Appendix

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Authors

Bob Blee

Head of Corporate Finance bblee@svb.com

Bob Blee heads Silicon Valley Bank’s Corporate Finance Group, which leads SVB’s relationships with public and late-stage private companies in the Innovation sector throughout North America, providing a full suite of lending and banking products, as well as guidance as a trusted partner, helping our clients succeed and quickly scale.

Previously, Bob held a variety of roles in SVB’s California and Midwest regions, including heading seed, early and mid-stage Infrastructure, Hardware, Consumer Internet and Fintech banking in the Bay Area and Southern California and was responsible for SVB’s Mezzanine Lending and Loan Syndications practices.

Bob sits on the nonprofit board of the Network for Teaching Entrepreneurship (NFTE) and the Silicon Valley Advisory Council of the Commonwealth Club. He is also active with his alma mater, the University of Illinois.

Steven Pipp, CFA

Vice President, Research spipp@svb.com

Steven Pipp is a Vice President based in San Francisco responsible for capital markets research and data-driven analysis of the

innovation economies that SVB serves globally. In this role, he has led research efforts exploring investment, fundraising and exit dynamics between the venture ecosystems of the US, Canada, Europe, China and SE Asia.

Prior to his research role, Steven managed strategic advisory and valuation engagements for venture-backed technology companies as part of SVB Analytics. Before joining SVB, Steven worked in Minneapolis as a consultant and entrepreneur with a focus on clean energy technology.

Steven earned a Master of Science in Finance from Boston College and a Bachelor of Science in Business from the University of Minnesota. In addition, he holds the Chartered Financial Analyst (CFA) designation.

Andrew Pardo

Sr. Associate, Research apardo@svb.com

Andrew Pardo is a Senior Research Associate based in San Francisco responsible for the capital markets research and data-driven analysis of the innovation economies that SVB serves globally. In this role, he supports research efforts exploring investment, fundraising and exit dynamics in the global venture ecosystem.

Prior to this role, Andrew was a Buy-Side Equity Research Analyst for a $100B+ asset manager based in the Bay Area. His area of coverage spanned the domestic and international Financials sector. Andrew earned a Bachelor of Science in accounting from Loyola Marymount University.

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About Silicon Valley Bank

For more than 35 years, Silicon Valley Bank has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centers around the world. With commercial, international and private banking services, SVB helps address the unique needs of innovators.

See complete disclaimers on previous page.

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@SVB_Financial

Silicon Valley Bank

@SVBFinancialGroup

Can this rally extend?

In our Global Investment

Committee’s assessment, the rally in risky assets has room to extend further over the next 12 months, though near-term periods of consolidation are possible.

Global PMIs and earnings revisions are ticking higher. Valuations, technicals and market diversity are not likely to constrain further gains.

We favour equities over bonds, alternative strategies and cash.

Within equities, we prefer Asia ex-Japan, and within bonds, we prefer EM USD government bonds and Asia USD bonds. The USD is likely to weaken.

‘Sell-in-May’ seasonality is a near-term risk. We also continue to watch trade relations and oil price risks closely.

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Global Market Outlook | 2 May 2019

3 Investment strategy

Can this rally extend?

•In our Global Investment Committee’s assessment, the rally in risky assets has room to extend further over the next 12 months, though near-term periods of consolidation are possible. Global PMIs and earnings revisions are ticking higher. Valuations, technicals and market diversity are not likely to constrain further gains.

•We favour equities over bonds, alternative strategies and cash. Within equities, we prefer Asia ex-Japan, and within bonds, we prefer Emerging Market (EM) USD government bonds and Asia USD bonds. The USD is likely to weaken.

•‘Sell-in-May’ seasonality is a near-term risk. We also continue to watch trade relations and oil price risks closely.

Q1 rebound has been strong, but markets are not stretched

Global equities gained a further 2.8% over the past month, regaining their prior record high. This means, YTD, global equities have now rebounded over 15% (with the Shanghai Composite up around 25%, at one extreme). Meanwhile, global corporate bonds have provided a total return of about 4.2% (with EM USD government bonds’ total returns of almost 7%) YTD.

After such strong gains over just a few months, unsurprisingly a key question for investors is whether this rally in risky assets can extend further, or whether it is now time to take some profit.

In our Global Investment Committee’s assessment, based on the seven factors below, the rally may have further to go. Forward-looking economic and market indicators are potentially the most positive factors. After consecutive months of decline, global PMIs (led by services) and earnings revisions – usually among the earliest indicators of market gains – have started to turn higher.

Valuations and short-term indicators are not unequivocally positive. However, we find it quite interesting that, despite the speed and size of YTD gains, they are not

IMPLICATIONS

FOR INVESTORS

Equities likely to outperform other traditional asset classes. Asia exJapan has the highest probability of outperforming global equities, in our assessment

EM USD government bonds and Asia USD bonds most likely to outperform within our bond universe

Macro environment supportive of core allocation to alternative strategies and a weaker USD

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Global Market Outlook | 2 May 2019

at levels that are likely to constrain further gains. Valuations have rebounded higher, but are only at or moderately above long-term average levels in most major regions. Short-term technical and positioning indicators are not showing signs of being stretched, suggesting they are also unlikely to hold back risky assets. Finally, measures of market diversity also show that the risk of a market reversal is not unusually high.

Only two indicators in our checklist – seasonality and event risk – argue for caution. ‘Sell-in-May’ seasonality is a wellknown (and far from certain) phenomenon. Trade tensions, meanwhile, continue to be a key risk; while US-China tensions could ease, US trade tensions with Europe and/or Japan could rise as they enter trade talks.

Putting these factors together, in our assessment, the rally in risky assets is still likely to extend further over the coming 12 months. While short-term consolidation is possible, we believe the case for preferring equities over bonds, alternative strategies and cash remains in place.

Rising downside risks for the USD

Another factor that may influence the outcome for major financial markets is the direction of the USD.

Figure 3

Real interest rate differentials turning against the USD

USD Index (DXY) vs. weighted real interest rate differentials

Source: Bloomberg, Standard Chartered

Real (net-of-inflation) interest rate differentials are increasingly turning against the USD as the Fed pauses, in our assessment. This could intensify if oil prices continue to rise (by raising inflation expectations and, hence, reducing real rates further).

Hence, we are bearish on the USD over a 12-month horizon. As we have discussed in prior months, a weak USD tends to

be supportive for EM assets as stronger EM currencies support EM asset class inflows and returns. This, in turn, should prove supportive for risky assets.

Maintain preference for Asia ex-Japan equities

Within equities, we maintain our regional preference for Asia ex-Japan. In our assessment, valuations, earnings and technicals all suggest there is room for gains to extend. Within the region, we continue to prefer China (onshore and offshore). While over 30% gains in the onshore Shanghai Composite may seem like a lot, history shows it is not uncommon for the market to deliver significantly more in a given year, especially if inflows to EMs are well-supported.

US equities are likely to remain focused on earnings expectations. While Q1 earnings likely contracted slightly, we believe the 12-month earnings revisions uptick is a positive.

We are less excited by Japanese equities, which rank lower in our preference order. While short-term rebounds may have been a function of excessively pessimistic positioning and receding risks at the start of the year, we do not believe the fundamental outlook has improved sufficiently for markets to outperform other regions.

EM bonds likely to be well-supported

Within bonds, we prefer EM USD government bonds and Asia USD bonds. The absolute level of yields (approximately 6.1% and 4.4% respectively) remains attractive, in our assessment. Meanwhile, further gains in risky assets and a weaker USD also argue the case for rising EM bond prices, especially as valuations are not a constraint.

Valuations are more of a constraint for Developed Market (DM) High Yield (HY) bonds, where our return expectations remain limited to the yield on offer. We have turned more cautious on DM Investment Grade (IG) bonds, both government and corporate. While we expect US Treasury yields to be largely range-bound, we see risks tilted towards rising yields (lower bond prices). The already-low yield on offer leaves very little buffer against a fall in bond prices. Hence, we see better risk/reward opportunities elsewhere.

Our expectations of further gains in equities and EM/Asian USD bonds, and a weaker US dollar, translate directly to continued support for Multi-Asset Income strategies, in our assessment.

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Global Market Outlook | 2 May 2019

How does the current context affect the historical view?

Tying current market conditions to historical analogues will never be perfect as history does not repeat in the exact same way. Therefore, we look at the current macroeconomic backdrop for clues.

The Fed’s pivot in Q1 to a more dovish stance has eased

USD liquidity conditions for Emerging Markets in general, and China’s policy stimulus is showing signs of boosting economic activity even earlier than we anticipated.

In the past month, monetary conditions indicators have showed an uptick, as did industrial production and Chinese new export orders. Although these are positive signals, we are now awaiting further confirmation from other countries’ data. Particularly, we will focus on trade and manufacturing data, along with a potential trade deal announcement by US and Chinese representatives in the coming weeks.

With regards to sentiment, we do take note that several indicators show that investors are more cautious this time around and have not overstretched their positioning. For example, margin trading by retail investors, although raising, is near 50% levels compared to the 2015 peak.

Measures of credit impulse improved meaningfully after the strong Total Social Financing (TSF) print in March. Although there are still concerns about China’s ability to stabilise GDP growth with sustainable levels of debt, credit impulse correlates well with earnings growth and points to a pick-up in H2.

Moreover, earnings growth revisions are being supported by positive preliminary earnings announcements, raising the probability that revisions will continue to improve going forward.

Figure 6

Leveraged stock market purchases are far from their peak

Chinese margin debt leveraged positions in USD 100m

Source: Bloomberg, Standard Chartered

In conclusion, taking into consideration history and the current macroeconomic context, we believe the case for further gains for both Chinese onshore and offshore markets into the year-end stands, albeit they may not follow the same path.

Figure 7

Chinese corporate earnings’ revision momentum was the first to turn, and is now aiming to cross into positive territory

3m moving averages of select Earnings Revision Indices (ERI)

1.5

Source: FactSet, Standard Chartered

Likewise, US equities also started the year strong: Can the rally continue?

Yes, our Global Investment Committee believes so. That said, our analysis indicates the pace of gains could be more in line with broader global equities performance. Meanwhile, the risks of a short-term pullback cannot be ruled out, especially given the strong performance YTD.

When looking at performance, there have been eight instances since 1968 (excluding the latest) where the S&P 500 index has gained more than 10% in the first quarter of the year. Analysing the ensuing three-quarter performance, we see that only in one instance – 1987, when world markets collapsed on Black Monday – did market momentum fail to extend through the rest of the year and the average return over the period was in the mid-single digits.

Figure 8

A low volatility environment is positive for stock returns

S&P 500 12-month total returns from different volatility levels

Source: Bloomberg, Standard Chartered

Analysis performed using daily data fro 1-Jan-99 to 19-Apr-18

Figure 9

Two alternative ways way to look at this question are from a market diversity and volatility point of view. Market diversity measures try to quantify the stability of a market based on whether investors’ views over-converge or remain diverse; currently our in-house indicators point to fair market diversity meaning that the current uptrend does not appear overly stretched.

With regards to volatility, following the Fed U-turn in monetary policy and with markets forecasting a higher probability of rate cuts for year-end, volatility waned providing a boost to the stock market rebound.

Figure below shows that positive 12-month stock returns tend to coincide with low or (very) high volatility regimes, while they tend to suffer at or near long-term average (ca. 22). The chart indicates that a lower volatility environment can be symptomatic of a regime where momentum lifts stocks higher, while a peak volatility regime usually occurs only at market bottoms – i.e. an emotionally challenging but rewarding entry point to invest in stocks.

Additionally, as the US Q1 reporting season gets past the halfway mark on the back of its busiest weeks, blended estimates point to a 0.0% y/y growth in earnings

(improving from earlier estimates of a 2.5% contraction). This reduces the chances of an earnings recession as the

S&P500 index tests September’s record high.

We prefer to look through the Q1 slump and focus on the positive effects of easing financial conditions, still-strong job market (evidenced by the strong March jobs report) and growing prospects of a US-China trade deal.

Based on the above analysis of historical data and considering what we’re learning from earnings results, we retain our view that US equities are likely to perform broadly in line with global equities, which remains our preferred asset class.

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Global Market Outlook | 2 May 2019

7 Macro overview

Signs of a recovery in China

•Core scenario: China’s economy appears to be responding to stimulus. Our Global Investment Committee believes China’s improving outlook, when combined with easier global financial conditions following the

Fed’s dovish turn in policy, is likely to extend the business cycle.

•Policy outlook: Global central bank policy is likely to remain accommodative for the next 12 months following the Fed’s decisively dovish turn amid moderating growth and still-subdued inflation.

•Key risks: While we are more optimistic about a US-China trade agreement, a flare-up of trade tensions with Europe/Japan is a key source of risk. Dovish central banks have reduced a major policy risk.

Core scenario

Our Global Investment Committee has turned more positive about Emerging Market (EM) growth outlook on the back of signs of a recovery in China, easing global financial conditions and expectations for a thaw in US-China trade relations. While we continue to expect growth across Developed Markets (DM) to moderate towards its long-term trend, we see a reasonably low likelihood (30% probability) of a US recession in the next 12 months. The Fed’s dovish shift in policy bias has led the ECB and other central banks (including EMs) to stay or turn more accommodative as inflation remains subdued. The key risk is a revival of trade tensions as the US starts trade talks with Japan and EU.

Figure 10

Asia ex-Japan is likely to benefit the most from China’s nascent recovery

Source: Standard Chartered

Legend: ●Supportive of risk assets Neutral○Not supportive of risk assets

IMPLICATIONS

FOR INVESTORS

The Fed to hold rates for rest of 2019

The ECB and BoJ to maintain their highly accommodative monetary policies

China to continue with targeted easing of fiscal and monetary policies to support domesticdriven growth

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US – Return to ‘Goldilocks’

Not too hot, not too cold. We expect US economic growth to continue moderating towards the long-term trend close to 2% as the stimulus from late-2017’s tax cuts fades. However, the rebound in job creation in March reaffirms our view that consumption is likely to remain the bedrock for the economy over the coming year. The Fed’s recent dovish turn, after 2% of rate hikes since 2017, has eased financial conditions and helped lower mortgage rates, which should be supportive for the housing sector. Manufacturing sector business confidence also appears to have stabilised, with expectations of a trade agreement with China. Inflation has trended lower this year towards the Fed’s 2% target amid subdued wage growth and a still-strong USD.

Fed on hold. We believe moderating growth and inflation are likely to allow the Fed to maintain its still-accommodative policy through 2019, especially as it mulls a policy shift towards letting inflation overshoot its 2% target for a while.

Euro area – External headwinds cloud outlook

Diverging growth drivers. Consensus Euro area growth continued to be revised lower, primarily due to external headwinds. However, the recovery in China, a key trading partner, and likely pick-up in credit demand (based on an ECB survey) could help stabilise the economy in H2. The domestic economy remains resilient, as highlighted by stillfavourable private consumption and robust services sector activity. Uncertainty around upcoming EU parliamentary elections and possible US tariffs on EU products, as the two sides prepare to start trade talks, remain key headwinds.

ECB remains supportive. The ECB is likely to tweak its already-accommodative policy to address the pressure on banks’ profits from prolonged negative deposit rates.

However, we expect policy to remain highly accommodative through 2019 as inflation stays well below ECB’s 2% target.

UK – Brexit uncertainty prolonged

Decision shelved. The EU’s move to push back the Brexit deadline to 31 October prolongs the uncertainty. However, we see high likelihood of a negotiated solution in the next 12 months, possibly after an election. UK data has surprised positively recently as the threat of hard-Brexit recedes.

BoE torn. The BoE is likely to stay on hold over the next 12 months as it balances rising wage pressures with negative impact of Brexit uncertainty on business investment.

Figure 11

Market expectations of a Fed rate cut by end-2019 are now evenly balanced with expectations of no change in rates

Money market probabilities of a Fed rate hike and no-change by Dec 2019

100 80

60 % 40

20

Source: Bloomberg, Standard Chartered

Figure 12

Euro area’s domestic-driven services sector confidence is showing signs of recovery; manufacturing sector confidence remains under pressure, but could revive with China’s recovery

Euro area manufacturing and services sector PMIs

Source: Bloomberg, Standard Chartered

Figure 13

UK economic data has exceeded expectations lately as risk of a hard Brexit recedes

UK economic surprises index

Source: Citigroup, Bloomberg, Standard Chartered

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Japan – Trade talks, sales tax hike in focus

Global slowdown dominates outlook. Japan’s exports contracted for the fourth straight month in March. The BoJ’s Tankan Survey also indicated business sentiment was hurt by the external slowdown. The outlook for Japan’s large manufacturers, a barometer of trade conditions, fell sharply, while the outlook for domestic-focussed non-manufacturers remained resilient, highlighting the relatively robust services sector. A trade deal with the US and/or a delay in the planned sales tax hike in October could improve sentiment.

BoJ to stay accommodative. The BoJ’s latest downgrade to its outlook for exports and production suggests the central bank remains concerned about downside risks to growth and inflation. We believe it will maintain its accommodative policy over the next 12 months, despite tight labour markets.

China – Economy responding to stimulus

Nascent upturn. Latest data suggests China’s coordinated policy easing has started to impact the real economy. The acceleration in infrastructure investment growth, for instance, coincided with the pick-up in credit impulse, although a few more months of data may be needed to confirm the upturn. While the stimulus measures are unlikely to match previous cycles (the credit impulse so far is notably smaller than in 2009, 2012 and 2015), the front-loading of stimulus measures may be sufficient to stabilise growth by H2, as stability becomes a key policy priority in the lead-up to the 70th anniversary of the People’s Republic on 1 October.

Sustainable recovery likely. The latest policy easing, including tax cuts and targeted lending initiatives, has been targeted towards the private sector, which are usually more efficient and account for a larger share of employment than state-owned firms. Hence, we believe the latest policy easing may have longer-lasting second-order effects.

Emerging Markets – Outlook brightening

Turning positive. We are more constructive on Emerging Markets (EM) and believe the consensus is underestimating the impact on EM growth from China’s nascent recovery and the dovish shift in global central bank policy. Rate cuts across many EMs are likely, aiding recovery in growth.

Differentiation remains key. We believe Asia is likely to benefit from China’s recovery and easing financial conditions, while markets with structural deficits (Turkey, South Africa) are likely to remain under pressure.

Figure 14

Japan’s manufacturing sector outlook remains under pressure due to trade uncertainty, while services sector holds up

Japan’s Tankan survey indicator of the outlook for manufacturing and nonmanufacturing sector business confidence

Source: Bloomberg, Standard Chartered

Figure 15

China’s infrastructure investment is showing signs of recovery as authorities revive credit stimulus

China’s infrastructure investment, % y/y 3-month average; credit impulse (y/y change in new credit issued as percentage of GDP)

Source: Bloomberg, Standard Chartered

Figure 16

EM economic data surprises have turned positive with signs of a recovery in China, while DM data has continued to disappoint

EM and DM economic surprises indices

Source: Bloomberg, Standard Chartered

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USD – Looking for a move back down

The USD faces several cyclical and structural headwinds. We believe narrowing interest differentials and renewed focus on the US twin deficits will ultimately drive the USD lower. We remain bullish on the EUR as we expect the currency to benefit from positive spillover effects of fiscal and monetary policies from China and other Asian economies. We also continue to like the GBP given its attractive valuations, which is underpinned by our expectation of a

“soft” or no Brexit.

Gold – Lacking catalysts to move higher

Lukewarm investor sentiment weighs on gold. Gold prices have eased as market participants scaled back the probability of a Fed rate cut this year. We expect the Fed to remain on hold this year and we do not expect the economy to tilt into recession. Central bank buying and an improving physical market have slowed the decline.

Range-trading likely in the absence of fresh catalysts.

Unless we see a further compression in real rates or a significant decline in the USD, we believe risks are skewed towards the upside given our expectations of gold trading in the USD 1250-1350/oz range over the next 6-12 months.

Crude Oil – Is this time different?

Supply continues to hog headlines. Demand for oil has remained resilient despite the recent soft patch in the global economy, while concerns around supply (i.e. renewed conflict in Libya) have risen. The timing of the US decision to end all sanction waivers caught most market participants by surprise, driving prices higher. However, we believe the fundamental set-up is significantly different compared to last year, given the visibility on available OPEC spare capacity.

Tug of war between OPEC and US shale continues. The US has continued to increase its oil output although this had been offset by OPEC production cuts. The de-bottlenecking of the Permian on the back of new pipeline and export capacity should boost US shale production. Investor diversity has also been relatively low. Further price gains will unlikely be sustained in our view. Our expectation for oil to trade in the USD 65-75/bbl range remains unchanged.

Figure 17

The allocation of FX reserves has gradually broadened; A sharper focus on US twin deficits could drive the USD lower

DXY, FX holdings in USD (% of total; RHS)

Source: Bloomberg, Standard Chartered

Figure 18

Central bank buying has remained robust

Central Bank demand (tonnes)

Source: World Gold Council, Standard Chartered

Figure 19

There is greater visibility on spare capacity, despite recent supply disruptions

Estimated Saudi Arabia spare capacity (mbd)

Source: Bloomberg, Standard Chartered

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Global Market Outlook | 2 May 2019

8 Bonds

Preference for EM bonds

•We retain bonds as a core holding and view them as an important source of income and diversification in an investment allocation.

•A pick-up in Emerging Market (EM) growth, largely range-bound US Treasury yields and relatively attractive yields should help EM bonds outperform global bonds. We believe EM USD government bonds have the highest likelihood of outperforming global bonds, closely followed by Asian USD bonds; both are preferred.

•A Fed pause and an accommodative ECB stance should reduce the risk of a sharp increase in government bond yields. We believe US 10-year Treasury yields will remain within a 2.50-2.75% range over the next 12 months. However, the low yield on offer leads us to view Developed Market (DM) Investment Grade (IG) government bonds as most likely to underperform global bonds.

Figure 20

Bond sub-asset classes in order of preference

Stronger data nudges yields higher

Global bond yields rebounded in April as stronger economic data led markets to reduce their expectations for a rate cut by Fed in 2019 and the yield curve (difference between 10-year and 3-month Treasury yields) reverted to positive territory. However, short of a sustained increase in US long-term inflation expectations, we expect US 10-year Treasury yield to remain largely rangebound.

IMPLICATIONS

FOR INVESTORS

EM USD government bonds are most likely to outperform global bonds

Upgrade Asian USD bonds to a preferred holding following constructive data in China

Reduce DM IG government bonds to less preferred owing to low absolute yield

Source: Bloomberg, JPMorgan, Barclays, FTSE, Standard Chartered

# 25 March to 25 April 2019

*As of 31 March 2019

IMPLICATIONS

FOR INVESTORS

Global equities are the preferred asset class, with a preference for Asia ex-Japan

Asia ex-Japan is preferred, while US, Euro area, Non Asia EM and UK are core holdings. Japan is least preferred

Prefer China (onshore and offshore) within Asia ex-Japan

Source: FactSet, MSCI, Standard Chartered. Note: valuation and earnings data refer to 12-month forward data for MSCI indices, as of 25 April 2019

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Global Market Outlook | 2 May 2019

Asia ex-Japan equities – Preferred holding

Asia ex-Japan equities are a preferred holding and are most likely to outperform global equities over the coming 6-12 months, in USD terms, in our assessment.

This view is underpinned by expected USD weakness, which could lead to fund inflows to the region, as well as nascent signs of a recovery in corporate earnings’ expectations.

The consensus 12-month forward EPS growth forecast of 8% looks achievable assuming that a US-China trade resolution in H2 helps trade and investment flows pick up. Meanwhile, the easing of fiscal and credit policy in China could help Asia ex-Japan’s earnings to bottom out.

Although the 12-month ahead price-earnings ratio – currently at 14x – is in line with the long-term average valuation, we believe a recovery in earnings momentum could be a catalyst, driving the performance of Asia ex-Japan equities ahead.

Risks to our preferred view include: escalation in US-China trade tensions, a slowdown in the global economy and fund outflows, potentially on the back of significant USD strength. From current valuations, history since 2005 suggests a 76% probability of positive returns in the coming 12 months.

China is a preferred market within Asia ex-Japan. The rebound in Q1 economic data reassures investors that fiscal stimulus measures and credit easing policies have been effective in boosting the economy. Meanwhile, the rising foreign investment in Chinese equities brought about by the gradual opening up of capital markets is constructive for fund inflows.

Figure 24

Earnings growth for Asia ex-Japan has started to recover

MSCI Asia ex-Japan’s earnings growth estimate for 12-month

Source: FactSet, MSCI, Standard Chartered

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Global Market Outlook | 2 May 2019

12 FX

USD to peak as rate differentials narrow

•The ECB and the BoJ have little room to lower rates. Reduced rate differentials should ultimately weigh on the USD

•We expect the USD to break lower once the current period of sideways trading and falling volatility ends. US trade talks with China, Japan and EU are a key risk

•China economic stimulus could support AUD and EUR if trade flows improve. We expect USD/INR to fall on investment inflows post-election

Figure 25

Foreign exchange: key driving factors and outlook

Source: Bloomberg, Standard Chartered Global Investment Committee

Legend: ●Supportive Neutral○Not Supportive ▲Bullish ▼Bearish Range

USD – Sideways trading and low volatility augur a breakout

As cyclical and structural factors generate increasing headwinds and the USD uptrend loses momentum, we expect the USD to break lower in the near term and begin a medium-term downtrend. We believe China, Japan and EM will deliver fiscal stimulus that could help re-synchronise global growth and allow interest rate differentials to narrow. Capital flows could also shift away from the US. We also await the outcome of bilateral US trade talks with China, Japan and the EU for currency agreements that could limit USD gains. Combined with a gradual diversification in FX reserves allocation and sharper focus on the US twin deficits, the USD is likely peaking now. The USD (DXY) index has strong resistance near 98.00. A break of the previous low at 95.74 and key 95.00 support would increase confidence that a downtrend towards 92.00 is developing. After recent tight ranges, this move could accelerate.

IMPLICATIONS

FOR INVESTORS

We believe the USD uptrend is fading. A rise in volatility and a breakout from recent tight trading ranges could signal the start of a USD decline

The EUR is likely to strengthen amid USD weakness and a stabilising economy

The GBP is likely to strengthen as a ‘hard Brexit’ is avoided and valuations remain inexpensive

Figure 26

Where markets are today

Source: Bloomberg, Standard Chartered

# 25 March to 25 April 2019

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Global Market Outlook | 2 May 2019

EUR – Global stimulus expected to drive rally

We are bullish on EUR/USD in the medium term despite current weak European growth and inflation data. Ongoing policy uncertainty resulting from Brexit, US-EU trade issues and forthcoming EU elections continue to weigh on the EUR. However, we believe that as China and Asian economies recover on the back of fiscal and monetary stimulus, sentiment towards the Euro area will become less pessimistic as the economy stabilises. If the USD loses its upward traction, EUR/USD, almost by necessity, would finally turn higher. Once the bottoming process is widely accepted, EUR/USD could gain momentum from narrowing interest rate differentials and increasing capital inflows.

EUR/USD volatility has fallen to very low levels as the sideways trading range endures. A break of 1.1450 – 1.15 resistance would add confidence to our bullish view, and that a medium-term EUR/USD rally towards 1.1700 and 1.1865 is under way. A break below 1.1170 could trigger a decline to the 1.0850 – 1.10 support area before the current downtrend is complete.

JPY – Trade talks and hedging costs are key

We expect USD/JPY to be range-bound and subject to twoway risk. Key drivers are likely to be centred around trade talks with the US and the visit of President Trump in late May, as well as the decisions of institutional investors regarding hedging foreign, particularly USD, assets. High costs have recently supported USD/JPY as Japanese investors have preferred not to hedge. Any trade agreement that includes a USD-capping currency accord could trigger USD/JPY weakness. Near-term levels to watch for a break of trading range are 109.70 and 114.60. A break lower opens the risk of a 105 test.

GBP – Bullish GBP despite deadline delay

We remain bullish on the GBP as we expect a “soft” or no

Brexit, following the recent deadline delay to 31 October. UK political negotiations are likely to centre around a common market or customs union, with a growing chance of a confirmatory referendum. The GBP is very undervalued and we expect that Brexit resolution and interest rate normalisation will drive the GBP strength in the nearand medium-term. We expect GBP/USD to find immediate support around 1.29 or risk re-testing the 1.2430 January low. A break of 1.34 would suggest a rally to reclaim the 1.4375 high of 2018 is underway.

Figure 27

Major currency drivers – what has changed

Source: Bloomberg, Refinitiv, Standard Chartered

Figure 28

Sideways trading and falling volatility suggest breakout soon

DXY Index vs. Deutsche Bank FX volatility index (RHS)

Source: Bloomberg, Deutsche Bank, Standard Chartered

Figure 29

EUR to rally medium term as EU economic data recovers

EUR/USD vs. EU – US economic surprise indices (RHS)

Source: Bloomberg, Citibank, Standard Chartered

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Global Market Outlook | 2 May 2019

AUD – RBA awaits data as exports may boost

We expect AUD/USD to continue trading within a broad 0.6825 – 0.7400 range. The RBA is likely to wait on further house price, household spending and employment data to monitor the weak domestic economic backdrop before taking any interest rate action. Much will also depend upon export growth. Australia’s terms of trade have improved recently, and exports, particularly of LNG to China, have improved. While domestic and international economic drivers remain balanced, we see no obvious catalyst for the current broad range to break.

CNY – Data shows stimulus supports stability

China has continued to provide additional monetary and fiscal support into its slowing economy, and this is visible in recent data releases that indicate the quest for economic stability is succeeding. Currency stability has continued in tandem. Despite a weakening current account balance – and the prospect of a further deterioration should a Sino-US trade agreement be finalised soon – there are few signs of pressure on the capital account. We expect capital flows into China will continue to be supported by recent index inclusion as investors target increased allocations to onshore markets.

USD/CNY movements are likely to be driven by the outcome of trade talks that may have multiple stages. We await the conclusion of the first stage, and specifically any currency statement or accord, that might set the tone for the USD/CNY and broad USD trend in the medium term. The recent tight range between 6.67 and 6.74 has held for two months. Given our bearish medium-term USD view, a positive trade outcome could see a break down to 6.50.

EM FX – Trending stronger; USD/INR may fall

EM currencies are likely to trade in line with our bearish medium-term USD view, although we expect most to trade towards the stronger side of established ranges. We believe USD/INR can move towards 68.25 and 66.85 as the election process concludes. Foreign investment inflows can rise and we see little current account or inflationary pressure weighing on the economy. Higher oil prices are a risk to this view. USD/SGD is likely to remain range-bound following the unchanged MAS decision.

Figure 30

AUD/USD export improvement to offset softer domestic market

AUD/USD vs. Australia Terms of Trade (RHS)

Source: Bloomberg, Standard Chartered

Figure 31

What has changed in Emerging Market currencies

Source: Bloomberg, Standard Chartered

Would this year be a repeat of ‘Sell in May and go away’?

This is a very pertinent question given the sharp rise (over 20%) in the S&P 500 index YTD. Also, there have been five instances since the Great Financial Crisis when the index has made a high in April-May and corrected lower in subsequent months (2009, 2010, 2011, 2013, 2015).

Sentiment indicators are not at their highs even as the S&P index is close to its record high. The American Association of Individual Investors Bullish Reading index is well below its January 2018 peak. Likewise, other indicators, including the CBOE put-call ratio and the NYSE New Highs minus New Lows, are not at their extremes.

This is important from a psychological standpoint. Markets often peak when optimism is at its peak and bottom when pessimism is at its extreme. However, that doesn’t seem to be the case right now. Given consistent signals across several sentiment/breadth market indicators, the probability of a meaningful correction at this stage seems low.

When will the USD break out of its range?

The narrowing of trading ranges and the sharp fall in implied volatilities reflect the lack of direction in major currencies. This can be partly explained by the convergence of monetary policies and economic growth outlook this year (vs diverging policies and growth outlook last year). Just as the Fed switched to a dovish stance, other central banks followed suit. Also, notwithstanding the recent upbeat global manufacturing data, the global economy is expected to slow this year (IMF recently downgraded its forecasts). This leaves little room for differentiation and makes risk-reward assessments difficult.

The question then arises, when will the sideway period end? The Bollinger Band Width (BBW) indicator is at its lowest level since 2014. Extreme low levels indicate low level of volatility, but this is often followed by a rise in volatility and a break out of the USD index from its range. Obviously, for this to occur, there needs to be a catalyst. In this regard, global data in the next few weeks will be key. A repricing in Fed interest rate expectations and signs of the US economy underperforming or outperforming, or a stabilisation in the Euro area growth outlook, could bring life back to the currency markets.

Not at the peak of optimism yet

Source: Bloomberg, Standard Chartered

Figure 34

FX volatility has fallen sharply

CVIX, Daily chart

Figure 35

USD appears to be in advanced stages of its range

USD (DXY) Index, Weekly chart

Source: Refinitiv Eikon, Standard Chartered

Year to date

15.3%

11.1%

15.7%

12.0%

17.5%

15.7%

13.7%

9.8%

8.1%

13.4%

13.1%

11.6%

12.1%

8.6%

17.3%

19.9%

5.9%

5.1%

14.2%

18.8%

11.4%

15.8%

13.6%

3.9%

17.4%

26.0%

12.7%

17.3%

8.1%

13.5%

0.9%

1.6% -0.4%

6.8%

2.5% 2.1%

4.1%

7.5%

8.6%

4.4% 5.1%

6.7%

-5.8%

21.5%

7.9%

-2.0%

-0.4%

0.2%

-0.5% -2.9%

1.1%

-1.8% 0.0%