monthly outlook gold

7/30/2019 Monthly Outlook Gold

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April 2013

Global implications of AbenomicsThe appointment by J apans Prime Minister Abe of a new central bank Governor, Haruhiko Kuroda,along with two new Deputy Governors, has raised many questions: What will happen next? How is thenew leadership different from the old one? What will be the market impact? Will Kuroda and his newcolleagues transform the Bank of J apan (BoJ ) into an aggressive, quantitative easing (QE)-supportingcentral bank, as the Prime Minister hopes?


2/10

Global implications of Abenomics To address these questions, Citi analysts have considered a number of factors that are likely to determine the stance of

BoJ policy going forward and the scope for the BoJ to transform itself. In short, Citi remains unconvinced on the likelihoodof transformation, while recognizing that direction from the top is influential and important.

Re-orientation of monetary policy could face headwinds

With J apanese interest rates already at very low levels, a further easing of J apanese monetary policy may result in the

weakening of its currency. Stronger communication and Announcement effects may be sufficient to fuel J apanese Yen

depreciation initially, but sustaining a substantial depreciation is likely to require a sizeable expansion in the BoJ s balance

sheet and aggressive ongoing asset purchases. Empirical evidence suggests that maintaining the Yen at 110 against the

US Dollar (USD) might require a doubling or more of the BoJ s balance sheet.

Such a re-orientation of J apanese monetary policy would face powerful headwinds from both within J apan and abroad.

Given J apans aging population, there are likely to be many citizens who are more concerned about inflation (and the

potential for negative real returns on their savings) than deflation, which has assured positive real returns.

Moreover, a substantial easing of monetary policy would not be well-received in some foreign capitals. If key emerging

Asian central banks loosened policy to allow their currencies to depreciate in tandem with the yen, the stimulus to the

J apanese economy would be reduced, but the resulting exchange rate shock for the United States, Europe, and Latin

American would be correspondingly larger. Citi analysts do not believe that currency wars is an apt description of the

global economy at present. However, if a sizable drop in the yen were followed by meaningful declines in emerging Asian

currencies, there is some risk that a destructive series of competitive devaluations may ensue, with negative consequences

for global growth and the stability of financial markets.

Taking all factors described into account, it is surprising how vigorously financial markets have responded to the promise of

increased monetary stimulus from J apan. Since early-October 2012, the Yen has fallen by nearly 20% against the USD

and a broad basket of currencies, and J apanese equity prices have surged by more than 30%.

Sources: Bank of J apan, Ministry of Finance Japan, Nikkei, and Citi Research as of March 11, 2013


3/10

Global implications of Abenomics In contrast, J apanese government bond yields are relatively little changed during the same period. If the BoJ had been

poised to make a dramatic shift in inflation expectations, the J apanese bond market would have responded with more signsof anxiety, including intensified volatility, given the low level of yields. One possible explanation is that bond holders are

confident that massive securities purchases by the BoJ will keep yields down even in the face of rising inflation. Another

possible explanation is that the domestic investors who dominate this market may be less convinced than foreign investors

who play a more prominent role in foreign exchange and equity markets that a durable shift in BoJ policy is imminent.

BoJ unlikely to transform overnight

In summary, Citi analysts believe that whether the so-called Abenomics will actually transform the Bank of J apan may

remain an open issue even after nearly two decades of deflation. Citis best guess is that newly-appointed Governor

Kuroda will bring a more ambitious rhetoric to monetary policy and expand the BoJ s asset-purchase program. The BoJ will

look and sound different than it has under Governor Shirakawa. But ultimately, the pivot in policy is likely to fall short of the

expectations of some market participants. Citis observation after many years watching the J apanese economy is that

things in J apan change only slowly.


4/10

Euro-AreaCyprus reached bailout deal

Cyprus clinched a last-minute deal with international lenders to shut

down its second largest bank and inflict heavy losses on uninsured

depositors, in return for a 10 billion euro deal. The deal removes to a

large extent short-term uncertainty and the risk of uncontrolled bank

bankruptcies which might possibly have led to Cyprus exiting EMU.

However, with confidence in the Cyprus banking sector severely hit by

developments of the past week, the risk of major deposit outflows

occurring when capital controls are eventually removed (or softened)

remains significant.

With mixed and below-par sentiment indicator readings, Citi analysts

expect GDP growth around 0% in the remainder of the year, bringing

their 2013 forecast to -0.5%. In an environment of poor economic

growth, record high unemployment and moderating wage growth, the

European Central Bank (ECB) may cut the refi rate by 25 bps to 0.5% in

2Q, and a further cut in the remainder of the year to 0.25%.

Modest nominal global GDP growth including a 2H13 pick-up in US

growth and a pick-up in EPS-boosting M&A and buybacks could support

modest single-digit earnings growth in 2013E. But, recession in the

Euro Area and near-record margins suggest that big earnings gains are

unlikely. Citi's analysts expect 10-15% earnings growth in 2013E and

2014E.

European equities look fair value on trailing P/E and price/book

multiples, in-line with long-term averages. While, in the absence of an

earnings collapse, absolute valuations look supportive of further 2013

gains for European equities, it is relative valuations which continue to

show equities as looking particularly cheap. In the UK, dividends have

not looked this cheap vs UK gilts in the last 100 years. European

equities are trading at record cheaps relative to investment grade credit.

Chart 1:

S&P 500 Index Chart 2:Dow Jones Stoxx 600 Index

*Denotes cumulative performancePerformance data as of 31 March 2013Source: Bloomberg


United StatesFed may begin to taper pace of asset purchase in 2H13

Citi analysts continue to expect economic growth of 2.1 % this year and

picking up further in 2014 to 2.8%. Support for expansion has improved

with widespread hiring, more effective monetary accommodation as

reflected in buoyant financial markets, and the rippling effects of

reviving housing. But fiscal drag may likely check upside momentum

now that the full budget sequester is going into effect. Slow

implementation is expected to further delay the larger fiscal drag, while

the recoverys underlying momentum may also be buffering the impact

of deficit reduction.

The Federal Reserves (Fed) aggressive forward guidance and open-

ended bond-buying have yielded the longest stretch of accommodative

financial conditions since the late-1990s. The drag from fiscal restraint

and policymakers high bar for satisfactory job growth will likely sustain

QE at an elevated pace through 1H13 but may begin to taper the pace

in 2H13. High unemployment and low inflation suggest no start to exit

strategies through 2014.

From an equity perspective, new highs for the Dow Jones and the S&P

500 are met with deep concerns about the sustainability of the advance

and questions regarding any opportunity for more appreciation.

According to Citis latest client survey, US investors seem most focused

on 4 issues: 1) Corporate margins sitting near previous highs; 2)

Valuation continues to come up as being relatively high; 3) Potential

Fed policy reversal as many believe that all of the gains in stock prices

have been "liquidity" driven; and 4) Allegedly frothy investor sentiment.

Citi analysts continue to believe that 2H13 may prove more challenging

as political drama in the form of another debt ceiling fight or elections in

Germany could be problematic. In the interim, the S&P 500 could

exceed our year-end 2013 target of 1,615 before slipping in the second

half.

3.60%

10.03%11.41%

34.18%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1-Mth YTD 1-Yr 3-Yr*

1.32%

5.04%

11.57% 11.46%

0%

2%

4%

6%

8%

10%

12%

14%



5/10

Chart 3:

Topix Index Chart 4:MSCI Asia ex Japan Index



JapanEconomic activity l ikely to pick up in near term

Economic activity is likely to accelerate in the near term, thanks to a

pickup in the global economy, positive impact from the yen depreciation,

fiscal stimulus from the latest supplementary budget and frontloading in

household spending ahead of the consumption tax hike in 2014.

However, the economy may shrink in 2Q14 because of the 3%-point

consumption tax rate hike. If so, the second consumption tax hike

scheduled in October 2015 may become difficult to implement politically

and this might strengthen concerns over fiscal sustainability.

Governor Kuroda stated at the recent parliamentary hearings that

monetary easing under the previous leadership is unlikely to achieve a

2% inflation target in the near future and that bolder steps should be

taken with a sense of urgency. Citi analysts expect that the Bank of

J apan will decide to consolidate the Rinban J GB purchases

conducted in terms of money market operations and those under the

asset purchase program and to purchase a much larger amount of

longer-dated JGBs at a policy meeting on April 3/4 or April 26.

Since late February, Japanese equities have continued to rise, even

without yen weakening, on gains in US equities and rising hopes for

structural reforms. However, yen weakness does stimulate

consumption, through the income effect resulting from the rise in yen

conversion amounts on overseas income and the wealth effect from

rising share prices. Citi analysts estimate that TOPIX rises by around

1.3% on every 1 weakening of the yen versus the dollar.

One large potential surprise is that the new BoJ governor Kuroda has

suggested there is a mountain of assets the BoJ can buy and that it will

purchase risk assets. Should the BoJ purchase risk assets in units of

trn (approximate US$9.5bn), we could easily see the yen weakening to

102/$ and TOPIX pushing on to around 1,130 in the near-term. In this

kind of environment, asset-rich companies are likely to outperform.

As ia Pacif icInflation remains benign

Citi analysts think it is the wide divergence in domestic demand

dynamics that is the main differentiating factor in both policy responses

and asset performance Thailand and Philippines are leading the

domestic demand resurgence while Koreas domestic demand is

lagging, partly due to cyclical policies staying too tight for too long.

Asia's headline inflation has begun to surprise on the upside, but core

inflation remains more benign, allowing some central banks to ease

further Philippines to deter PHP appreciation and reduce sterilization

costs & India to support moribund growth or keep rates low for longer

than warranted Indonesia and Thailand. Korea is an exception,

resisting a cut (so far) despite J PYKRW decline.

One market concern is that the US dollar will rally, which has historically

been negative for Asian markets, and inflation would also rise. Well,

history suggests that one of the two will happen, but not both. The

reason for the relationship between inflation and the US dollar is that

Asia is a net importer of many commodities. Whenever the US dollar

has been strong, commodity prices have been weak and hence input

costs for Asia ex have fallen.

Another common perception is that inflation is bad for stocks. However,

Citi analysts find a rather weak relationship between interest rates (long

rates) and valuations. Asian stock markets tend to be more asset-

intensive than their US and European counterparts, with a shift in

manufacturing base to the East. In an inflationary environment, the

replacement cost of book assets goes up. Hence, given the more asset-

intensive nature of Asia-ex, investors here tend to benefit from asset-

lighter stock markets. Also, the consumer sector is quite small in Asia-

ex versus other markets. While consumers tend to lose out, inflation is

actually a positive for the manufacturing sector with more room to pass

through price increases.

6.05%

20.34% 21.11%

5.71%

0%

5%

10%

15%

20%

25%


-1.78%

1.44%

7.59%

11.80%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%



6/10

Chart 5:

MSCI Emerging Markets Index


Emerging MarketsPositive on Latam equities

A persistently weak Euro Area is likely to keep CEEMEA1

activity weak,

in spite of encouraging PMIs and aggressive loosening by the Polish

central bank. Private sector deleveraging and weak external demand

are likely to be the main forces behind weak activity, but in some cases

e.g. Hungary, South Africa, Russia, Turkey uncertainties about the

quality of policymaking should also help cap potential growth.

Although valuations are attractive (at 8.4x 2013E earnings, compared to

10.8x for GEMs), sentiment on CEEMEA remains poor and earnings

momentum appears weak with a slower rebound in earnings growth

expected in 2013 (6-7%).

In 6-12 months, as the US dollar gains ground more generally,

CEEMEA currencies, particularly ZAR and HUF, are anticipated to

weaken further. Except for MXN, which is closely tied to the US, Latam

currencies are also forecast to depreciate/stay flat in the 6-12 month

time frame.

Within Latin America, Citi analysts now expect a hiking cycle to take the

policy rate to 8.75% in Brazil. In Mexico, no further policy rate changes

are anticipated after Banxico's one-off 50bp cut. Argentina's loss of

international reserves and worsening harvest outlook have put pressure

on the FX market.

As for Latin American equities, Citi analysts are now positive after its

severe underperformance in 2012 and the expectation of strong

earnings and accommodating central banks. Preferred markets include

Mexico (expectations of another strong earnings forecast in 2013,

structural reform and a cheap peso) and Brazil (strong earnings

rebound expected this year).

1. CEEMEA is the collective term for Central and Eastern Europe, Middle East

and Africa.

Positive on High-grade corporates and Emerging

market debt

US Treasuries

Benchmark rates are likely to remain rangebound as sluggish growth

prospects, political uncertainties, and the US fiscal debate weigh heavily

on the yield curve.

US Corporates

While corporates are still poised to outperform other areas of fixed income

this year, spreads should tighten only modestly from here. Valuations are

less compelling now as yields trade near historic lows and spreads hover

around post-crisis tights. Considering lower quality spreads still remain

relatively wide, Citi analysts expect triple-B credits to outperform.

US High-Yield

High yield returns have been more resilient than investment grade

securities due to better carry and strong continued fund inflows as a result

of improved risk appetites.

Emerging Market Debt

Debt markets in emerging nations have benefitted from improved fiscal

balances and more credible monetary regimes. Easing inflation pressures

allow central banks more room to ease (or at least, not hike), boosting

fixed income asset markets.

Euro Bonds

Citi analysts prefer Bunds and Gilts over Treasuries as economic and

fiscal headwinds are more supportive to the bond market and should keep

yields rangebound and safe haven sentiment intact.

Japan Bonds

Citi analysts expect J GB yields to rise during the course of 2013, given: (1)

the supply/demand mismatch due to large increases in issuance; (2) a

stronger risk appetite among investors resulting from continued Yen

weakness and gains from equities; (3) weaker confidence in fiscal

discipline; and (4) a potential rise in US Treasury yields.

Asia Bonds

In the near term, higher yielding government bond markets Vietnam, Sri

Lanka and India could still provide investors sufficient carry to offset the

risks. Despite the strong rally, pullbacks on PHP bonds provide entry

opportunity as further SDA rate cuts could keep bond curve inverted and

drive further rally in the very long end of the curve. Finally, Citi analysts

prefer Thai government bonds to Malaysia government bonds (MGS)

where foreign positioning is lighter, fiscal risks are more contained, and

bonds have underperformed swaps more in the last month.

-1.87% -1.92%

-0.63%

2.43%

-3%

-2%

-2%

-1%

-1%

0%

1%

1%

2%

2%

3%

3%



7/10

Currencies

USD: Generalised strength

While Fed QE is unlikely to end imminently, underlying US growth appears to be accelerating and markets may start anticipating some QE withdrawal

maybe from the September FOMC onwards. In G10, at least, this implies upside for the USD over 6-12 months against most other major currencies

although precise forecasts depend on local policy dynamics too.

EUR: Drifting

Citis short term forecast reflect the possibility of some partial retracement of the recent fall in EUR. Longer term, their forecast is more driven by USD

specific factors of economic outperformance and rising yields. The latter is likely to remain an important FX driver over the medium term. Overall, Citi

analysts forecast upside to 1.31 over 0-3 months with some pullback towards 1.29 over 6-12 months.

GBP: Amongst the weakest in G10

Sterling continues to lose ground, with cable temporarily breaking below 1.50 for the first time since mid-2010. This weakness is likely to persist on the

back of weak data and ultimately an increase in BoE accommodation. Citi analysts forecast GBP/USD at 1.51 in 0-3 months and 1.42 further out. By

implication of single currency views, EUR/GBP is seen at 0.87 and 0.91 in 0-3 months and 6-12 months respectively.

JPY: Waiting for Kuroda

Given how much is has been priced in for the J PY, Citi analysts think some disappointment may set in over 6-12 months, especially if risk appetite is

corrected later in 2013 by the start of the withdrawal of full accommodation by the Fed. Of course there are also J PY bearish factors to consider

including likely higher UST yields and a gradual further deterioration in J apans current account surplus. Nonetheless, Citi analysts forecast 97 over 6-

12 months.

AUD: Low er in medium term

On the positive side, risk appetites remain buoyant which tends to encourage carry trading and supports the AUD. But carry is gradually declining as

the RBA cuts rates and Citi economists do not think the RBA is done cutting yet, partly because the impact of existing cuts of 175bp have been muted

by the strength of the currency so far and by limited pass through to mortgage rate. With the USD now likely to be stronger earlier than seemed

probable before, Citi analysts have maintained their 0-3 months forecast for AUD at 1.04 and expect the rate to fall through parity again over 6-12

months, albeit likely only marginally.

EM Asia: Holding up better

Emerging Asian currencies have held up better than either CEEMEA or Latam since mid September, although the latest drift lower points to some US

dollar strength growing visible here too. That said, moves in local currencies have been strongly divergent in recent months while THB, INR and

PHP have all strengthened since mid-J anuary, KRW, TWD and MYR have weakened by more.

Aside from broader USD moves, the CNY provides a crucial anchor for Asian currencies. The USD/CNY fixing has been moving broadly sideways

since mid-J anuary. Citi economists expectations are that China is likely to shade monetary conditions tighter this year, especially with very high credit

growth and M1 and inflation both picking up recently. A stronger exchange rate would presumably be a key aspect of overall tightening, given the

strong policy desire to shift towards domestic demand driven growth. Citi analysts forecast USD/CNY at 6.19 in 0-3 months and 6.10 in the medium

term.


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Spotlight on Allocations


9/10

Spotlight on Allocations


10/10

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