober. Chairman Powell reiterated that this is not thestart of a rate cutting cycle. Meanwhile, a number of EMcentral banks continue with their monetary easing tosupport growth. (GTMA P. 30, 31)
• China’s economic growth slowed to 6.2% yoy in 2Q on theback of weak investment, while consumption remains apillar to growth. The story is similar in the U.S., with 2QGDP expanded at 2.1% annualized. Strong personal andgovernment spending offset weakness in inventorycorrection and corporate spending. Meanwhile, U.S.-Chinatrade negotiations restarted in Shanghai, but with limitedprogress. (GTMA P. 8, 19, 20, 25)
Equities:
• July started strong for global equities but earnings and a lack of fresh positive news weighed on sentiment. The S&P 500 was up 0.5% in the month, while the Euro Stoxx 50 was down 0.9%. U.S. 2Q earnings was slightly ahead of expectations due to share buybacks, as revenue growth was offset by the squeeze in profit margins. Investors will soon focus on 2020 earnings growth. The current forecast of double digit growth could be too optimistic.(GTMA P. 33, 35)
• Softening global growth is weighing on market sentiment across Asia. The CSI 300 was down 3.5% in July, with the rest of Asia down in the range of 3%-4%. India has underperformed the region (Sensex was down 5.6% in the month) due to renewed pressure on the currency and also questions surrounding the next growth driver.(GTMA P. 39, 40)
Fixed income:
• The 10-year U.S. Treasury yield was stuck in a 1.95%-2.1%range in July as investors waited for the Fed’s decision. In contrast, government bond yields in some European markets and Japan pushed further into negative territory because of their central banks’ dovish stances. 34% of developed market government bonds now have a negative yield. (GTMA P. 44)
• Despite a stronger U.S. dollar and weaker economic data, both EM fixed income and U.S. corporate credit continued their positive return streak in July. U.S. investment gradeand high yield corporate credit both saw a credit spread tightening of 7-8bps in the month. Hard currency sovereign and corporate debt also saw a 17bps spread tightening in July. This reflects the hunt for yield by both institutional and retail investors as cash return falls. (GTMA P. 52-55)
Other assets:
• The price of oil moved in a narrow range, with the NYMEXWest Texas Intermediate Crude ranging between USD 56-61pb. Two opposite forces are at work. Geopoliticaltensions between Iran and the west, in particular aroundthe Strait of Hormuz, should have added a risk premium tooil prices. 17% of global oil output moves through thisstretch of water. This was offset by the fear on weakerdemand. In contrast, falling real yields are supporting goldprices, breaking above USD 1,400/oz. (GTMA P. 64, 65)
• More dovish positions by global central banks drove the U.S. dollar stronger in July. The USD index rose 2%, largely reflecting a weaker euro and British pound. A less dovish Fed is likely to boost the U.S. dollar in the near term, but currencies with high yields should remain well supported. (GTMA P. 61, 62)
Market Bulletins - July:
• Keeping a LID on portfolio volatility for Asian investors
• Yield curve inversion: Understanding the fire alarm
• 2Q19 Earnings bulletin: Threading the needle
4
Source: Factset, J.P. Morgan Economic Research, National Statistics Agencies, J.P. Morgan Asset Management.*The series aggregates monthly capital goods imports growth data of 29 developed and emerging markets, weighted by their nominal Gross Domestic Product.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Capital goods imports and investment goods outputIndex, 7-month lead Year-over-year change, 3MMA
Global manufacturing PMI - New orders sub-indexIndex
Investment goods
Consumer goods
Global Mfg. PMI – Investment Goods Output sub-index
Global (ex-China) capital goods imports growth* -15%
-10%
-5%
0%
5%
10%
15%
20%
25%
44
46
48
50
52
54
56
58
60
'11 '12 '13 '14 '15 '16 '17 '18 '19 '2044
46
48
50
52
54
56
58
60
'11 '12 '13 '14 '15 '16 '17 '18 '19
5
0
1,000
2,000
3,000
4,000
5,000
6,000
U.S. China EU Japan Mexico
0%
2%
4%
6%
8%
10%
Brazil India China Russia Japan UK EU U.S. Canada Mexico
Effective weighted average tariff rate**
Source: J.P. Morgan Asset Management; (Left and top right) Peterson Institute for International Economics, U.S. Commerce Department, U.S. International TradeCommission, Office of the U.S. Trade Representative (USTR), World Bank; (Bottom right) WTO. *Imported value of products from trading partner appearing on eitherthe USTR or China Ministry of Commerce lists as a percent of total imports from that trading partner over the same period. **Value of imports-weighted average tarifffor 2017, plus additional tariffs from trade actions in 2018 or 2019 related to U.S. trade disputes calculated as the additional tariffs collected as a result of each newaction as a percent of total imports for that year. ***Barriers can take the form of health and safety regulations—sanitary production requirements or health andinvasive species restrictions; technical barriers—minimum standards or certifications for products sold in a certain country; anti-dumping duties—taxes on imports toprevent other countries offloading excess supply at artificially cheap prices; Countervailing duties—taxes on imports to offset subsidies received elsewhere.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
U.S. and China: Proposals and actions*% of annual imports from other covered by tariffs
Non-tariff barriers to trade***Number of measures in effect, 2017
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Jan '18 Apr '18 Jul '18 Oct '18 Jan '19 Apr '19
Tariffs by
U.S. on
imports from
China
Tariffs by
China on
imports from
U.S.
Proposed
ProposedIn effect
In effect
2017
Retaliation for new U.S. tariffs
U.S. steel & aluminum tariffs
U.S. tariffs on China in place
U.S. threatened tariffs on China
Health and safety regulations
Technical barriers
Anti-dumping duties
Countervailing duties
6
Source. J.P. Morgan Asset Management; (Top left and right) Office of the U.S. Trade Representative, U.S. International Trade Commission; (Bottom left) AmericanChamber of Commerce in China & in Shanghai; (Right) United Nations.*Survey allows selection of multiple locations and thus, does not sum to 100. **Indian subcontinent grouped together in survey responses. ***Analysis classifies eachindividual product the U.S. imports from China to the HTS-8 level that either appears on the 2018 & 2019 tariff lists published in the U.S. Federal Register or has beenthreatened with higher tariffs into its appropriate System of National Accounts group and aggregates these categories by value of imports in 2017—the last yearwithout increased tariffs for which data was available.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Tariffed goods distribution across economic categories***USD billion
U.S. importsU.S. goods imports, June 2018 = 100
Plans to relocate productionOf companies currently operating in China, % considering relocating to*
0
20
40
60
80
100
120
140
160
In effect Proposed
65
80
95
110
125
140
Jun '18 Sep '18 Dec '18 Mar '19
World ex-ChinaChina
25% tariffs onUSD 34B
25% tariffson USD 16B 10% tariffs on
USD 200B
Threatened increasefrom 10% to 25% on
USD 200B
0%
10%
20%
30%
40%
50%
60%
70%
Notplanningto move
SoutheastAsia
Mexico India** U.S. East Asia Europe Other
Capital goods
Consumption goods
Intermediate goods
7
-300
-200
-100
0
100
200
300
400
500
600
700
'06 '08 '10 '12 '14 '16 '18 '20
Source: Bank of England, Bank of Japan, Bloomberg Finance L.P., European Central Bank, U.S. Federal Reserve, J.P. Morgan Asset Management.*New purchases of bonds are based on period to period changes in average holdings during the quarter across various asset purchase programs as reported by eachrespective G4 central bank (the Bank of England, the Bank of Japan, the European Central Bank and the U.S. Federal Reserve), announced purchase plans of thesecentral banks and J.P. Morgan Asset Management projections, converted to common currency by average quarterly exchange rates.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Central bank bond purchases Quarterly net bond purchases by G4 central banks*, USD billions
Projections
U.S.
Eurozone
Japan
Net
UK
8
1.84%
1.47% 1.46%
2.40%
2.10%
2.40%2.50%
0%
1%
2%
3%
4%
5%
6%
'05 '07 '09 '11 '13 '15 '17 '19 '21
Source: Bloomberg Finance L.P., FactSet, Federal Reserve, J.P. Morgan Asset Management.Market expectations are the federal funds rates priced into the Fed Fund futures market as of 31/07/19. Federal Reserve projections shown are median estimates ofFOMC participants.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Federal funds rate expectationsFOMC and market expectations for the fed funds rate
Federal funds rate
FOMC long-run projection
FOMC year-end estimates
Market expectations on 31/07/19
FOMC June 2019 forecasts
Percent
2019 2020 2021Long
run
Change in real GDP, 4Q to 4Q 2.1 2.0 1.8 1.9
Unemployment rate, 4Q 3.6 3.7 3.8 4.2
PCE inflation, 4Q to 4Q 1.5 1.9 2.0 2.0
Longrun
9
Source: FactSet, MSCI, Standard & Poor’s, J.P. Morgan Asset Management.Returns are total returns based on MSCI indices, except the U.S., which is the S&P 500 and China A, which are based on the CSI 300 index in U.S. dollar terms.China return is based on the MSCI China index. 10-yr total (gross) return data is used to calculate annualized returns (Ann. Ret.) and annualized volatility (Ann. Vol.)and reflect the period 31/07/09 – 31/07/19. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2Q '19 YTD '19 Ann. Ret. Ann. Vol.
India ASEAN U.S. India U.S. China A Japan Taiwan China U.S. ASEAN China A U.S. China A
Earnings growthEarnings per share, year-over-year change, consensus estimates
Source: IBES, MSCI, Standard & Poor’s, Thomson Reuters Datastream, J.P. Morgan Asset Management. Asia Pacific ex-Japan, EM, Europe and U.S. equity indicesused are the MSCI Asia Pacific ex-Japan, MSCI Emerging Markets, MSCI Europe and S&P 500, respectively. Consensus estimates used are calendar year estimatesfrom IBES. Revisions are based on the current unreported year. Net earnings revisions is (number of companies with upward earnings revisions – number ofcompanies with downwards earnings revisions) / number of total companies. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Earnings revisions ratiosNet earnings revisions to consensus estimates, 13-week moving average
2018
2017
2019
U.S.
Europe
Asia Pacific
ex-Japan
Japan
12%
24% 24%
16%
24%
7%
4%
6%
2%
4% 4%
3%
0%
5%
10%
15%
20%
25%
30%
U.S. EM Asia Pacific ex-Japan
Europe -60%
-40%
-20%
0%
20%
40%
60%
'13 '14 '15 '16 '17 '18
11
EM equity relative performance and commoditiesRelative index level, Dec. 1997 = 100 Index level
Source: FactSet, MSCI, J.P. Morgan Asset Management; (Left) J.P. Morgan Economic Research; (Top right) Bloomberg Finance L.P.*REER is the real effective exchange rate. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
EM vs. DM growth and equity performance%, next 12 months’ growth estimates Index level
Relative EM / DM equity performance and USD REERRelative index level, Dec. 1997 = 100 Index level
EM growth & equity
outperformance
EM growth & equity
underperformance
EM minus DM GDP growth
MSCI EM / MSCI DM
MSCI EM / MSCI DM
Bloomberg Commodity Index
USD REER (inverted)*
MSCI EM / MSCI DM
0
20
40
60
80
100
120
140
160
-1%
0%
1%
2%
3%
4%
5%
'95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
12
Source: MSCI, J.P. Morgan Asset Management; (Left) IBES; (Right) CEIC, national statistics agencies.Consensus estimates used are calendar year estimates from IBES. Earnings per share (EPS) used is next 12 months’ aggregate estimate. *EM Asia ex-Chinaincludes Hong Kong, Korea, Malaysia, Singapore, Taiwan, Thailand and Vietnam. Overall exports aggregate is gross domestic product (GDP)-weighted. Pastperformance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
MSCI AC Asia Pacific ex-Japan earnings by sectorEarnings growth, consensus estimates
Growth in nominal exports and earnings per shareUSD, year-over-year change
Source: J.P. Morgan Asset Management; (Top and bottom left) FactSet, MSCI; (Bottom left) Bloomberg Finance L.P.; (Top right) Bloomberg, MSCI, World Bank(Bottom right) CEIC, Hong Kong Exchanges and Clearing Limited. The CSI 300 represents onshore Chinese A-share large cap equities. MSCI China representsprimarily offshore listed Chinese equities and the onshore equities included in MSCI benchmarks.*Share of EM GDP is for 2018 and is calculated as Chinese nominalGDP in USD as a percentage of all emerging markets within the MSCI EM index.**Share of EM market cap is for 2018 and is calculated as China’s market capitalization of listed domestic companies as a percentage of all emerging markets’ capitalization of listed domestic companies within the MSCI EM index.***Currently, an index inclusion factor (IIF) of 10% is applied to China A Large Cap securities. By November 2019, the inclusion factor will be 20% for China A largeCap, ChiNext Large Cap and China A Mid Cap (including eligible ChiNext shares). 100% A share inclusion is shown for illustrative purposes only.Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Foreign investors’ holdings of onshore Chinese equitiesRMB trillions
Stock Connect monthly net flowsHKD billions RMB billions
CSI 300
MSCI China
Foreign investor holdings
Total as a % of
domestic market cap Northbound (Hong Kong to China)Southbound
(China to Hong Kong)
45.4%38.0%
27.8% 30.5%23.4%
3.8%4.0%
19.0%
0%
20%
40%
60%
80%
100%
Share of EMGDP*
Share of EMmarket cap**
10% A-shareinclusion(Current)
20% A-shareinclusion
(Nov 2019)
100% A-shareinclusion
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
'13 '14 '15 '16 '17 '18-60
-30
0
30
60
90
-30
0
30
60
90
'14 '15 '15 '16 '16 '17 '17 '18 '18 '19
14
Source: J.P. Morgan Economic Research, J.P. Morgan Asset Management.Based on J.P. Morgan Asia Credit High Yield Index (USD Asia high yield), J.P. Morgan CEMBI (USD EMD corporates), J.P. Morgan EMBI Global (USD EMD), J.P.Morgan Asia Credit Corporates Index (USD Asia corporates), J.P. Morgan Developed Market HY Index (USD DM high yield), J.P. Morgan Domestic High Yield Index(U.S. high yield), J.P. Morgan GBI-EM Global (Local EMD), J.P. Morgan GBI-DM (Local DM sovereigns). Past performance is not a reliable indicator of current andfuture results.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Debt return compositionLast 12 months
Income return
Price return
Currency return
Total return
-10%
-5%
0%
5%
10%
15%
USD EMD USD EMDcorporates
USD Asiahigh yield
USD Asiacorporates
USD DMhigh yield
U.S. high yield Local EMD Local DMsovereigns
15
Global bond marketUSD trillions
10-year government bond yields
Source: FactSet, U.S. Federal Reserve, J.P. Morgan Asset Management; (Left) BIS; (Right) Bank of Japan.*Data begins, and averages calculated from, 01/01/70 for U.S. Treasuries, 02/10/72 for German Bunds and 03/02/86 for Japanese Government Bonds. Pastperformance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Source: J.P. Morgan Asset Management; (Left and bottom right) Bloomberg Barclays, FactSet; (Left and top right) J.P. Morgan Economic Research; *Investment gradeis Bloomberg Barclays U.S. Aggregate Credit – Corporate Investment Grade Index. **EBITDA is earnings before interest, tax, depreciation and amortisation. Spreadsindicated are benchmark yield-to-worst less comparable maturity Treasury yields.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Corporate bond spreadSpread over comparable government bond, basis points*
Source: J.P. Morgan Asset Management; (Top and bottom left) J.P. Morgan Economic Research; (Bottom right) BofA/ML, FactSet.*Default rate is defined as the percentage of the total market trading at or below 50% of par value and includes any Chapter 11 filing, pre-packaged filing or missedinterest payments. Spreads indicated are benchmark yield-to-worst less comparable maturity Treasury yields. **EBITDA is earnings before interest, tax, depreciationand amortisation. U.S. corporate high yield is represented by the J.P. Morgan Domestic High Yield Index.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
High yield leverageEBITDA** / interest expense Debt/EBITDA
High yield spread and default rate*
Default rate Spread to worst (basis points)
10-yr average Latest
HY spread to worst 553bps 452bps
HY default rate 2.4% 2.1%
BB B CCC and below
Recessions
Average issuance: 2014 – 2018
Interest coverage Leverage
3.5
4.0
4.5
5.0
5.5
3.0
3.5
4.0
4.5
5.0
5.5
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '190
50
100
150
200
250
300
350
'21 '22 '23 '24 '25 '26 '27 '28
18
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
100 200 300 400 500 600 700 800 900
Source: Bloomberg Finance L.P., J.P. Morgan Asset Management; (Left) J.P. Morgan Economics Research.*J.P. Morgan GBI-EM Broad Diversified Index sub-component used for each country. Spread is the difference between the yield on each country’s local 3-5 yeargovernment bond and the yield on the Bloomberg Barclays U.S. Aggregate Government - Treasury (3-5 Year). **EM debt is represented by the J.P. Morgan EmergingMarket Equal Weight Blended Index, which is an equal-weighted composite index of the J.P. GBI-EM Global Diversified, J.P. Morgan EMBI Global Diversified and J.P.Morgan CEMBI Broad Diversified indices. Spreads are the difference between the yield on EM debt securities and an equivalent maturity U.S. Treasury bond in basispoints. Returns are calculated using monthly data from 31/01/03 –31/07/19.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Spread between local rates and U.S. Treasuries3-5 year local currency government bond index*, basis points
EM debt spreads to U.S. Treasuries and returns12-month forward total return, spread in basis points**
Current spread range: 310-320
5-year average
Current
-200 0 200 400 600 800 1000
S. Africa
Mexico
Russia
Indonesia
Brazil
India
Colombia
Malaysia
China
Poland
Thailand
19
80
85
90
95
100
105
110
115
120
125
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
'95 '98 '01 '04 '07 '10 '13 '16 '19
Source: FactSet, Federal Reserve, J.P. Morgan Asset Management; (Left) U.S. Bureau of Economic Analysis; (Right) BIS, Tullett Prebon.*Interest rate differential is the difference between the 10-year U.S. Treasury yield and a basket of the 10-year yields of each of the markets included in the FederalReserve’s Broad Nominal Trade-Weighted Index (except Chile, Saudi Arabia and Venezuela due to data limitations), weighted by each market’s share of total global debt securities outstanding. Europe is defined as the 19 countries in the euro area.Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Dollar supplyCurrent account balance, % of nominal GDP USD broad nominal index
Dollar demandU.S. minus international 10-year yields* USD broad nominal index
Yield difference USD
Current account balance USD
20
Source: FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management.*The real trade-weighted exchange rate index is the weighted average of a market’s currency relative to a basket of other major currencies adjusted for the effects ofinflation. The weights are determined by comparing the relative trade balances, in terms of one market’s currency, with other markets within the basket.Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Currency deviation from 10-year average in real effective exchange rate* termsNumber of standard deviations away from average
FX above
long-term
average
FX below
long-term
average
Current
Max
Min
-1.8 -1.7
-1.3-1.0 -1.0 -0.9 -0.8
-0.6 -0.5 -0.5 -0.4
0.0 0.1
0.5
0.8
1.31.4
3.2
1.0
-4
-2
0
2
4
21
-4 -3 -2 -1 0 1 2 3 4
Commodity Index
Agriculture
Natural Gas
Industrial Metals
Oil
Precious Metals
Gold
Example
Source: Bloomberg Finance L.P., FactSet, J.P. Morgan Asset Management; (Left) CME; (Right) Barclays, J.P. Morgan Economic Research, MSCI. Commodities are representedby the appropriate Bloomberg Commodity sub-index priced in U.S. dollars. Crude oil shown is West Texas Intermediate (WTI) crude. Other commodity prices are represented byfutures contracts. Z-scores are calculated using daily prices over the past five years. Based on Bloomberg Commodity Index (Comdty.); MSCI ACWI Select – Energy ProducersIMI, Metals & Mining Producers ex Gold & Silver IMI, Gold Miners IMI, Agriculture Producers IMI (Energy (E), M&M (E), Gold (E), Agri. (E)); Bloomberg Barclays Global AggregateCredit – Corporate Energy Index (Energy (FI)); Bloomberg Barclays U.S. Aggregate Credit – Corporate High Yield Metals & Mining Index (U.S. M&M (FI)); Bloomberg BarclaysEuro Aggregate Credit – Corporate Metals & Mining Index (Euro M&M (FI)); J.P. Morgan Emerging Market Corporate Credit – Corporate Metals & Mining Index (EM M&M (FI)).Five-year total return data is used to calculate annualized returns (Ann. Ret.) and 5-year price return data is used to calculate annualized volatility (Ann. Vol.) and reflects the period31/07/14 – 31/07/19. Past performance is not a reliable indicator of current and future results. Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Commodity pricesCommodity price z-scores, USD per unit
Returns
High level
Current
Low level
$2.1
$39
$1,438
$114
$1.6 $4.8
$68
$1,458
$144$84
$1,050
$37
$98$26
$59
$195$144
$176
$128$73
$79
2014 2015 2016 2017 2018 2Q '19 Ann. Ret. Ann. Vol.
U.S. oil inventory and rig count* Number of rigs Billion barrels
Source: FactSet, J.P. Morgan Asset Management; (Top right) Baker Hughes, U.S. Department of Energy; (Left) U.S. Energy Information Administration.*Weekly U.S. crude oil and petroleum ending inventory includes strategic petroleum reserve, and active rig count represents both natural gas and oil rigs. Pastperformance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 31/07/19.
Crude oil production growthMonthly change, thousand barrels per day Total, million barrels per day
Brent crude and USD real effective exchange rate (REER)USD / bbl Index
USD depreciation
USD appreciation
Brent crude oil USD REER (inverted)
Rig count U.S. oil inventory
Change from Iran, Libya & Venezuela
Change from OPEC (Less Iran, Libya & Venezuela) & Russia
Change from U.S.
Global
80
85
90
95
100
10520
40
60
80
100
120
140
'13 '14 '15 '16 '17 '18 '19
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