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BPV Capital
Market Update
July
2016
GLOBAL MARKET SUMMARY
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A risk-on environment in equities did not translate to fixed income, keeping interest
rates subdued
United States
Economic: Employment data has been improving and housing data is
strong, but Q2 GDP missed expectations.
Business Cycle: Late-cycle dynamics are taking shape and the
domestic economy looks poised for an extended late cycle.
Equities
US Equities hit new highs during the month and the S&P 500 finished
3.69% higher.
Fixed Income
The yield curve was flatter in the month and the 10 and 30-year hit
new all-time lows. Interest rates around the world remain relatively
subdued in an uncertain global economic environment.
Currencies
The yen was stronger during the month as fiscal and monetary policy
failed to move the currency much after the BoJ’s July meeting. The
pound remains near 30-year lows as investors await Brexit clarity.
Volatility
The VIX is near one-year lows as equities have rallied to new all-time
highs.
Commodities
Oil began a new leg down in the month as markets are worried about
another round of oversupply issues. Rig counts increased every week in
the month and inventories saw unexpected builds.
Europe
Europe is still awaiting clarity regarding the Brexit. The UK has a new
Prime Minister, Theresa May, and she has pledged not to invoke Article
50 until 2017 at the earliest.
China
Chinese equity markets have remained relatively calm in 2016. The
PBOC continued to weaken the yuan through much of the month, but
now looks for stability in the face of an uncertain global economic
environment.
July 2016
CHART OF THE MONTH
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Since the ECB first cut interest rates into negative territory on June 5th 2014,
European Banks have underperformed the market by 37%. As we have discussed
in previous updates, negative interest rates hurt bank profitability, especially when
banks don’t pass on the negative deposit rates to their clients. On the other hand,
negative interest rates in Europe have succeeded in lowering interest rates across
the curve. Many European governments can borrow money at the lowest rate in
history, with German bunds having negative yields all the way out to the 15 year
maturity, and the average yield on European Investment Grade corporate debt has
fallen all the way to 0.46%.
While negative interest rates are certainly a problem for European banks, this is not
the most pressing issue. Currently, the Italian banking sector is facing a crisis due
to its extremely high level of Non-Performing Loans (NPLs). This isn’t a new story.
Italian banks have had a very high level of NPLs since the financial crisis, but it has
become a bigger issue now because Monte dei Paschi, one of Italy’s largest and
oldest banks, is having major problems with over 30% of total loans considered
non-performing. In the recent European Banking Authority’s stress tests, Monte dei
Paschi is estimated to be insolvent in the “adverse” scenario.
If Monte dei Paschi were to collapse, this would cause major problems for the
Italian economy. The effects wouldn’t just be isolated to the corporate sector, as
almost 1/3 of Italian bank bonds are held by retail investors, much higher than the
rest of the world. Even with the recent plan by Monte dei Paschi to raise €5bn of
equity and securitize €50bn of non-performing loans, the road ahead for European
banks looks very rocky. With economic growth already at low levels and potential
negative headwinds from the Brexit, it is extremely important for the Italian
government and the ECB to find a way stop this problem from turning into a full
blown crisis.
European banks have greatly underperformed the broader market
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
MSCI EMU MSCI EMU - Banks
EQUITY PERFORMANCE
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Data as of July 29, 2016
PRICE 1 MONTH QTD YTD 1 YEAR
S&P 500 2,173.60 3.69% 3.69% 7.66% 5.60%
Consumer Discretionary 647.81 4.56% 4.56% 5.26% 3.53%
Consumer Staples 560.03 (0.71%) (0.71%) 9.67% 11.67%
Energy 502.23 (1.93%) (1.93%) 13.86% 2.03%
Financials 318.90 3.55% 3.55% 0.39% (3.81%)
Healthcare 869.78 4.94% 4.94% 5.38% 0.01%
Industrials 503.83 3.40% 3.40% 10.08% 10.43%
Information Technology 768.74 7.89% 7.89% 7.55% 9.77%
Materials 305.29 5.10% 5.10% 12.94% 8.40%
Telecommunications 182.67 1.01% 1.01% 26.11% 26.42%
Utilities 264.75 (0.69%) (0.69%) 22.56% 23.10%
Russell 2000 1,219.94 5.97% 5.97% 8.31% (0.01%)
Europe (Stoxx 600) 341.89 3.72% 3.72% (3.90%) (10.62%)
Germany (DAX) 10,337.50 6.79% 6.79% (3.77%) (8.59%)
China (Shanghai Composite) 2,979.34 2.70% 2.70% (14.25%) (17.02%)
Japan (Nikkei) 16,569.27 6.39% 6.39% (12.08%) (17.98%)
FIXED INCOME PERFORMANCE
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1 MONTH QTD YTD 1 YEAR
Barclay's US Treasury 1-3 YR (0.06%) (0.06%) 1.38% 1.20%
Barclay's US Treasury 7-10 YR 0.32% 0.32% 7.90% 8.30%
Barclay's US Treasury 20+ YR 2.43% 2.43% 18.64% 18.79%
BofAML 1-3YR Agency and Treasury (0.06%) (0.06%) 1.36% 1.19%
Bloomberg Corporate Bond Index 1.47% 1.47% 9.19% 8.99%
Bloomberg High Yield Bond Index 2.62% 2.62% 12.45% 6.13%
YIELD 1 MONTH QTD YTD 1 YEAR
US 2 YR 0.66% 0.58% 0.58% 1.05% 0.70%
US 5 YR 1.02% 1.00% 1.00% 1.76% 1.61%
US 10 YR 1.45% 1.47% 1.47% 2.27% 2.29%
US 30 YR 2.18% 2.28% 2.28% 3.02% 3.00%
5 YR Breakeven 1.32% 1.40% 1.40% 1.28% 1.43%
10 YR Breakeven 1.49% 1.44% 1.44% 1.58% 1.77%
Germany (0.12%) (0.13%) (0.13%) 0.63% 0.72%
France 0.10% 0.18% 0.18% 0.99% 1.01%
Italy 1.17% 1.26% 1.26% 1.59% 1.90%
Spain 1.02% 1.16% 1.16% 1.77% 1.95%
UK 0.69% 0.87% 0.87% 1.96% 1.98%
Japan (0.20%) (0.22%) (0.22%) 0.26% 0.40%
Data as of July 29, 2016
CURRENCIES PERFORMANCE
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Data as of July 29, 2016
PRICE 1 MONTH QTD YTD 1 YEAR
USD/JPY 102.06 (1.10%) (1.10%) (15.34%) (17.65%)
EUR/USD 1.12 0.61% 0.61% 2.93% 1.73%
GBP/USD 1.32 (0.61%) (0.61%) (10.28%) (15.20%)
USD/CHF 0.97 (0.67%) (0.67%) (3.19%) 0.15%
USD/CAD 1.30 0.82% 0.82% (5.95%) 0.66%
USD/SEK 8.56 1.15% 1.15% 1.15% (0.95%)
AUD/USD 0.76 1.95% 1.95% 4.01% 4.13%
DXY Index 95.53 (0.64%) (0.64%) (3.20%) (1.49%)
JPMorgan Emerging Markets Currency Index 68.57 (0.08%) (0.08%) 4.50% (4.39%)
COMMODITIES PERFORMANCE
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PRICE 1 MONTH QTD YTD 1 YEAR
Bloomberg Commodity Index 84.28 (5.13%) (5.13%) 7.46% (7.98%)
Natural Gas USD/MMBtu 2.88 (1.44%) (1.44%) 14.81% (7.58%)
WTI USD/bbl. 41.60 (15.12%) (15.12%) (1.61%) (23.15%)
Brent USD/bbl. 43.53 (13.22%) (13.22%) 1.16% (27.68%)
WTI-Brent USD/bbl. (0.86) (1.35) (1.35) (0.46) (4.59)
Gasoline USd/gal. 131.94 (12.47%) (12.47%) (10.00%) (21.99%)
Heating Oil USd/gal. 130.75 (13.31%) (13.31%) 1.93% (25.37%)
Copper USd/lb. 222.15 1.18% 1.18% 5.91% (9.29%)
Aluminum USD/MT 1,644.00 (0.30%) (0.30%) 11.61% (1.11%)
Zinc USD/MT 2,242.75 6.57% 6.57% 41.34% 12.62%
Nickel USD/MT 10,598.25 12.44% 12.44% 23.84% (6.71%)
Gold USD/t oz. 1,351.28 2.22% 2.22% 25.75% 23.20%
Silver USD/t oz. 20.34 8.66% 8.66% 46.58% 37.22%
Platinum USD/t oz. 1,148.58 12.12% 12.12% 30.00% 16.45%
Palladium USD/t oz. 710.18 18.42% 18.42% 31.39% 14.09%
Corn USd/bu. 342.75 (7.68%) (7.68%) (9.08%) (12.73%)
Soybean USd/bu. 1,003.00 (13.03%) (13.03%) 14.92% 10.46%
Live Cattle USd/lb. 111.73 (2.55%) (2.55%) (10.33%) (20.66%)
Cocoa USD/MT 2,835.00 (4.32%) (4.32%) (9.02%) (11.65%)
Coffee USd/lb. 146.20 0.38% 0.38% 12.77% 8.18%
Lean Hog USd/lb. 59.05 (17.64%) (17.64%) (10.43%) (10.87%)
Sugar USd/lb. 19.05 (6.30%) (6.30%) 31.83% 46.88%
Wheat USd/bu. 407.75 (8.47%) (8.47%) (15.40%) (23.10%)
Cotton USd/lb. 74.04 15.38% 15.38% 15.15% 16.20%
Data as of July 29, 2016
MACROECONOMIC SUMMARY
GDP: Q2 GDP was lower than analyst estimates, with growth
coming in at just 1.2% for the quarter. Inventories and fixed
investment were large detractors on growth, subtracting 1.16% and
0.52% from GDP. Personal consumption was the highlight of the
report, growing at 4.2% and contributing 2.83% to GDP, its highest
contribution since Q4 2014.
Employment: The June employment report was a large
improvement from May’s weak reading, with the economy adding
287k jobs in June. May’s number was revised even lower to just 11k
jobs added, but the average of the two months was 149k, and the
Fed now seems unfazed by May’s reading.
• The unemployment rate increased to 4.9% in the month,
partially due to an increase in the labor force participation
rate to 62.7%.
• Average hourly earnings continue to be one of the
stronger economic readings, increasing to 2.6% YoY
growth in June.
Housing: Housing continues to show slow and steady improvement
overall. Housing starts, existing home sales, and new home sales all
came in much better than expected, and all are at or near post-
crisis highs.
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Economic data in the US is beginning to improve
Citi Economic Surprise Index has increased with positive data
Housing data is at post-crisis highs
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700.0
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1.0
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Existing Home Sales New Home Sales
-80.0
-60.0
-40.0
-20.0
0.0
20.0
40.0
60.0
CESI - US
BUSINESS CYCLE
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Firmly in beginning stages of prolonged late cycle
Operating margins continue to decline
Lack of inflation could prolong late cycle
Indicators of the Late Cycle
• Above trend rates of inflation
• GDP and Industrial Production begin to hit slower
growth rates
• Monetary policy tightens
• Profit margins deteriorate
• Inventories tend to build unexpectedly as sales decline
• During the late cycle equities historically average annual
returns of 5%, slowing down from 15% a year in the mid-
cycle.
Late Cycle Transition: We believe that the US economy is
currently at the beginning of the late stage of the business cycle.
The economy is showing signs of moderating, with profit margins
starting to decline, lackluster GDP growth, and poor
manufacturing data. While inflation is currently increasing, and
the Fed is at the beginning of a tightening cycle, both are
occurring at a much slower pace than usual.
• The late cycle typically lasts roughly one year in length
before transitioning to a recession, but the lack of
inflation and monetary tightening suggests the business
cycle, specifically the late cycle, could last longer than
its historical average.
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15.0%
Operating Margin
-1.0
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1.0
2.0
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4.0
5.0
Headline CPI
EQUITIES
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Equities hovering near new highs as investors put faith in central banks
Trailing P/E is now above 20
Tech has rallied with positive earnings reports, energy has underperformedPerformance: The S&P 500 finished the month with a gain of
3.69%. The index hit a new all-time high on July 22 of 2,175 and
remained close to that level for the rest of the month. Better
economic data, dovish central banks, and better than expected
earnings all contributed to the increase.
Second Quarter Earnings: Q2 earnings season is officially
underway, with 297 companies in the S&P 500 reporting in July.
Similar to Q1, earnings have been coming in much better than
expected while expectations are being revised lower. So far, Q2
earnings have contracted 3.3% compared to expectations of a 5.8%
contraction. Full year 2016 EPS estimates are now showing a
growth rate of just 0.23%.
Valuations: Valuations continued to increase as the S&P 500
remains near all-time highs, with the trailing P/E increasing above
20 for the first time since the financial crisis. Valuations in
defensive sectors are particularly high. Utilities is currently at its
highest trailing P/E since 2001, and consumer staples is at its
highest since 2002.
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20.5
21.0
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107.0
108.0
109.0
110.0
111.0
112.0 Trailing 12M EPS Trailing P/E
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S&P 500 Index Information Technology Energy
FIXED INCOME
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Long-term interest rates remain subdued with low global growth and inflation outlooks
The yield curve was flatter in JulyYield Curve: The curve flattened during the month as short-term
interest rates recovered from the initial Brexit fall, while long-term
rates remained at low levels. The 10-year and 30-year hit new
all-time lows in the month at 1.32% and 2.09%. Low international
rates and very dovish central banks have kept longer term rates
low and are likely to continue to do so in the near-term.
Federal Reserve: The Federal Reserve’s July meeting resulted in
no policy change and a post-meeting statement that had minimal
change from June. The Fed recognized the improvement in the
labor market in June and the continued strength in household
spending. While the FOMC did not directly mention Brexit or
other international events, the statement noted that “near-term
risks to the economic outlook have diminished” following the
financial market rally post-Brexit. Fed fund futures now predict
the next interest rate increase in June 2017.
Interest Rate Changes
1M 2YR 5YR 10YR 30YR
6/30/2016 0.17% 0.58% 1.00% 1.47% 2.28%
7/29/2016 0.18% 0.66% 1.02% 1.45% 2.18%
Change 0.01% 0.07% 0.02% (0.02%) (0.10%)
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
6/30/2016 7/29/2016
FIXED INCOME
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High yield spreads decreased in a risk-on environment
High yield spreads are now 5.71%
High Yield: High yield spreads fell to 5.71% in the risk-on
environment, giving the Bloomberg High Yield Index a gain of
2.62% in the month. Spreads are now at their lowest point since
July 2015 despite oil trading near $40 a barrel and inflation
expectations remaining very low.
Breakevens: 10-year inflation expectations increased slightly to
1.49% in July despite large decreases in commodity prices and
continued global growth concerns.
1.00%
1.10%
1.20%
1.30%
1.40%
1.50%
1.60%
1.70%
1.80%
1.90%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0% High Yield Spread 10 YR Breakeven
FIXED INCOME
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Central bank policies are keeping interest rates very low
Maturity
1 2 3 4 5 6 7 8 9 10 15 20 30
Switzerland (1.02%) (1.00%) (1.04%) (0.98%) (0.94%) (0.87%) (0.82%) (0.72%) (0.65%) (0.60%) (0.39%) (0.27%) (0.12%)
Netherlands (0.60%) (0.60%) (0.61%) (0.60%) (0.47%) (0.47%) (0.38%) (0.26%) (0.13%) (0.02%) 0.16% 0.22% 0.42%
Finland (0.58%) (0.58%) (0.58%) (0.52%) (0.49%) (0.39%) (0.34%) (0.24%) (0.14%) 0.01% 0.24% 0.42%
Sweden (0.67%) (0.54%) (0.38%) (0.26%) (0.12%) 0.09% 0.59% 0.94%
France (0.57%) (0.56%) (0.53%) (0.49%) (0.40%) (0.36%) (0.26%) (0.17%) (0.03%) 0.10% 0.41% 0.65% 0.83%
Greece 7.01% 8.97% 8.07% 7.96% 7.79%
Italy (0.19%) (0.06%) 0.01% 0.09% 0.29% 0.46% 0.64% 0.84% 1.00% 1.17% 1.54% 1.83% 2.17%
Spain (0.23%) (0.17%) (0.08%) 0.00% 0.17% 0.24% 0.44% 0.73% 0.86% 1.02% 1.34% 1.72% 2.07%
Portugal 0.02% 0.44% 0.98% 1.41% 1.70% 2.20% 2.64% 2.72% 2.92% 3.27% 3.56% 3.76%
Germany (0.62%) (0.63%) (0.67%) (0.62%) (0.53%) (0.52%) (0.46%) (0.36%) (0.25%) (0.12%) (0.02%) 0.16% 0.34%
United Kingdom 0.11% 0.10% 0.13% 0.22% 0.28% 0.39% 0.47% 0.59% 0.60% 0.68% 1.21% 1.39% 1.55%
Japan (0.27%) (0.26%) (0.27%) (0.26%) (0.27%) (0.28%) (0.29%) (0.27%) (0.24%) (0.20%) (0.01%) 0.18% 0.26%
China 2.22% 2.45% 2.55% 2.58% 2.71% 2.78% 2.84% 2.78% 3.35%
Russia 9.73% 9.17% 9.08% 8.70% 8.67% 8.56% 8.49% 8.60%
India 6.81% 6.87% 6.90% 6.99% 7.05% 7.16% 7.16% 7.17% 7.22% 7.17% 7.44%
Brazil 13.07% 12.52% 12.30% 12.14% 11.92% 11.79% 11.81%
Mexico 4.71% 5.32% 5.45% 5.51% 5.62% 5.72% 5.80% 5.86% 5.93% 6.15% 6.35% 6.41%
Canada 0.57% 0.54% 0.50% 0.54% 0.60% 0.69% 0.75% 0.83% 0.92% 1.03% 1.62% 1.64%
United States 0.49% 0.66% 0.75% 1.02% 1.29% 1.45% 2.18%
CURRENCIES
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Yen strengthens as BoJ disappoints, pound remains near 30-year low
EUR/USD at 1.11, USD/JPY at 102
GBP remained near 30-year lows
USD: The dollar finished the month slightly weaker against most
major currencies, and 0.61% weaker versus the euro. Major
economic data points such as durable goods and GDP came in
much weaker than expected during the last week of the month,
putting pressure on the dollar.
Yen: The yen was slightly stronger versus the dollar, gaining
1.10% in the month. The Bank of Japan’s July meeting resulted in
additional ETF purchases, but no interest rate cut or helicopter
money was announced. Prior to the meeting there were rumors
that Japan might institute a helicopter money program in
coordination with the Japanese government, but after no
program was announced the yen sharply strengthened.
Pound: The pound remained at its post-Brexit levels in July. The
Bank of England’s meeting was just two weeks after the Brexit
vote and there was no economic data that represented the effect
of the vote. This caused the BoE to keep policy on hold for the
time being, but their post-meeting statement hinted at additional
easing measures to be announced at their August 4 meeting.
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1.05
1.07
1.09
1.11
1.13
1.15
1.17 EUR/USD USD/JPY
1.25
1.30
1.35
1.40
1.45
1.50
1.55
1.60
GBP/USD
COMMODITIES
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Oil begins a new leg lower, while gold slightly higher with post-Brexit uncertainty
Gold higher with Brexit fears
Oil near $40 on renewed oversupply concernsOil: Concerns about oversupply are creeping back into oil
markets, and WTI finished the month with a decline of 15.12%.
Rig counts increased every week during the month, and the last
storage report of July showed a very large build in inventories.
While production has continued to decline, markets are worried
that with the rig counts increasing, US production is nearing the
bottom. Unexpected global supply outages, such as Canada and
Nigeria, from earlier in the year are also beginning to fade.
• Gasoline inventories are also causing concern. As oil
prices increased earlier this year, refiners were a key
source of demand as they processed raw crude into
refined products such as gasoline. The IEA estimates
that refinery runs in Q1 were 60% higher than refined
product demand growth. This has led to large storage
injections, and gasoline storage now sits 12% above its
five-year average.
Gold: Geopolitical tensions and global growth concerns were
supportive for Gold in July as it stabilized near post-Brexit highs
finishing with a gain of 2.22%.
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Lower 48 Oil Production WTI
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Gold
VOLATILITY
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With the S&P 500 hovering near all-time highs, the VIX is at YTD lows
VIX trading at 1-year lowsVIX: Despite another quarter of negative earnings growth, global
growth shocks, and valuations at their highest point since the
financial crisis, the VIX continued to fall as the S&P 500 rallied in
the month. After a small Brexit spike up to 25.8 in June, the VIX
traded at year-to-date lows on July 20 at 11.5 and ended the
month at 11.9.
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45.0 VIX
EUROPE
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European equities have recovered post-Brexit losses
United Kingdom: The UK continued to digest the aftermath of the
Brexit vote. David Cameron officially stepped down as Prime
Minister, and Theresa May assumed the position on July 13. She
has stated that she does not intend to trigger Article 50 until
2017 at the earliest as the nation tries to prepare for Brexit
negotiations. This would potentially prolong the exit process until
2020. While a number of different options have been discussed,
the only certainty has been uncertainty.
Italy: Alongside the previously mentioned banking problems
within Italy, and Europe as a whole, PM Renzi has scheduled a
referendum vote for October. The referendum is seen as a
confidence vote for his government, and if he loses then he has
pledged to step down to allow a new government to be formed.
With their latest victory in the mayoral race in Rome, the anti-EU
Five Star party has been gaining momentum and poses a similar
risk to Italy as the Brexit vote did to the UK.
Europe quickly recovered post-Brexit losses
German 10-Year firmly in negative territory
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111
S&P 500 Index FTSE 100
-0.4
-0.2
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0.2
0.4
0.6
0.8
1.0
German 10-Year
CHINA
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Chinese markets remained relatively calm in July
Economic Data: Chinese economic data was mixed in the month.
PMIs remain weak and the Caixin PMI reading for July slightly
rebounded to 50.6 after three months of decline. Retail sales
continue to be strong at 10.6% growth and industrial production
has remained at 6.2%.
Yuan: The PBOC stopped depreciating the yuan in July, and the
currency finished with a gain of 0.20% in the month. From March
31 to July 18, the yuan quietly depreciated by a total of 3.89% as
the PBOC aimed to ease capital flight from the country and
relieve pressure on exporters.
Equities: Equity markets finished mixed in July, with the Shanghai
Composite posting a gain of 2.70% and the Shenzen Composite
losing 1.66%. Despite gains of 6.1% since May 27, the Shanghai
Composite is still down 15.82% YTD as the market has stabilized
after an extremely volatile 2015.
Equity markets have been quiet in Q2
The yuan stabilized in July
1,500
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4,100 Shanghai Composite Shenzen Composite
6.1
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6.4
6.5
6.6
6.7
6.8
USD/CNY
DISCLOSURES
The Volatility Index (VIX) shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide
range of S&P 500 index options. You can not invest directly in an index.
The S&P 500 Total Return Index is the total return of the Standard & Poor’s composite index of 500 stocks, a widely recognized,
unmanaged index of common stock prices. You cannot invest directly in an index.
The Shanghai Composite is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.
You cannot invest directly in an index.
The Russell 2000 Index tracks the stocks of the 2,000 smallest companies in the Russell 3000 index. It is considered the benchmark
index of the small-cap U.S. equity universe. You cannot invest directly in an index.
The STOXX 600 tracks 600 publicly-traded companies based in one of 18 EU countries. The index includes small cap, medium cap,
and large cap companies. You cannot invest directly in an index.
The DAX (Deutscher Aktienindex (Germanstock index)) is a blue chip stock market index consisting of the 30 major German
companies trading on the Frankfurt Stock Exchange. You cannot invest directly in an index.
CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 19
DISCLOSURES
The Nikkei 225 Stock Average, or Nikkei, is the leading index of Japanese stocks. It is a price-weighted index comprised of Japan’s top
225 blue-chip companies on the Tokyo Stock Exchange. You cannot invest directly in an index.
The Bloomberg US Corporate Bond Index is a rules-based market-value weighted index engineered to measure the investment grade,
fixed-rate, taxable, corporate bond market. You cannot invest directly in an index.
The Bloomberg US High Yield Corporate Bond Index is a rules-based market-value weighted index engineered to measure the non-
investment grade, fixed-rate, taxable, global corporate bond market. You cannot invest directly in an index.
The Barclay's 1-3 Year Treasury Index is an unmanaged index tracking short-term government securities with maturities between 1
and 2.99 years. You cannot invest directly in an index.
The Barclay’s 7-10 Year Treasury Index is an unmanaged index tracking medium-term government securities with maturities between
7 and 9.99 years. You cannot invest directly in an index.
The Barclay’s 20+ Year Treasury Index is an unmanaged index tracking long-term government securities with maturities greater than
20 years. You cannot invest directly in an index.
CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 20
DISCLOSURES
JP Morgan Emerging Market Currency Index is comprised of the spot prices of 10 emerging market currencies relative to the U.S.
dollar. You cannot invest directly in an index.
The Bloomberg Commodity Index is a broadly diversified commodity price index designed to allow investors to track commodity
futures through a single, simple measure. The index is designed to minimize concentration in any one commodity or sector.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure emerging markets
equity performance. You cannot invest directly in
an index.
The opinions expressed are as of the date written and may change as subsequent conditions vary. This paper is not intended to be relied
upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to
adopt any investment strategy. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper
is at the sole discretion of the reader.
CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 21
Contact Us:
865.243.8000 Local 877.819.2188 Toll Free
9202 S. Northshore Drive, Suite 300
Knoxville, TN 37922
www.backporchvista.com Copyright © 2016 by BPV Capital Management. All rights reserved.

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BPV Capital Market Update July 2016

  • 2. GLOBAL MARKET SUMMARY CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 2 A risk-on environment in equities did not translate to fixed income, keeping interest rates subdued United States Economic: Employment data has been improving and housing data is strong, but Q2 GDP missed expectations. Business Cycle: Late-cycle dynamics are taking shape and the domestic economy looks poised for an extended late cycle. Equities US Equities hit new highs during the month and the S&P 500 finished 3.69% higher. Fixed Income The yield curve was flatter in the month and the 10 and 30-year hit new all-time lows. Interest rates around the world remain relatively subdued in an uncertain global economic environment. Currencies The yen was stronger during the month as fiscal and monetary policy failed to move the currency much after the BoJ’s July meeting. The pound remains near 30-year lows as investors await Brexit clarity. Volatility The VIX is near one-year lows as equities have rallied to new all-time highs. Commodities Oil began a new leg down in the month as markets are worried about another round of oversupply issues. Rig counts increased every week in the month and inventories saw unexpected builds. Europe Europe is still awaiting clarity regarding the Brexit. The UK has a new Prime Minister, Theresa May, and she has pledged not to invoke Article 50 until 2017 at the earliest. China Chinese equity markets have remained relatively calm in 2016. The PBOC continued to weaken the yuan through much of the month, but now looks for stability in the face of an uncertain global economic environment. July 2016
  • 3. CHART OF THE MONTH CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 3 Since the ECB first cut interest rates into negative territory on June 5th 2014, European Banks have underperformed the market by 37%. As we have discussed in previous updates, negative interest rates hurt bank profitability, especially when banks don’t pass on the negative deposit rates to their clients. On the other hand, negative interest rates in Europe have succeeded in lowering interest rates across the curve. Many European governments can borrow money at the lowest rate in history, with German bunds having negative yields all the way out to the 15 year maturity, and the average yield on European Investment Grade corporate debt has fallen all the way to 0.46%. While negative interest rates are certainly a problem for European banks, this is not the most pressing issue. Currently, the Italian banking sector is facing a crisis due to its extremely high level of Non-Performing Loans (NPLs). This isn’t a new story. Italian banks have had a very high level of NPLs since the financial crisis, but it has become a bigger issue now because Monte dei Paschi, one of Italy’s largest and oldest banks, is having major problems with over 30% of total loans considered non-performing. In the recent European Banking Authority’s stress tests, Monte dei Paschi is estimated to be insolvent in the “adverse” scenario. If Monte dei Paschi were to collapse, this would cause major problems for the Italian economy. The effects wouldn’t just be isolated to the corporate sector, as almost 1/3 of Italian bank bonds are held by retail investors, much higher than the rest of the world. Even with the recent plan by Monte dei Paschi to raise €5bn of equity and securitize €50bn of non-performing loans, the road ahead for European banks looks very rocky. With economic growth already at low levels and potential negative headwinds from the Brexit, it is extremely important for the Italian government and the ECB to find a way stop this problem from turning into a full blown crisis. European banks have greatly underperformed the broader market 5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 MSCI EMU MSCI EMU - Banks
  • 4. EQUITY PERFORMANCE CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 4 Data as of July 29, 2016 PRICE 1 MONTH QTD YTD 1 YEAR S&P 500 2,173.60 3.69% 3.69% 7.66% 5.60% Consumer Discretionary 647.81 4.56% 4.56% 5.26% 3.53% Consumer Staples 560.03 (0.71%) (0.71%) 9.67% 11.67% Energy 502.23 (1.93%) (1.93%) 13.86% 2.03% Financials 318.90 3.55% 3.55% 0.39% (3.81%) Healthcare 869.78 4.94% 4.94% 5.38% 0.01% Industrials 503.83 3.40% 3.40% 10.08% 10.43% Information Technology 768.74 7.89% 7.89% 7.55% 9.77% Materials 305.29 5.10% 5.10% 12.94% 8.40% Telecommunications 182.67 1.01% 1.01% 26.11% 26.42% Utilities 264.75 (0.69%) (0.69%) 22.56% 23.10% Russell 2000 1,219.94 5.97% 5.97% 8.31% (0.01%) Europe (Stoxx 600) 341.89 3.72% 3.72% (3.90%) (10.62%) Germany (DAX) 10,337.50 6.79% 6.79% (3.77%) (8.59%) China (Shanghai Composite) 2,979.34 2.70% 2.70% (14.25%) (17.02%) Japan (Nikkei) 16,569.27 6.39% 6.39% (12.08%) (17.98%)
  • 5. FIXED INCOME PERFORMANCE CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 5 1 MONTH QTD YTD 1 YEAR Barclay's US Treasury 1-3 YR (0.06%) (0.06%) 1.38% 1.20% Barclay's US Treasury 7-10 YR 0.32% 0.32% 7.90% 8.30% Barclay's US Treasury 20+ YR 2.43% 2.43% 18.64% 18.79% BofAML 1-3YR Agency and Treasury (0.06%) (0.06%) 1.36% 1.19% Bloomberg Corporate Bond Index 1.47% 1.47% 9.19% 8.99% Bloomberg High Yield Bond Index 2.62% 2.62% 12.45% 6.13% YIELD 1 MONTH QTD YTD 1 YEAR US 2 YR 0.66% 0.58% 0.58% 1.05% 0.70% US 5 YR 1.02% 1.00% 1.00% 1.76% 1.61% US 10 YR 1.45% 1.47% 1.47% 2.27% 2.29% US 30 YR 2.18% 2.28% 2.28% 3.02% 3.00% 5 YR Breakeven 1.32% 1.40% 1.40% 1.28% 1.43% 10 YR Breakeven 1.49% 1.44% 1.44% 1.58% 1.77% Germany (0.12%) (0.13%) (0.13%) 0.63% 0.72% France 0.10% 0.18% 0.18% 0.99% 1.01% Italy 1.17% 1.26% 1.26% 1.59% 1.90% Spain 1.02% 1.16% 1.16% 1.77% 1.95% UK 0.69% 0.87% 0.87% 1.96% 1.98% Japan (0.20%) (0.22%) (0.22%) 0.26% 0.40% Data as of July 29, 2016
  • 6. CURRENCIES PERFORMANCE CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 6 Data as of July 29, 2016 PRICE 1 MONTH QTD YTD 1 YEAR USD/JPY 102.06 (1.10%) (1.10%) (15.34%) (17.65%) EUR/USD 1.12 0.61% 0.61% 2.93% 1.73% GBP/USD 1.32 (0.61%) (0.61%) (10.28%) (15.20%) USD/CHF 0.97 (0.67%) (0.67%) (3.19%) 0.15% USD/CAD 1.30 0.82% 0.82% (5.95%) 0.66% USD/SEK 8.56 1.15% 1.15% 1.15% (0.95%) AUD/USD 0.76 1.95% 1.95% 4.01% 4.13% DXY Index 95.53 (0.64%) (0.64%) (3.20%) (1.49%) JPMorgan Emerging Markets Currency Index 68.57 (0.08%) (0.08%) 4.50% (4.39%)
  • 7. COMMODITIES PERFORMANCE CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 7 PRICE 1 MONTH QTD YTD 1 YEAR Bloomberg Commodity Index 84.28 (5.13%) (5.13%) 7.46% (7.98%) Natural Gas USD/MMBtu 2.88 (1.44%) (1.44%) 14.81% (7.58%) WTI USD/bbl. 41.60 (15.12%) (15.12%) (1.61%) (23.15%) Brent USD/bbl. 43.53 (13.22%) (13.22%) 1.16% (27.68%) WTI-Brent USD/bbl. (0.86) (1.35) (1.35) (0.46) (4.59) Gasoline USd/gal. 131.94 (12.47%) (12.47%) (10.00%) (21.99%) Heating Oil USd/gal. 130.75 (13.31%) (13.31%) 1.93% (25.37%) Copper USd/lb. 222.15 1.18% 1.18% 5.91% (9.29%) Aluminum USD/MT 1,644.00 (0.30%) (0.30%) 11.61% (1.11%) Zinc USD/MT 2,242.75 6.57% 6.57% 41.34% 12.62% Nickel USD/MT 10,598.25 12.44% 12.44% 23.84% (6.71%) Gold USD/t oz. 1,351.28 2.22% 2.22% 25.75% 23.20% Silver USD/t oz. 20.34 8.66% 8.66% 46.58% 37.22% Platinum USD/t oz. 1,148.58 12.12% 12.12% 30.00% 16.45% Palladium USD/t oz. 710.18 18.42% 18.42% 31.39% 14.09% Corn USd/bu. 342.75 (7.68%) (7.68%) (9.08%) (12.73%) Soybean USd/bu. 1,003.00 (13.03%) (13.03%) 14.92% 10.46% Live Cattle USd/lb. 111.73 (2.55%) (2.55%) (10.33%) (20.66%) Cocoa USD/MT 2,835.00 (4.32%) (4.32%) (9.02%) (11.65%) Coffee USd/lb. 146.20 0.38% 0.38% 12.77% 8.18% Lean Hog USd/lb. 59.05 (17.64%) (17.64%) (10.43%) (10.87%) Sugar USd/lb. 19.05 (6.30%) (6.30%) 31.83% 46.88% Wheat USd/bu. 407.75 (8.47%) (8.47%) (15.40%) (23.10%) Cotton USd/lb. 74.04 15.38% 15.38% 15.15% 16.20% Data as of July 29, 2016
  • 8. MACROECONOMIC SUMMARY GDP: Q2 GDP was lower than analyst estimates, with growth coming in at just 1.2% for the quarter. Inventories and fixed investment were large detractors on growth, subtracting 1.16% and 0.52% from GDP. Personal consumption was the highlight of the report, growing at 4.2% and contributing 2.83% to GDP, its highest contribution since Q4 2014. Employment: The June employment report was a large improvement from May’s weak reading, with the economy adding 287k jobs in June. May’s number was revised even lower to just 11k jobs added, but the average of the two months was 149k, and the Fed now seems unfazed by May’s reading. • The unemployment rate increased to 4.9% in the month, partially due to an increase in the labor force participation rate to 62.7%. • Average hourly earnings continue to be one of the stronger economic readings, increasing to 2.6% YoY growth in June. Housing: Housing continues to show slow and steady improvement overall. Housing starts, existing home sales, and new home sales all came in much better than expected, and all are at or near post- crisis highs. CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 8 Economic data in the US is beginning to improve Citi Economic Surprise Index has increased with positive data Housing data is at post-crisis highs - 100.0 200.0 300.0 400.0 500.0 600.0 700.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Existing Home Sales New Home Sales -80.0 -60.0 -40.0 -20.0 0.0 20.0 40.0 60.0 CESI - US
  • 9. BUSINESS CYCLE CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 9 Firmly in beginning stages of prolonged late cycle Operating margins continue to decline Lack of inflation could prolong late cycle Indicators of the Late Cycle • Above trend rates of inflation • GDP and Industrial Production begin to hit slower growth rates • Monetary policy tightens • Profit margins deteriorate • Inventories tend to build unexpectedly as sales decline • During the late cycle equities historically average annual returns of 5%, slowing down from 15% a year in the mid- cycle. Late Cycle Transition: We believe that the US economy is currently at the beginning of the late stage of the business cycle. The economy is showing signs of moderating, with profit margins starting to decline, lackluster GDP growth, and poor manufacturing data. While inflation is currently increasing, and the Fed is at the beginning of a tightening cycle, both are occurring at a much slower pace than usual. • The late cycle typically lasts roughly one year in length before transitioning to a recession, but the lack of inflation and monetary tightening suggests the business cycle, specifically the late cycle, could last longer than its historical average. 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% Operating Margin -1.0 0.0 1.0 2.0 3.0 4.0 5.0 Headline CPI
  • 10. EQUITIES CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 10 Equities hovering near new highs as investors put faith in central banks Trailing P/E is now above 20 Tech has rallied with positive earnings reports, energy has underperformedPerformance: The S&P 500 finished the month with a gain of 3.69%. The index hit a new all-time high on July 22 of 2,175 and remained close to that level for the rest of the month. Better economic data, dovish central banks, and better than expected earnings all contributed to the increase. Second Quarter Earnings: Q2 earnings season is officially underway, with 297 companies in the S&P 500 reporting in July. Similar to Q1, earnings have been coming in much better than expected while expectations are being revised lower. So far, Q2 earnings have contracted 3.3% compared to expectations of a 5.8% contraction. Full year 2016 EPS estimates are now showing a growth rate of just 0.23%. Valuations: Valuations continued to increase as the S&P 500 remains near all-time highs, with the trailing P/E increasing above 20 for the first time since the financial crisis. Valuations in defensive sectors are particularly high. Utilities is currently at its highest trailing P/E since 2001, and consumer staples is at its highest since 2002. 16.0 16.5 17.0 17.5 18.0 18.5 19.0 19.5 20.0 20.5 21.0 104.0 105.0 106.0 107.0 108.0 109.0 110.0 111.0 112.0 Trailing 12M EPS Trailing P/E 95 97 99 101 103 105 107 109 111 S&P 500 Index Information Technology Energy
  • 11. FIXED INCOME CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 11 Long-term interest rates remain subdued with low global growth and inflation outlooks The yield curve was flatter in JulyYield Curve: The curve flattened during the month as short-term interest rates recovered from the initial Brexit fall, while long-term rates remained at low levels. The 10-year and 30-year hit new all-time lows in the month at 1.32% and 2.09%. Low international rates and very dovish central banks have kept longer term rates low and are likely to continue to do so in the near-term. Federal Reserve: The Federal Reserve’s July meeting resulted in no policy change and a post-meeting statement that had minimal change from June. The Fed recognized the improvement in the labor market in June and the continued strength in household spending. While the FOMC did not directly mention Brexit or other international events, the statement noted that “near-term risks to the economic outlook have diminished” following the financial market rally post-Brexit. Fed fund futures now predict the next interest rate increase in June 2017. Interest Rate Changes 1M 2YR 5YR 10YR 30YR 6/30/2016 0.17% 0.58% 1.00% 1.47% 2.28% 7/29/2016 0.18% 0.66% 1.02% 1.45% 2.18% Change 0.01% 0.07% 0.02% (0.02%) (0.10%) 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 6/30/2016 7/29/2016
  • 12. FIXED INCOME CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 12 High yield spreads decreased in a risk-on environment High yield spreads are now 5.71% High Yield: High yield spreads fell to 5.71% in the risk-on environment, giving the Bloomberg High Yield Index a gain of 2.62% in the month. Spreads are now at their lowest point since July 2015 despite oil trading near $40 a barrel and inflation expectations remaining very low. Breakevens: 10-year inflation expectations increased slightly to 1.49% in July despite large decreases in commodity prices and continued global growth concerns. 1.00% 1.10% 1.20% 1.30% 1.40% 1.50% 1.60% 1.70% 1.80% 1.90% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% High Yield Spread 10 YR Breakeven
  • 13. FIXED INCOME CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 13 Central bank policies are keeping interest rates very low Maturity 1 2 3 4 5 6 7 8 9 10 15 20 30 Switzerland (1.02%) (1.00%) (1.04%) (0.98%) (0.94%) (0.87%) (0.82%) (0.72%) (0.65%) (0.60%) (0.39%) (0.27%) (0.12%) Netherlands (0.60%) (0.60%) (0.61%) (0.60%) (0.47%) (0.47%) (0.38%) (0.26%) (0.13%) (0.02%) 0.16% 0.22% 0.42% Finland (0.58%) (0.58%) (0.58%) (0.52%) (0.49%) (0.39%) (0.34%) (0.24%) (0.14%) 0.01% 0.24% 0.42% Sweden (0.67%) (0.54%) (0.38%) (0.26%) (0.12%) 0.09% 0.59% 0.94% France (0.57%) (0.56%) (0.53%) (0.49%) (0.40%) (0.36%) (0.26%) (0.17%) (0.03%) 0.10% 0.41% 0.65% 0.83% Greece 7.01% 8.97% 8.07% 7.96% 7.79% Italy (0.19%) (0.06%) 0.01% 0.09% 0.29% 0.46% 0.64% 0.84% 1.00% 1.17% 1.54% 1.83% 2.17% Spain (0.23%) (0.17%) (0.08%) 0.00% 0.17% 0.24% 0.44% 0.73% 0.86% 1.02% 1.34% 1.72% 2.07% Portugal 0.02% 0.44% 0.98% 1.41% 1.70% 2.20% 2.64% 2.72% 2.92% 3.27% 3.56% 3.76% Germany (0.62%) (0.63%) (0.67%) (0.62%) (0.53%) (0.52%) (0.46%) (0.36%) (0.25%) (0.12%) (0.02%) 0.16% 0.34% United Kingdom 0.11% 0.10% 0.13% 0.22% 0.28% 0.39% 0.47% 0.59% 0.60% 0.68% 1.21% 1.39% 1.55% Japan (0.27%) (0.26%) (0.27%) (0.26%) (0.27%) (0.28%) (0.29%) (0.27%) (0.24%) (0.20%) (0.01%) 0.18% 0.26% China 2.22% 2.45% 2.55% 2.58% 2.71% 2.78% 2.84% 2.78% 3.35% Russia 9.73% 9.17% 9.08% 8.70% 8.67% 8.56% 8.49% 8.60% India 6.81% 6.87% 6.90% 6.99% 7.05% 7.16% 7.16% 7.17% 7.22% 7.17% 7.44% Brazil 13.07% 12.52% 12.30% 12.14% 11.92% 11.79% 11.81% Mexico 4.71% 5.32% 5.45% 5.51% 5.62% 5.72% 5.80% 5.86% 5.93% 6.15% 6.35% 6.41% Canada 0.57% 0.54% 0.50% 0.54% 0.60% 0.69% 0.75% 0.83% 0.92% 1.03% 1.62% 1.64% United States 0.49% 0.66% 0.75% 1.02% 1.29% 1.45% 2.18%
  • 14. CURRENCIES CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 14 Yen strengthens as BoJ disappoints, pound remains near 30-year low EUR/USD at 1.11, USD/JPY at 102 GBP remained near 30-year lows USD: The dollar finished the month slightly weaker against most major currencies, and 0.61% weaker versus the euro. Major economic data points such as durable goods and GDP came in much weaker than expected during the last week of the month, putting pressure on the dollar. Yen: The yen was slightly stronger versus the dollar, gaining 1.10% in the month. The Bank of Japan’s July meeting resulted in additional ETF purchases, but no interest rate cut or helicopter money was announced. Prior to the meeting there were rumors that Japan might institute a helicopter money program in coordination with the Japanese government, but after no program was announced the yen sharply strengthened. Pound: The pound remained at its post-Brexit levels in July. The Bank of England’s meeting was just two weeks after the Brexit vote and there was no economic data that represented the effect of the vote. This caused the BoE to keep policy on hold for the time being, but their post-meeting statement hinted at additional easing measures to be announced at their August 4 meeting. 100.00 105.00 110.00 115.00 120.00 125.00 130.00 1.05 1.07 1.09 1.11 1.13 1.15 1.17 EUR/USD USD/JPY 1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60 GBP/USD
  • 15. COMMODITIES CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 15 Oil begins a new leg lower, while gold slightly higher with post-Brexit uncertainty Gold higher with Brexit fears Oil near $40 on renewed oversupply concernsOil: Concerns about oversupply are creeping back into oil markets, and WTI finished the month with a decline of 15.12%. Rig counts increased every week during the month, and the last storage report of July showed a very large build in inventories. While production has continued to decline, markets are worried that with the rig counts increasing, US production is nearing the bottom. Unexpected global supply outages, such as Canada and Nigeria, from earlier in the year are also beginning to fade. • Gasoline inventories are also causing concern. As oil prices increased earlier this year, refiners were a key source of demand as they processed raw crude into refined products such as gasoline. The IEA estimates that refinery runs in Q1 were 60% higher than refined product demand growth. This has led to large storage injections, and gasoline storage now sits 12% above its five-year average. Gold: Geopolitical tensions and global growth concerns were supportive for Gold in July as it stabilized near post-Brexit highs finishing with a gain of 2.22%. 20.00 25.00 30.00 35.00 40.00 45.00 50.00 55.00 8,000 8,200 8,400 8,600 8,800 9,000 9,200 Lower 48 Oil Production WTI 1,000 1,050 1,100 1,150 1,200 1,250 1,300 1,350 1,400 Gold
  • 16. VOLATILITY CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 16 With the S&P 500 hovering near all-time highs, the VIX is at YTD lows VIX trading at 1-year lowsVIX: Despite another quarter of negative earnings growth, global growth shocks, and valuations at their highest point since the financial crisis, the VIX continued to fall as the S&P 500 rallied in the month. After a small Brexit spike up to 25.8 in June, the VIX traded at year-to-date lows on July 20 at 11.5 and ended the month at 11.9. 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 VIX
  • 17. EUROPE CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 17 European equities have recovered post-Brexit losses United Kingdom: The UK continued to digest the aftermath of the Brexit vote. David Cameron officially stepped down as Prime Minister, and Theresa May assumed the position on July 13. She has stated that she does not intend to trigger Article 50 until 2017 at the earliest as the nation tries to prepare for Brexit negotiations. This would potentially prolong the exit process until 2020. While a number of different options have been discussed, the only certainty has been uncertainty. Italy: Alongside the previously mentioned banking problems within Italy, and Europe as a whole, PM Renzi has scheduled a referendum vote for October. The referendum is seen as a confidence vote for his government, and if he loses then he has pledged to step down to allow a new government to be formed. With their latest victory in the mayoral race in Rome, the anti-EU Five Star party has been gaining momentum and poses a similar risk to Italy as the Brexit vote did to the UK. Europe quickly recovered post-Brexit losses German 10-Year firmly in negative territory 95 97 99 101 103 105 107 109 111 S&P 500 Index FTSE 100 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 German 10-Year
  • 18. CHINA CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 18 Chinese markets remained relatively calm in July Economic Data: Chinese economic data was mixed in the month. PMIs remain weak and the Caixin PMI reading for July slightly rebounded to 50.6 after three months of decline. Retail sales continue to be strong at 10.6% growth and industrial production has remained at 6.2%. Yuan: The PBOC stopped depreciating the yuan in July, and the currency finished with a gain of 0.20% in the month. From March 31 to July 18, the yuan quietly depreciated by a total of 3.89% as the PBOC aimed to ease capital flight from the country and relieve pressure on exporters. Equities: Equity markets finished mixed in July, with the Shanghai Composite posting a gain of 2.70% and the Shenzen Composite losing 1.66%. Despite gains of 6.1% since May 27, the Shanghai Composite is still down 15.82% YTD as the market has stabilized after an extremely volatile 2015. Equity markets have been quiet in Q2 The yuan stabilized in July 1,500 1,600 1,700 1,800 1,900 2,000 2,100 2,200 2,300 2,400 2,500 2,500 2,700 2,900 3,100 3,300 3,500 3,700 3,900 4,100 Shanghai Composite Shenzen Composite 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 USD/CNY
  • 19. DISCLOSURES The Volatility Index (VIX) shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. You can not invest directly in an index. The S&P 500 Total Return Index is the total return of the Standard & Poor’s composite index of 500 stocks, a widely recognized, unmanaged index of common stock prices. You cannot invest directly in an index. The Shanghai Composite is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. You cannot invest directly in an index. The Russell 2000 Index tracks the stocks of the 2,000 smallest companies in the Russell 3000 index. It is considered the benchmark index of the small-cap U.S. equity universe. You cannot invest directly in an index. The STOXX 600 tracks 600 publicly-traded companies based in one of 18 EU countries. The index includes small cap, medium cap, and large cap companies. You cannot invest directly in an index. The DAX (Deutscher Aktienindex (Germanstock index)) is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. You cannot invest directly in an index. CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 19
  • 20. DISCLOSURES The Nikkei 225 Stock Average, or Nikkei, is the leading index of Japanese stocks. It is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange. You cannot invest directly in an index. The Bloomberg US Corporate Bond Index is a rules-based market-value weighted index engineered to measure the investment grade, fixed-rate, taxable, corporate bond market. You cannot invest directly in an index. The Bloomberg US High Yield Corporate Bond Index is a rules-based market-value weighted index engineered to measure the non- investment grade, fixed-rate, taxable, global corporate bond market. You cannot invest directly in an index. The Barclay's 1-3 Year Treasury Index is an unmanaged index tracking short-term government securities with maturities between 1 and 2.99 years. You cannot invest directly in an index. The Barclay’s 7-10 Year Treasury Index is an unmanaged index tracking medium-term government securities with maturities between 7 and 9.99 years. You cannot invest directly in an index. The Barclay’s 20+ Year Treasury Index is an unmanaged index tracking long-term government securities with maturities greater than 20 years. You cannot invest directly in an index. CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 20
  • 21. DISCLOSURES JP Morgan Emerging Market Currency Index is comprised of the spot prices of 10 emerging market currencies relative to the U.S. dollar. You cannot invest directly in an index. The Bloomberg Commodity Index is a broadly diversified commodity price index designed to allow investors to track commodity futures through a single, simple measure. The index is designed to minimize concentration in any one commodity or sector. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure emerging markets equity performance. You cannot invest directly in an index. The opinions expressed are as of the date written and may change as subsequent conditions vary. This paper is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader. CONFIDENTIAL INFORMATION | © 2016 BPV Capital Management. All rights reserved. Institutional only. 21
  • 22. Contact Us: 865.243.8000 Local 877.819.2188 Toll Free 9202 S. Northshore Drive, Suite 300 Knoxville, TN 37922 www.backporchvista.com Copyright © 2016 by BPV Capital Management. All rights reserved.