Equities have shown some recovery, with the S&P 500 up by 0.5%, while bond yields have risen slightly, indicating a decline in prices. The Russian ruble continues to suffer due to collapsing oil prices, and the document highlights concerns over upcoming U.S. Federal Reserve decisions as well as market volatility. Factors supporting future equity performance include rising consumer spending, improving labor markets, and the potential for significant consumer stimulus from falling oil prices.

1. JP Capital
Perspective is everything
September 9, 2015
Equity Equities recovered their early week loses to stage a late rally. The S&P 500 up
0.5%.
Fixed Income Bond yields rose slightly with the benchmark US Treasury rising from
2.04% to 2.18%. Prices, which move inversely with yields, declined.
Currencies Russian Ruble is on the look this week, it is getting crushed due to oil
prices.
Commodities This week, we are having a look at how oil is affecting Russia. Gold is
slowly going back down now that Equities are looking brighter.
Market roundup
Source: Bloomberg, Spot returns. All data as of last Friday’s close. Past performance is no guarantee of future returns
Equities
Total Return in USD (%)
Level WTD MTD YTD
DJIA 16,643.0 -3.2 -2.5 -8.1
Nasdaq 4,828.3 -3.0 -1.9 -0.3
S&P 500 1,988.9 -3.4 -2.5 -5.4
MSCI World 1,658.1 -3.7 -3 -5.4
Fixed Income
Total Return in USD (%)
Yield WTD MTD YTD
U.S. 10- Year Treasury 2.12 0.6 0.7 1.6
U.S. Corporate Master 3.41 0.4 0.5 -0.1
ML High Yield 7.32 0.3 0.2 0.2
Commodities & Currencies
Total Return in USD (%)
Level WTD MTD YTD
Gold Spot 1,123.5 -0.9 -1.0 -5.2
WTI Crude $/Barrel 46.1 1.8 -6.4 -13.6
Current Prior Week End Prior Month End 2014 Year End
EUR/USD 1.11 1.12 1.12 1.21
USD/JPY 119.0 121.7 121.2 119.8

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EQUITIES
Riding out the storm
1
Sit tight Despite the recent correction,
equities still looks well placed to benefit
over the coming months. We hold this
view based on some key factors. The U.S
consumer contributes around 70% of
economic growth to the American
economy. History has shown (albeit is no
definite guide to the future), that a $30 fall
in oil roughly shifts $1 trillion from
producers to consumers. Logically, a $60
dollar fall, which is what we’ve seen,
leads to $2 trillion. That’s a considerable
tailwind and as an effective stimulus, is
larger than any government rescue
package measure in recent years. Rising
home prices, falling unemployment,
increasing wage growth and falling
energy prices will all support equities over
the medium term. As the labour market
tightens and full employment edges
closer, the Fed will be forced to raise
rates, if not to have the ability to act in
the next downturn.
2
Volatility in the near term will be a key
feature and from an optimistic viewpoint,
creates greater opportunities to pick up a
few bargains. One key worry to watch out
for in coming weeks is the FOMC decision
on the 17th September and the U.S budget
talks. Bear in mind the U.S has not had an
active budget for five years. When we talk
about the Fed being the only game in
town, this is a case in point. Politicians are
paralysed, which is why markets are
watching the Fed intently trying to front
run and reposition themselves before the
decision is known. Health care and
technology, sectors poised to benefit from
some underlying structural themes, have
been in our view unfairly punished by the
recent volatility. That said, if one is
prepared to weather the storm and realise
fundamentals have not significantly
changed, certain sectors will fair well
amid a tightening environment, namely
financials and the cyclical sector,
consumer discretionary.
Next- FX update: Oil market loses its three main anchors
Exhibit 1: Commodity slowdown weighs on energy
sectors
Source: Bloomberg, As of August 20, 2015

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FX &
COMMODITIES
Oil vs Russian Ruble A lot has been
mentioned in the last few weeks about the
Yuan devaluation, the fact that the Euro is
now becoming an attractive and safe
currency, and more importantly that the
Euro/Dollar parity is now becoming less
likely. However, there has not been a lot of
talk about the Ruble. What is interesting
with the Ruble is the degree of correlation
with the price of oil. In the last 12 months,
the oil price has dropped by a mere 55%,
while the Ruble has depreciated by about
50% against the U.S dollar, and the Ruble
index only about 34%. The likely explanation
is that 50% of Russian GDP is generated
from oil revenues; consequently, a 50%
drop in oil prices is equivalent to a 25% drop
in GDP. The Russian economy has been
pushed into recession for the first time since
2009 and with oil prices not looking like they
will climb back to their 2014 highs for a
while yet, we certainly would not
encourage a long position in the Ruble at
any point soon.
Gold Events seem to be looking a fraction
more stable with China, and I emphasise
on the word ‘fraction’ here. What I mean
by that is we are not experiencing as large
daily drops as we did from the Shanghai
Composite, relative to recent weeks. Gold
is becoming less attractive and has
declined by $40 in the last 2 weeks. We still
expect the precious metal to close the
year in $1130 region.
Yen/USD The Yen stood just under the 122
barrier just over a week ago, however, with
news that investors are withdrawing their
money from the U.S in the last week, the
Yen has gained amid negative sentiment
and is now just under the 120 barrier
against the USD.
Oil plays Russian roulette
Next- Bond update: Draghi talks Euro lower
Exhibit 2: Russian ruble collapses with oil price
Source: Bloomberg data
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USD/ RUB (RHS)Brent Oil (LHS)

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FIXED INCOME
Jawbone “We will do whatever it takes,
and believe me, it will be enough”, were
the words of the ECB President Mario
Draghi in his London speech back in
2012. Few people have the ability to talk
markets lower without action. In
economic theory, if the central bank
commits to an objective, but then
reneges on its promise, this ‘fooling’
mechanism causes markets to realign,
adjusting to the paradigm. Clearly,
fooling the market continuously leads to
distrust for future promises, yet super
Mario has the magic touch few posses.
With the Chinese currency move and
the subsequent turmoil it has caused on
emerging nations, the European
situation has been forgotten. The
resignation of the Greek Prime Minister,
Alexis Tsipras, has sparked renewed
uncertainty over the future of future
bailouts agreements.
.
Bund yields have been on the decline since 1970 and have dropped to the lowest levels
not since in the past 200 years (see Exhibit 4). The oil shock of 1973 spiked rates to circa
10% but has fallen ever since. In many respects, the decline is symptomatic of the
European project itself, with most countries being worse off since joining the common
market. To this day, the four pillars of a full union are still not fully intact.
In the summer of this year we did see a minor yet dramatic reversal in bund yields,
where the benchmark 10 year rose by circa 80 basis points from near 0% to just under
1%. The move was caused by some key factors. Initially, growth and inflation
expectations for the Euro Area increased, yet in hindsight, were maybe premature due
to softer PMI figures and the subsequent devaluation of the Chinese Yuan. Moreover,
issuance outpaced demand sending prices lower and yields higher. Finally, albeit not
the final reason, was that the negative shorter dated yields became eligible for
purchase, shifting demand towards the lower end of the bund curve.
We see rates maintaining these lower levels in the medium term, as growth is unlikely to
be blockbuster in the near term.
Exhibit 4: German Bund Yields since 1807
Super Mario eases
concerns
Source: BoAML Research

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JP Capital
Perspective is everything
Jonathan Taubert
FX and Commodities
Pete McCarthy
Equities and Fixed Income
JP Capital Team
Going forward Equities tend to show greater volatility in low interest rates environments.
On the flipside, the current bull market, up until now, did not show signs of faltering. It
was only the Yuan move that sparked the sudden panic and the subsequent emerging
market currency devaluations and stock market selling. The longer rates stay at the
effective zero level, the greater chance there is of business models running into
difficulties. It’s therefore not a question of how much lower can we go to inject
economic resilience, but how long can we continue to be in emergency conditions,
when unemployment in the U.S is 5% and oil prices have halved over the medium term.
The former Fed Chairman, Ben Bernanke outlined that when you go ‘unconventional’,
you have to suffer the costs and risks as well as the benefits. The recent sell off has
created opportunities in the major public markets and as the U.S continues to improve
economically, the EUR/USD rate should track lower as the ECB maintains its loose
monetary stance by expanding the share issue limit to 33%. Furthermore, the Euro as a
funding currency may be called into question if the Greek situation gets messier in the
next few months.