Last Hurrah for Central Banks?

Macro Strategy Review for September 2105

by Jim Welsh with David Martin, Forward Markets

Central Banks’ Last Hurrah?

The Federal Reserve (Fed) launched its first round of quantitative easing (QE) in 2008 and finished its third round of QE in December 2014.

In the process, the Fed expanded its balance sheet from $900 billion in 2007 to $4.5 trillion in 2015. The Fed has been extremely accommodative, holding the federal funds rate just above 0% since December 2008. It would be an understatement to say the Fed has kept the monetary policy pedal to the metal for a very long time. Despite the Fed’s extraordinary ministrations, the average annual increase in gross domestic product (GDP) has averaged just 2.30% since the recovery began in June 2009. In the other 10 post-World War II recoveries, when the Fed only had to lower interest rates to spur a strong self-sustaining recovery, GDP averaged an annual increase of 5.36%.

The term “quantitative easing” was first used and implemented by the Bank of Japan (BOJ) on March 19, 2001. The BOJ was forced to attack weak growth and persistent deflation after 0% interest rates failed to rejuvenate economic growth. After more than a decade of QE failed to lift Japan’s economy and oppressive deflation, the BOJ moved to devalue the yen in 2012 at the behest of newly elected prime minister Shinzo – Abe. On April 1, 2014, an increase in the sales tax from 5% to 8% tipped the economy back into recession in the second and third quarter. In our August 2014 Macro Strategy Review (MSR), we said that if the economy didn’t improve in the third quarter, the Bank of Japan would likely launch another round of QE. On October 31, 2014, the BOJ did initiate a huge QE program. The BOJ announced it would increase its balance sheet by 15% of GDP per year and extend the average duration of its bond purchases from seven years to 10 years. As desired, the new aggressive QE program resulted in another decline in the yen’s value versus the dollar. Since fall 2012, the yen has plummeted more than 38% relative to the dollar. After three years of unfettered QE, Japanese government bonds on the BOJ’s balance sheet now represent 68% of GDP, up from 31% in fall 2012. The economic impact of the BOJ’s unprecedented monetary stimulus has been almost nil. In the second quarter, Japan’s GDP contracted -1.6% and is still lower than it was in 2007.

The European Central Bank’s (ECB) path to QE was similar to the Fed’s and the BOJ’s. The ECB lowered its policy interest rate to 0.25% on December 14, 2011, and then to 0% on July 11, 2012. When lower rates proved insufficient to invigorate the eurozone’s moribund economy, the ECB launched the Long Term Refinancing Operation (LTRO) in October 2011, which was intended to provide one-year loans at below-market rates to eurozone banks. Just two months later, the ECB significantly expanded the LTRO program so it would provide bank loans for three years and expanded the range and quality of assets it would accept as collateral. By March 1, 2012, a total of 1,323 banks had received $1.589 trillion of loans. Unfortunately, most of the borrowed money was never lent to eurozone consumers or businesses and instead remained reserves parked at the ECB. In an attempt to push banks to use the LTRO loans for lending to boost the eurozone economy, the ECB levied a charge of -0.10% on reserves held at the ECB on June 11, 2014. This penalty rate was increased to -0.20% on September 10, 2014. Rather than paying the penalty rate imposed by the ECB, eurozone banks merely repaid the loans. As we noted last month, bank lending has finally turned positive in the last two months after being negative since the spring of 2012. After the first quarter of 2011, the eurozone economy contracted through the end of 2012 before a modest recovery took hold in the second quarter of 2013.

In 2014, the ECB was between a rock and a hard place. Economic growth was anemic, inflation was just 0.5% and well below the ECB’s 2% target, rates were near zero percent for savers and negative for bank deposits, the Asset Quality Review of the 128 largest banks wouldn’t be completed until October 2014, and the ECB was many months away from being able to launch its QE program due to the complexity of the eurozone. In the spring of 2014 we thought these challenges left the ECB only one option: lower the value of the euro to lift inflation and GDP growth through growing exports. Since May 2014, the euro has lost more than 21% of its value versus the dollar. The depreciation of the euro has lifted exports and GDP, as we forecast in June 2014. In the first quarter of 2015, GDP growth was up 1.5%, the best in four years, but slipped to 1.3% in the second quarter. While modest growth is better than the alternative, such anemic growth will only have marginal success in bringing down the eurozone’s unemployment rate, which was 11.1% in June. It would be exaggeration to describe the ECB’s monetary exertions over the past four years as a success.

The monetary path other central banks have taken since the financial crisis has been quite similar. When traditional monetary tools proved ineffective, central banks were forced to adopt extraordinary measures. Despite tremendous monetary stimulus, economic growth has remained sluggish or weak compared to prior recoveries in the U.S., Japan and Europe. This reality has not registered fully with global investors who remain dazzled by the impact central banks have on equity prices. The widening gap between economic growth and elevated equity valuations has the potential to become an abyss if and when global investors realize central bankers are not wizards but conmen who have accomplished the largest sting in financial history. If you haven’t seen the film “The Sting,” it, besides being a great movie, is a wonderful example of how humans can be duped by seeing what they want to see and believe. Investors want and need to believe central bankers have the magic potion, which allows investors to rationalize buying assets that are clearly overpriced and, more importantly, mispriced.

This raises a very important question: when will investors begin to question their faith in central bank omnipotence? We have no idea when this doubt will begin, but we are confident that the day is coming (2016 or 2017?) Our guess (hopefully an educated one) is that equity markets are poised for a decline of 10% or more before the end of 2015. We expect central bankers to respond with words of comfort and the prospect of yet another rabbit being pulled from their monetary hat of tricks; global investors will rejoice and feel they can buy equities with impunity; equity markets will leap upward, which will reinforce investors’ unbridled faith in central banks. The potential rally is likely to be impressive and the market’s last hurrah. We think the next round of central bank stimulus will be even less effective in spurring economic growth than the last seven years of unprecedented monetary accommodation. If correct, valuations after the last hurrah rally will be even more stretched than they currently are, especially if economic growth fails to improve, as we suspect. There is always a chance that central banks will manage to navigate around the highest global debt-to-GDP ratios in history, weak global growth and a beggar-thy-neighbor currency war that is likely to intensify if global growth remains punk over the next year. However, investors would be wise to also accept the possibility that the economic challenges we face will overwhelm central banks and evaporate the faith investors have placed in them. Investors are heading for their “uh-oh” moment when they realize their blind faith in central banks has made them a modern-day Wile E. Coyote whose jet pack has just run out of fuel. To ignore this possibility and not prepare for the economic and social dislocation that would result seems imprudent.

China

In the September 2014 MSR we noted that no central bank had ever been successful in unwinding a credit bubble or deflating an asset bubble without significant damage to their economy. We didn’t think the People’s Bank of China (PBOC) would be the first to succeed, but thought they might be more successful than other central banks in preventing a full-scale financial crisis. Since November 2014, the PBOC has lowered its benchmark lending rate four times to a record low of 4.85% in June. The PBOC has lowered banks’ reserve ratio from 20.0% to 18.0% in an attempt to free up money so Chinese banks can lend more. To address over-indebted local governments, the PBOC has made cheap money available to banks to lend to local governments so local governments can sell the old loans to the PBOC. Yeah, you read that correctly, but local governments are under the gun so convoluted efforts are necessary. According to JPMorgan, local governments in China face a debt service burden of $156 billion this year on $2.9 trillion of debt. According to the Chinese government, land sales, which constitute a significant portion of local government revenue, plunged $150 billion from last year while fiscal revenue grew only 5.4% in the first seven months of 2015, compared to 8.5% growth last year. Between 2009 and 2013, local government revenue grew an average of 19%, according to Deutsche Bank. The combination of higher interest expense and lower revenue will squeeze local governments in coming months.

China has reported that its economy grew 7% in the second quarter, but the actions of the PBOC speak louder and offer a different message. Despite monetary stimulus, China’s economy continues to be weighed down by excess capacity and weak exports. China’s producer price index (PPI) has been negative for 40 consecutive months and provides clear evidence of the deflationary pressures generated by a huge overhang of excess capacity. This has caused Chinese producers to dump their excess capacity on the global market, even if it means selling products at a loss.

The cost of Chinese products has increased since wages in China have quadrupled over the last 12 years. This is a positive in the long run since it has increased the size of China’s middle class and domestic demand and will eventually reduce China’s dependence on domestic investment and exports. But what has really hurt China’s export competitiveness is the devaluation of the yen and euro against the dollar. China has endeavored to keep the yuan tied to the dollar, in part to avoid being named a currency manipulator by Washington politicians. As a result, the yuan has risen 38% versus the yen since November 2012 and is up 22% relative to the euro since May 2014. The yuan has also increased 4.1% against the New Taiwan dollar since May, 8.7% against the Thai baht since February 2015 and 20% versus the Malaysian ringgit since August 2014.

On Monday, August 10, Chinese exports were reported down -8.3% in July from a year ago, which proved to be the final straw for the PBOC. China devalued the yuan by 1.9% on Tuesday, August 11 and by August 14 it was down by 4.4%. The action surprised global markets which sold off sharply until China intervened to stabilize the yuan on August 14. In the April MSR we wrote:

“The depreciation of the yen and euro is squeezing Chinese exporters unmercifully… The relative strength of the yuan versus a host of trade competitors and weak Chinese export growth…will force the PBOC to cut rates again and consider lowering the value of the yuan to defend its exporters…If China moves to protect itself by lowering the value of the yuan, another wave of deflation will be unleashed in the global economy.”

In the wake of the yuan devaluation, many commodities have posted multi-year lows, as have a number of emerging market (EM) currencies and markets.

If China wants to lift economic growth through an increase in exports, a 4.4% devaluation is not going to move the needle. Given the magnitude of the yuan’s appreciation versus the yen, euro and many EM currencies, we think the PBOC will seek to further lower the value of the yuan through a managed and gradual process over time. If they are successful, the financial market fallout is likely to diminish as markets accept it. Even if financial markets calm down, the economic fallout on EM economies will persist and continue to be a drag on growth. Just as the Fed, BOJ and ECB were pushed to pursue ongoing monetary accommodation to lift growth and attempt to stem the persistent spread of deflation, the PBOC will likely lower rates further in coming months.

Emerging Economies

The euro represents 57.6% of the dollar index while the yen represents just 13.6%. As the nearby table shows, the yuan has no weighting nor does any EM currency. During the last few months, the euro and the yen have remained in a small trading range and, as a result, the dollar index has also been trading in a small range. On the surface, the narrow trading range makes it look as if the turmoil in the foreign exchange market, so evident early in 2015, has significantly calmed down. However, the trade-weighted dollar index, which includes China, Mexico, Korea and Asia ex-Japan, has been making new highs above the mid-March high in the dollar index. As this is being written on August 19, the JPMorgan Emerging Market Currency Index, which consists of only EM currencies, is down almost -8% since mid-May and has plunged 20% versus the dollar since June 2014. Since mid-May, the dollar index has been virtually unchanged, which illustrates why the extreme weakness in EM currencies has not been making headlines. That may be about to change.

According to the International Monetary Fund (IMF), $650 billion flowed into emerging market countries as a result of QE by the Federal Reserve. As we noted in the December 2014 MSR, there was a significant risk that some of this “hot” money would flow out of emerging economies as EM currencies depreciated. As money flows out of EM countries, it represents a tightening of monetary policy, even if domestic monetary policy remains unchanged. This will act as a drag on growth for the EM countries experiencing outflows. According to the Bank of International Settlements, the amount of dollar-denominated loans in EM countries since 2009 has soared 50% to $9.2 trillion as of September 2014. Much of this debt was not hedged since the dollar was expected to weaken against EM currencies. The cost for EM companies to service unhedged dollardenominated debt has increased proportionately to the amount the local currency has depreciated. The 20% decline in the JPMorgan Emerging Market Currency Index since June 2014 means many EM companies’ debt service, and the face amount of the loan, has risen by 20%, and almost 8% just since mid-May. The higher cost of debt service will crimp EM companies’ cash flow, which will result in less business spending, more layoffs and slower growth for many EM countries in coming months.

In the October 2014 MSR using data provided by the September 8, 2014, JPMorgan report entitled “Emerging Markets and Outlook Strategy,” we analyzed 12 countries based on their GDP growth, current account surplus or deficit, budget surplus or deficit and level of inflation, creating a “net composite” level of each. We concluded that those countries that had the weakest fundamentals, as measured by the net composite, were likely to be vulnerable to the largest currency declines. With the benefit of hindsight, that analysis proved prescient, as those countries with the lowest net composite have experienced large currency declines versus the dollar.

In our April MSR we discussed the potential of a replay of the Asian and EM crisis in 1997-1998. The crisis in 1997-1998 was precipitated by a decline in EM currencies, especially in those countries that were burdened by a high proportion of debt held by foreigners as a percentage of GDP. In 1996, the average foreign debt of 15 EM countries was 14.8% versus 18.4% as of September 30, 2014, an increase of 24.3%. The combination of more capital outflows from foreign debt, more currency weakness and an increasingly heavier debt load for EM companies is a toxic combination. The realization that all is not well in the EM world has dawned on EM investors. The iShares Emerging Markets Local Currency Bond ETF (LEMB) is down almost 20% since July 2014.

In the October 2014 MSR, we presented a chart of the iShares MSCI Emerging Markets ETF (EEM), noting that it had just failed to break above the trend line connecting the highs in 2007 and 2011 and had fallen below intermediate support at $43.25. We thought EEM was likely to decline below $39.00. It bottomed at $37.22 on December 19, 2014. After the dollar peaked in mid-March, emerging markets were provided a temporary reprieve. From the low in mid- March under $38.00, EEM rallied to $44.09 on April 28, but again failed to breakout above the trend line from its 2007 peak. The long-term uptrend line starting on October 3, 2011, has been tested on numerous occasions, with each test being followed by a rally of 10%–15%. On July 6, EEM fell decisively below this important trend line, closing at $38.66, almost 3% lower than the trend line. This breakdown suggested that EEM would decline to $36.00, which has been an important pivot point for the last 10 years. On August 19, EEM closed at $34.33, well below $36.00. The intra-day low on August 19 was $34.04, less than 1% below the October 3, 2011, low of $34.29. Given the EM fundamentals, we suspect this area of potential support will prove temporary. In 2011, EEM fell from $49.35 on May 2 to $34.29 on October 3, a loss of $15.06. If EEM matches that decline from the high of $45.35 on September 14, it would drop to $30.29. The low in 2008 was $18.22 on November 20, which was followed by a rally of $31.13 to $49.35 in May 2011. If EEM retraces the Fibonacci ratio 61.8% of that rally, EEM would fall to $30.11. These two technical measuring techniques suggest EEM is likely to fall another 10% from its close on August 19.

In the spring of 2014, our fundamental analysis of the eurozone economy led us to forecast a decline in the euro. After the euro experienced a weekly key reversal during the week of May 9, we said the combination of our fundamental and technical analysis provided a high level of conviction that the dollar was beginning a major rally since the euro represents 57.6% of the dollar index. As that rally unfolded, we highlighted the negative implications it held for commodities, emerging market currencies and equity markets. Since we discussed it last April, long before it was on anyone’s radar, the risk of a 1997-1998 style EM crisis has increased. We suspect there will be references to the crisis in 1997-1998 in coming weeks, which will likely result in additional selling and an increase in negative sentiment toward emerging markets. Investors’ faith in emerging markets is likely to be shaken as they realize that the large GDP growth spread between emerging and developed countries that prevailed for many years has narrowed and is not likely to recover to prior levels.

In our December 2013 MSR we discussed the economic fundamentals of China, Brazil, India and Indonesia and concluded that these countries were unlikely to return to prior growth rates in 2014 and beyond. GDP growth has slowed in China from 7.7% in 2013 to 7.0% in 2015, has slowed in Indonesia from 5.8% to 4.4% and will contract in Brazil -1.2% in 2015 after growing 2.5% in 2013. Only India has improved, with growth picking up from 5.5% in 2013 to 7.5% in 2015, due in part to changes made by prime minister Narendra Modi who took office in May 2014.

Oil

Our combination of fundamental and technical analysis has really helped us in anticipating the wild volatility in oil prices. In the January 2015 MSR, we discussed why we expected oil production in other oil-producing countries to remain high. Many countries are highly dependent on oil revenue to fund domestic spending programs, which include subsidies for food and energy for the poorest people in their country, and many need oil above $90 a barrel. In the U.S., companies seeking to cash in on the boom in fracking have issued $500 billion of bonds since 2008. We expected these firms to continue pumping oil in order to service their debt.

We observed that producers were choosing to put their excess production into storage, which would be supportive in the short run. However, the key point was that sooner or later all that supply sitting in storage would eventually find its way into the market. After falling from over $100 a barrel to under $45 a barrel, oil was extraordinarily oversold. We expected oil to rebound in a choppy fashion up to $62 a barrel before it would fall again and at least test the initial low. In the April MSR we said:

“In 2008 oil prices bottomed around $32 a barrel. If [WTI] oil prices drop below $40 a barrel, as we expect in coming months, the low in 2008 could act as a magnet and bring prices down to at least test that level.”

Our guess is that oil is likely to establish a low between $32 and $40 a barrel. As this is being written on August 19, WTI oil closed under $41 a barrel. There is a risk that WTI oil could briefly drop below $32 a barrel. Unless there is a geopolitical supply disruption, WTI oil is unlikely to trade much above $50 a barrel in coming months. If correct, the odds favor at least one oil-related bond default before year end, which would especially rattle the high-yield bond market and likely spill over into the stock market.

Gold

the longest losing streak since 1996, and had also closed under $1,100 an ounce for the first time since March 2010. We quipped that the carnage was likely to lead to articles that inferred anyone considering buying gold or gold stocks should seek psychiatric help. With sentiment so negative, we thought it was exactly the time to consider buying. Our guess was that a trading low was likely to be established between $1,050 and $1,081. Gold made its low at $1,077.25 on July 24 and closed above $1,130 on August 19, as this is being written. We continue to expect gold to rally to $1,200– $1,224 before year end.

What makes the rally in gold somewhat remarkable is that it occurred while many commodities have been quite weak, especially in the wake of China’s decision to devalue the yuan. So often the fundamental reason why gold has rallied or declined comes out after the move is well underway. Potentially, gold will already be above $1,200 when an oil company defaults on a bond or the disruption in emerging markets worsens and begins to make front page headlines. There is the possibility that gold could rally up to $1,300, which we’ll discuss in more detail if gold does approach $1,200.

Federal Reserve

We don’t think the Federal Reserve will raise rates at its September 16 Federal Open Market Committee meeting. Domestically, GDP growth is okay and job growth is decent, but wage growth remains stuck in neutral at 2.1%. The trade-weighted dollar index continues to make new highs, which means the export headwind from a more expensive dollar is getting stronger. The decline in the price of oil is dragging inflation expectations lower and inflation remains under the Fed’s 2% target showing no concrete signs of accelerating. We don’t think the Fed is oblivious to the renewed wave of deflation and the economic and financial stresses that are likely to result from low oil prices and the significant declines in EM currencies. Raising rates now could easily precipitate more dollar strength, an EM currency crisis or a plunge in oil prices well below $40 a barrel as concerns about global growth increase. We know the Fed wants to begin to normalize rates, but the global financial system is more fragile now than most investors realize. We hope the Fed realizes it too.

Bonds

Between October 2013 and May 2015, the yield on the 10-year Treasury yield was contained in the downward channel as indicated by the parallel red trend lines on the nearby graph. After briefly dropping below the lower trend line in January, the yield quickly popped back up into the channel. From late May through mid- August, the yield held above the upper red trend line after failing to reenter the channel on July 7.

Last month we thought the 10-year Treasury yield would make one more attempt to reenter the channel, so a drop below 2.190%, possibly as low as 2.100%, seemed likely. On August 20, the 10-year Treasury yield fell to 2.075% mid-day and closed at 2.084% due to the weakness in the stock market. If the stock market declines further, as we expect, and the Fed makes it clear they are not going to raise rates in September, the 10-year Treasury yield will likely remain in the downward channel. If the stock market drops by more than 10% and central banks intervene, the 10-year yield is likely to bottom and reverse higher as investors assume more central bank accommodation will lift growth both in the U.S. and globally. This may sound counterintuitive, but the 10-year yield rose 1.642% between July 2012 and December 2013 even though monetary policy remained unchanged. Now that the 10-year yield has reentered the channel, any move upward out of the channel could be an intermediate-term negative, especially if it closes above 2.280%. We think there has been a fair amount of short covering and new longs entering the Treasury bond market in response to the negative news in recent weeks, which means Treasury bonds could be vulnerable to a bout of long liquidation in coming months. If and when the intermediate-term trend turns negative, the 10- year yield is likely to rise above 3.034% and potentially reach 3.293%. This is the target level since it would equal the 1.642% increase between July 2012 and December 2013 when added to the 1.651% low in January 2015. We suspect the move higher in yields will not begin in earnest until later this year or early 2016.

Stocks

In the April MSR after it was announced that Apple was being added to the Dow Jones Industrial Average (DJIA), we noted that in recent decades it had not been uncommon for a stock to underperform after it had been added to the DJIA. Chart analysis of Apple’s stock indicated that some caution might be warranted since the chart pattern in Apple appeared to nearing the end of the advance that began in 2005. We thought Apple would exceed the February 24 high of $133.80, which it did on April 28, and then decline to $105.00–$110.00. On August 12, Apple traded down to $109.63 before bouncing. We think Apple will test $105.00 and could drop under $100.00 if the overall market experiences the deeper correction we expect.

The advance-decline (A/D) line is one of the better technical indicators since it measures whether the majority of stocks are participating in a rally or not. The A/D line has usually weakened before an intermediate or major market top is recorded, as it did in 2007 and numerous other instances going back to 1928, which is why we’ve highlighted it in the last two MSRs and again this month. The A/D line has continued to trade well below its peak made on April 24 and below the horizontal trend line on the nearby chart which connects highs on March 2, March 23, June 23 and July 16 and the low on May 7. The failure of market breadth to improve enough to allow the A/D line to climb above the horizontal trend line has been a sign of weakness. The pattern of successively lower highs in the A/D line represents rally failures. In a healthy market, the A/D line makes higher highs and higher lows. As we noted last month, the A/D line has now made a series of lower highs and a lower lows and completed what looks like a top. We also noted last month that the only missing ingredient before a 4%–7% correction occurred was for a reason to sell to appear. The devaluation of the yuan by China and weakness in oil, copper and many commodities amplified concerns about a slowing in the global economy. We think concerns about EM currencies and equity markets will increase in coming weeks and add to selling pressure. If a cluster of reasons to sell appear, the S&P 500 Index could test last October’s low near 1,820–1,860 before Halloween.

Last month, despite the market’s many technical shortcomings, we thought the S&P 500 had the potential for one more rally to our cited range of 2,140–2,160 as long as the S&P 500 did not close below 2,044. As this is being written after the close on August 20, the S&P 500 closed at 2,035.73. Not only did it close below 2,044, but it was the lowest close since February 2. This breakdown should lead to more selling and a test of support on the S&P 500 between 1,985 and 2,020 at a minimum. The lower the S&P 500 goes in the short run the more oversold it will get, which should lead to a decent snapback rally that will run into stiff resistance at 2,065–2,085. If we’re correct about the Fed not raising rates in September, it is likely that various Fed members will communicate this in speeches before the September 16 meeting. If investors come to believe the Fed will not raise rates at the September meeting, it will likely lead to a rally, which we suspect will run out steam if it approaches 2,065–2,085, especially if our assessment about emerging markets and oil prove correct. Until further notice, the market is on the defensive.

If a decline of 10% or more occurs in global equity markets, we would expect the central banks around the world to respond with more verbal and actual monetary stimulus. As we discussed previously, if central banks intervene to support global equity markets, a last hurrah rally could take hold that lasts into the first half of 2016. In the meantime, we’ll take it one step at a time.

Definition of Terms

10-year U.S. Treasury is a debt obligation issued by the U.S. Treasury that has a term of more than one year but not more than 10 years.

Advance-decline (A/D) line is a technical indicator that plots changes in the value of the advance-decline index over a certain time period.

Basis point (bps) is a unit of measure that is equal to 1/100th of 1% and used to denote a change in the value or rate of a financial instrument.

Cash flow is a revenue or expense stream that changes a cash account over a given period.

Debt-to-GDP ratio is a measurement of a country’s federal debt in relation to its gross domestic product (GDP). By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates a country’s ability to pay back its debt.

Devaluation is a monetary policy tool whereby a country reduces the value of its currency with respect to other foreign currencies.

Dow Jones Industrial Average (DIJA) is a price-weighted average of 30 blue- chip stocks that are generally the leaders in their industry and are listed on the New York Stock Exchange.

Federal funds rate is the interest rate at which a depository institution lends immediately available funds to another depository institution overnight.

Federal Open Market Committee (FOMC) is a branch of the Federal Reserve Board that determines the direction of monetary policy.

A Fibonacci number refers to a number sequence in which each number is the sum of the previous two numbers. The concept was introduced to the West by Italian mathematician Leonardo Fibonacci.

Gross domestic product (GDP) is the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. The GDP of a country is one of the ways of measuring the size of its economy.

JPMorgan Emerging Market Currency Index (EMCI) is a tradable benchmark for EM currency markets. The index is comprised of 10 liquid currencies across three equally weighted regions: Latin America, Asia and CEEMEA (Central & Eastern Europe, Middle East and Africa) vs. USD.

Market breadth is a ratio that compares the total number of rising stocks to the total number of falling stocks.

Producer Price Index (PPI) is a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time.

Quantitative easing refers to a form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero.

S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.

Short selling is the practice of selling a financial instrument that a seller does not own at the time of the sale with the intention of later purchasing the financial instrument at a lower price to make a profit.

Trade-Weighted U.S. Dollar Index measures the foreign exchange value of the U.S. dollar compared against foreign currencies most widely used in international trade.

U.S. Dollar Index is a measure of the value of the U.S. dollar relative to six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.

Valuation is the process of determining the value of an asset or company based on earnings and the market value of assets.

Volatility is a statistical measure of the dispersion of returns for a given security or market index.

One cannot invest directly in an index.

RISKS

Investing involves risk, including possible loss of principal. The value of any financial instruments or markets mentioned herein can fall as well as rise. Past performance does not guarantee future results.

This material is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer or solicitation with respect to the purchase or sale of any investment. Statistics, prices, estimates, forward-looking statements, and other information contained herein have been obtained from sources believed to be reliable, but no guarantee is given as to their accuracy or completeness. All expressions of opinio