Vix Strategy

EUROPEAN INVESTMENT STRATEGY WEEKLY REPORT
Is Stability Unstable?
January 9, 2014
Periodical In this Issue:
FF Low Volatility
Periods of low stock market volatility sow the seeds of their own destruction, because they encourage complacency and an under-pricing of risk. Buy the near month VIX contract and simultaneously sell the far month contract when the futures curve is upwardly sloping (taking into account the bid-offer spreads). Two important indicators will track whether the euro areas main imbalances are correcting: higher labour cost inflation in Germany compared to the other major euro area economies, and a converging distribution of bank lending rates across the euro area. Maintain a holding in the aggregate euro area sovereign bond and a long Eurostoxx, short S&P 500 equity market pair trade.
Doesnt Last............. 2
FF Why Stability Is
Unstable.................. 3
FF The Best Way To
Trade Volatility......... 4
FF Is There Too Much
Complacency In The Euro Area?................ 5
CHART OF THE WEEK

% 50 40 30
Volatility Has Mean-Reverted For A Century

VOLATILITY OF DOW JONES INDEX*
% 50 40 30
20
20
10
10
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1915
1925
1935
1945
1955
1965
1975
1985
1995
2005
*ANNUALISED STANDARD DEVIATION OF MONTHLY RETURNS OVER ROLLING 12-MONTH PERIODS.
editor@bcaresearch.com TEL 514.499.9550
www.bcaresearch.com Copyright 2014 BCA Research Inc. All Rights Reserved. Refer to last page.
Lisa Majmin INTERNATIONAL FINANCE CORP
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EUROPEAN INVESTMENT STRATEGY - WEEKLY REPORT JANUARY 9, 2014
Periods of subdued volatility do not last.
CHART 2
Stock Market Volatility Has No Trend In The U.K.

% 20 VOLATILITY OF FTSE ALL SHARE INDEX* % 20
15
15
10
10
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1964
1969
1974
1979
1984
1989
1994
1999
2004
2009
2014
Low Volatility Doesnt Last
f there is a universal truth in economics and financial markets it is that periods of subdued volatility do not last. This is true for the economy, but it is especially true for the stock market. Volatility has no long-term trend and always and inevitably mean-reverts. Furthermore, this result is remarkably consistent across different geographies and economic eras spanning years, decades and even centuries1 (Chart of the Week, Chart 2 and Chart 3). Nevertheless, the powerful evidence of volatilitys long-term constancy does not prevent a common delusion. An extended period of low volatility has frequently seduced leading politicians and economists into complacency that economic and financial market instability has been conquered. Barely a week before the Great Crash of 1929, Yale Universitys Professor of Economics Irving Fisher famously predicted that stocks have reached what looks like a permanently higher plateau. More recently, Ben Bernankes self-congratulatory 2004 speech titled The Great Moderation claimed that recessions had become less severe because of improved-monetary policy. And Britains former Chancellor and Prime Minister, Gordon Brown, infamously boasted in 2007 that we will never return to the old boom and bust.
G. William Schwert of the University of Rochester shows stock market volatility going back to 1802 at www.schwert.ssb.rochester. edu/volatility.htm
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Volatility has no long-term trend and always and inevitably mean-reverts.
CHART 3
% 40 35 30 25 20
Stock Market Volatility Has No Trend In The Euro Area

VOLATILITY OF EURO AREA EQUITY INDEX*
% 40 35 30 25 20
15
15
10
10
5
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1975
1980
1985
1990
1995
2000
2005
2010
Why Stability Is Unstable

Of course, in each case volatility did mean-revert with a vengeance, and an excellent explanation why comes from Hyman Minskys Financial Instability Hypothesis. Put simply, periods of low volatility sow the seeds of their own destruction, because they encourage complacency and an underpricing of risk. As a period of stability extends, more and more people including policymakers become convinced that it is permanent. This allows valuations of revenue streams to become richer, and financing arrangements to become riskier. The Minsky cycle begins with hedge finance when borrowers expected revenues are sufficient to repay interest and loan principal. It then moves on to speculative finance when revenues cover interest. And it escalates to Ponzi finance when revenues are insufficient to cover interest payments borrowers are entirely dependent on capital gains to meet their obligations. The cycle ends violently with a so-called Minsky moment a small drop in asset prices that tips the marginal Ponzi financed borrower into insolvency and triggers a widespread corrective phase of de-levering and re-pricing. Although Minsky focussed his instability hypothesis on the economy, we can draw very strong parallels in the stock market. An unusually extended period of subdued volatility like now encourages an under-pricing of risk for three reasons:
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Periods of low volatility sow the seeds of their own destruction, because they encourage complacency and an underpricing of risk.
1. Many asset allocation models such as mean-variance optimisers use past volatility as a predictor of future equity market risk, but tend to put a much greater weight on recent history than on distant history. In other words, just as Minsky points out, investors complacently expect the low recently experienced volatility to persist indefinitely and forget the long-term mean reversion. 2. This expectation of low volatility, and hence smaller drawdowns, emboldens equity investors to take on greater leverage. For example, note that NYSE margin debt (as a share of GDP) is approaching an all-time high.
CHART 4
When Volatility Spikes, The Futures Curve Inverts Sharply...

70 60 50 40 30 20 VIX SPOT INDEX 70 60 50 40 30 20
1.3 1.2 1.1 1.0 .9 .8 .7 VIX FUTURES: FAR-MONTH / NEAR-MONTH

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1.3 1.2 1.1 1.0 .9 .8 .7
3. Subdued volatility normally implies an 2008 2009 2010 2011 2012 2013 2014 extended uptrend in stock prices. And in an industry where calendar quarter performance determines your livelihood, fund managers simply cannot afford to be under-invested irrespective of their long-term view of valuations. As more and more long-term bears are forced to capitulate, there is no longer a healthy balance of views to price equity market risk.
The Best Way To Trade Volatility

Does all of this mean investors should buy volatility today? For those wanting insurance for an imminent large spike in risk, the answer is perhaps yes. But for anybody looking for a profitable investment opportunity, its not that simple. Unlike most financial and physical assets, it is impossible to buy or sell the spot volatility indices like the VSTOXX, VDAX or VIX. Instead, investors have to buy derivatives of these indices either futures or options. And unfortunately, this means they will be exposed to the pricing vagaries of these derivative instruments. Specifically, when spot volatility is low everybody expects it to rise. Hence, the futures price is in contango, which is to say more expensive than the spot price. Indeed, the lower the spot, the greater the contango. Such an upward sloping futures curve can make a buy-and-hold volatility strategy prohibitively expensive. For example, if spot volatility stayed unchanged for a month, the one-month future contract would roll down the curve and expire at a loss. Clearly, repeating this strategy month after month would make it a very costly trade.
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In a market panic, investors want immediate protection.
Luckily, there is a much better way to trade volatility. Whenever the futures curve is upwardly sloping (after taking into account bid-offer spreads), investors shouldnt trade volatility per se, but instead trade the steepness of the volatility futures curve. In practical terms this means buying the near month futures contract while simultaneously selling the far month contract.
CHART 5
...The Near-Month Volatility Future Rises More Than The Far-Month

70 60 50 40 VIX SPOT INDEX (LS) VIX FUTURES: NEAR-MONTH / FAR-MONTH (RS) 1.4 1.3 1.2
The theory behind this strategy is that when risk 30 eventually flares up, the futures curve tends to invert sharply go into backwardation as a market in panic puts much higher value on immediate protection (Chart 4 and Chart 5). 20 So the gain on the long near position is much greater than any loss on the short far position. On the other hand, if volatility remains low, the monthly expense is minimised as both the long BCA Research 2014 and short positions roll down the futures curve 2008 2009 2010 2011 2012 2013 2014 by near identical amounts. Therefore, with or without an imminent spike in risk, the strategy leaves open the possibility of large profits while reducing the penalising monthly rollover costs.
1.1
1.0
.9
.8
We are opening this strategy today on the VIX in preference to our current position on the VSTOXX, which we are closing at a small profit.
Is There Too Much Complacency In The Euro Area?

If stability sows the seeds of its own destruction, then the euro area might seem the top candidate for trouble. Over the last few years, euro area policy makers have pushed through painful but essential structural adjustments only when under intense pressure from financial markets. But with a fledgling recovery underway in the economy and a long period of calm in the markets, is the structural progress at risk of stalling in 2014? To answer this question, it is necessary to to define progress. First, it is important to recognise that the aggregate euro area remains relatively balanced. Indeed, as Mario Draghi recently pointed out:2 If you look at the euro area from a distance, you see that the fundamentals in this area are probably the strongest in the world. This is the area that has the lowest budget deficit in the world. Our aggregate public deficit is actually a small surplus. We have a small primary surplus of 0.7%, compared with, I think, a deficit of 6 or 7% deficit in US and 8% in Japan. This is the area with
2
At the ECBs November Press Conference
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The euro areas weak suit, employment, does not appear so bad based on the employment to population rate.
CHART 6
CHART 7
Euro Area Employment To Population Is Better Than Ten Years Ago

EMPLOYMENT TO POPULATION RATE*: U.S. EURO AREA
% 140
The Main Euro Area Imbalances Are Internal

HARMONISED COMPETITIVENESS INDICATORS BASED ON GDP DEFLATORS 140
78
78
76
76
130
Less competitive
130
74 72
74 72
120
120
110
Spain
110
70 68
70 100 68 100
Convergence
66 64
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66 64
90
90
Germany
80
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More competitive
80
2000
2002
2004
2006
2008
2010
2012
2014
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
SOURCE: ECB HARMONISED COMPETITIVENESS INDICATORS BASED ON GDP DEFLATORS RELATIVE TO TOP 20 TRADING PARTNERS; REBASED TO Q1 1999 = 100.
*EMPLOYMENT AS A PERCENTAGE OF POPULATION AGED 15-64. SOURCE: OECD.
the highest current account surplus. And it is also the area with one of the lowest if not the lowest inflation rate. Even the euro areas weak suit, employment, does not appear so bad based on the employment to population rate (Chart 6) which takes into account the euro areas structurally rising participation rate. Therefore, the main euro area imbalances that must be corrected are not external, but internal. Specifically, to justify a common exchange rate and interest rate for euro area nations, the competitiveness gap between Germany and the other major economies must continue to narrow (Chart 7 and Chart 8). Just as important, the fragmentation of the financial system which has created a large disparity in financial conditions across the euro area must continue to reverse.
CHART 8
The Competitiveness Gap Between Germany And The Rest Must Narrow
Spain Italy
150 TOTAL LABOUR COST*
France
150
140
140
130
Productivity plus inflation Germany
130
120
120
110
110
100
100
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2000
2002
2004
2006
2008
2010
2012
2014
* REBASED TO Q2 2000 = 100.
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The euro area needs higher labour cost inflation in Germany, and a converging distribution of bank lending rates.
CHART 9
%
CHART 10
% %
Higher Wage Inflation In Germany

LABOUR COST INFLATION (1-YEAR)*
Financial Fragmentation Is Reversing

BANK LENDING RATE*
7.0
7.0
6.5
6.5
6.0 4 4
6.0 5.5
Germany
3 3
5.5
Spain Italy
5.0 2
5.0 4.5
Italy Spain France
2 4.5 1
4.0 3.5
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Netherlands Germany France

2008 2009 2010 2011 2012 2013 2014 2015
4.0 3.5
0
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2008
2009
2010
2011
2012
2013
2014
*SOURCE: ECB.
* 1-5 YEAR LOANS UP TO A MILLION EUROS; SOURCE: ECB.
Hence, two important indicators will encapsulate the euro areas on-going adjustment through 2014 and beyond: higher labour cost inflation in Germany compared to the other major euro area economies (Chart 9), and a converging distribution of bank lending rates across the euro area (Chart 10). As long as these two indicators confirm that the euro areas internal imbalances are correcting, we will maintain our holding in euro area sovereign bonds and our long Eurostoxx, short S&P 500 equity market pair trade.
Dhaval Joshi, Managing Editor dhaval@bcaresearch.com Francesca Beausang, Associate Editor francesca@bcaresearch.com
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EUrOPEaN iNVESTMENT STraTEGY - WEEKLY rEPOrT JaNUarY 9, 2014
Recommendations
EQUITY POSITIONS
long polish and czech equities (50:50) versus euroPE LONG GREEK EQUITIES VERSUS EURO AREA LONG EURO AREA TELECOMS VERSUS MARKET LONG NETHERLANDS EQUITIES / SHORT U.K. EQUITIES SHORT U.K. CONSUMER SERVICES VERSUS THE MARKET LONG GERMAN CONSUMER SERVICES VERSUS THE MARKET long euro area large caps / short euro area small caps LONG EURO AREA EQUITIES / SHORT U.S. EQUITIES LONG IRISH EQUITIES / SHORT SPANISH EQUITIES LONG GERMAN REAL ESTATE EQUITIES / SHORT EURO AREA EQUITIES LONG GERMAN & ITALIAN EQUITIES / SHORT FRENCH & SPANISH EQUITIES LONG PERSONAL PRODUCTS VERSUS MARKET LONG COMPUTER HARDWARE VERSUS MARKET LONG SWISS EQUITIES / SHORT EURO AREA EQUITIES LONG HEALTHCARE VERSUS MARKET LONG DOW JONES LUXURY INDEX / SHORT EURO STOXX
INITIATION DATE
07-nov-13 17-OCT-13 08-AUG-13 28-MAR-13 7-MAR-13 24-JAN-13 01-Nov-12 20-SEP-12 12-APR-12 5-APR-12 8-MAR-12 22-DEC-11 22-DEC-11 8-SEP-11 14-APR-11 14-APR-11
RETURN (%)
-2.1 0.2 9.7 9.9 -11.1 13.0 -12.2 4.8 -1.7 -9.9 0.9 23.3 -1.4 2.9 37.8 26.1
COMMENTS
20% exposure 25% exposure
Includes currency exposure
INCLUDES ITALY VERSUS SPAIN FROM 01 MAR 2012
BONd ANd INTEREST RATE POSITIONS

LONG OVER 10-YeaR AGGREGATE EURO AREA BOND LONG 5-YEAR GERMAN INFLATION BREAKEVEN LONG 10-YEAR PORTUGUESE BONDS VERSUS EURO AREA OVER 10-YEAR BONDS: LONG U.S. / SHORT GERMANY LONG JUNE 2014 3M STERLING FUTURE LONG 10-YEAR U.K. GILTS / SHORT 10-YEAR SWEDISH BONDS ITALian govt. bonds: 2-10 year flattener LONG SWISS AND ITALIAN 10-YEAR BONDS (50:50 RATIO) LONG U.K. A-RATED CORPORATE BONDS
INITIATION DATE
28-NOV-13 14-NOV-13 24-OCT-13 25-JUL-13 04-juL-13 14-FEB-13 27-SEP-12 9-AUG-12 13-OCT-11
RETURN (%)
0.2 0.0 5.8 0.3 0.4 -0.9 2.8 10.9 12.5
COMMENTS
WEIGHTED BY ISSUE SIZE
Levered 5 Times
cURRENcY ANd OTHER POSITIONS

SHORT TURKISH LIRA / LONG U.S. DOLLAR SHORT MARCH 2014 EURO / DOLLAR CALL OPTION STRIKE 1.45 SHORT SOVEREIGN YIELD SPREAD FUTURES (ITALY VS. GERMANY) LONG VIX (S&P 500) / SHORT VDAX (DAX) (10% EXPOSURE) PROTECTOR PORTFOLIO*
* PLEASE SEE THE AUGUST 4, 2011 REPORT FOR MORE DETAILS.
INITIATION DATE
07-NOV-13 31-OCT-13 3-NOV-12 20-oct-11 4-AUG-11
RETURN (%)
6.5 0.8 2.7 4.4 20.0
COMMENTS
Levered 3 Times
Exposure cut on 27 sep 2012
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Closed Trades
TRADES CLOSED IN 2013/14
euro stoxx volatility futures: long 1-month / short 6-month (10% EXPOSURE) short euro / LONG YEN LONG EUROPEAN BASIC MATERIALS / SHORT EUROPEAN CONSUMER STAPLES LONG EURO AREA BOND / SHORT U.K. GILT (7-10 YEAR) LONG GERMAN SMALL CAPS / SHORT SPANISH SMALL CAPS LONG GERMAN BANKS / SHORT GERMAN RETAILERS LONG EURO AREA BANKS / SHORT FRENCH BANKS sell june 2013 1.375 call option on euro versus dollar SHORT EURO AREA AUTOS (10% EXPOSURE) SHORT EURO AREA BASIC MATERIALS (10% EXPOSURE) Vix (S&P 500): Long Near Term / Short Far Term LONG 10-YEAR IRISH BONDS / SHORT 10-YEAR BELGIAN BONDS NON-FOOD RETAIL SECTOR: LONG U.K. / SHORT GERMANY
INITIATION DATE
16-may-13
CLOSE DATE
09-JAN-14 11-DeC-13 03-OCT-13 05-SEPT-13 20-JUN-13 20-JUN-13 20-JUN-13 11-APR-13 28-mar-13 28-mar-13 28-mar-13 21-FEB-13 24-JAN-13
TOTAL RETURN (%)

0.1 -7.1 0.3 -2.9 0.7 -11.0 1.9 4.4 -0.5 -0.6 0.5 16.2 20.0
LINK TO REPORTS
JAN 9/14 140 stop activated OCT 3/13 SEP 5/13 JUN 20/13 JUN 20/13 JUN 20/13 APR 11/13 MAR 28/13 MAR 28/13 MAR 28/13 FEB 21/13 JAN 24/13
06-jun-13
23-MAY-13 18-OCT-12 31-MAR-11 29-SEP-11 14-JUL-11 21-FEB-13 29-Nov-12 01-Nov-12 26-apr-12 20-OCT-11 21-APR-11
TRADES CLOSED IN 2012

LONG 5-YEAR U.K. GILTS / SHORT 5-YEAR GERMAN BUNDS LONG VIX (S&P 500) (10% EXPOSURE) Short Pound versus U.S. Dollar Short EURO versus U.S. Dollar LONG SEP 2013 EURIBOR FUTURE / SHORT SEP 2012 EURIBOR FUTURE (3 TO 2 RATIO) SHORT BASIC MATERIALS VERSUS MARKET LONG EURO AREA LARGE CAPS / SHORT EURO AREA SMALL CAPS LONG 10-YEAR ITALIAN AND SPANISH BONDS / SHORT 5-YEAR ITALIAN AND SPANISH BONDS LONG 10-YEAR IRISH BONDS / SHORT 10-YEAR ITALIAN BONDS LONG JUNE 2012 SHORT STERLING FUTURE / SHORT EURIBOR FUTURE LONG JUNE 2012 SHORT STERLING FUTURE LONG U.K. EQUITIES / SHORT EURO AREA EQUITIES LONG 10-YEAR U.K. GILTS / SHORT 10-YEAR EURO AREA BONDS LONG DAX AND CAC 40 / SHORT MIB AND IBEX 35 LONG NEAR TERM GREEK GOVERNMENT BONDS LONG U.K. BANKS / SHORT ITALIAN BANKS LONG EURO STOXX / SHORT EURO AREA BANKS LONG FTSE 350 / SHORT U.K. BANKS LONG 10-YEAR SPANISH BONDS / SHORT 10-YEAR ITALIAN BONDS
INITIATION DATE
26-jan-12 26-jan-12 26-apr-12 15-DEC-11 15-dec-11 21-JUN-12 07-APR-11 01-MAR-12 06-OCT-11 21-APR-11 21-APR-11 14-JUL-11 21-JUL-11 17-FEB-11 26-MAY-11 28-APR-11 03-JUN-10 03-JUN-10 14-JUL-11
CLOSE DATE
26-OCT-12 27-SEP-12 20-SEP-12 20-SEP-12 20-SEP-12 06-SEP-12 06-SEP-12 09-AUG-12 12-JUL-12 28-JUN-12 28-JUN-12 22-MAR-12 22-MAR-12 08-MAR-12 08-MAR-12 09-FEB-12 09-FEB-12 09-FEB-12 26-JAN-12
TOTAL RETURN (%)

0.2 -0.9 0.0 0.6 1.2 4.0 12.0 1.4 10.0 -1.0 0.8 4.5 5.8 17.7 -28.2 28.0 34.5 33.6 8.5
LINK TO REPORTS
OCT 18/12 SEP 27/12 SEP 20/12 SEP 20/12 SEP 20/12 SEP 06/12 SEP 06/12 AUG 9/12 OCT 06/11 MAY 05/11 APR 28/11 MAR 22/12 MAR 22/12 MAR 08/12 MAR 08/12 FEB 09/12 FEB 09/12 FEB 09/12 JAN 26/12
editor@bcaresearch.com TEL 514.499.9550 www.bcaresearch.com Copyright 2014 BCA Research Inc. All Rights Reserved. Refer to last page.
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European Asset Performance

CURRENCY PERFORMANCES VERSUS THE DOLLAR*
EURO/USD GBP/USD CHF/USD SWE/USD DEN/USD NOR/USD
LAST
1.36 1.64 1.10 6.52 6.17 5.48
1-WEEK (%)
-1.3 -1.0 -1.8 -1.2 -1.7 -0.9
1-MONTH (%)
-0.8 0.1 -2.0 0.2 -0.5 -0.9
YEAR-TO-DATE (%)
-1.3 -1.0 -1.9 -1.2 -2.4 -1.1
10-YEAR GOVERNMENT BOND YIELD

U.K. GERMANY SWITZERLAND SWEDEN
LAST (%)
2.95 1.89 1.20 2.44
1-WEEK (BPs)
-7 -4 12 -6
1-MONTH (BPs)
3 5 20 9
YEAR-TO-DATE (BPs)
112 57 67 91
EQUITY SECTOR PERFORMANCE**

ENERGY MATERIALS CAPITAL GOODS COMMERCIAL SERVICES & SUPPLIES TRANSPORTATION AUTOMOBILES & COMPONENTS CONSUMER DURABLES & APPAREL HOTELS, RESTAURANTS & LEISURE MEDIA RETAILING FOOD & STAPLE RETAILING HOUSEHOLD & PERSONAL PRODUCTS HEALTH CARE & EQUIPMENT SERVICES PHARMACEUTICALS & BIOTECHNOLOGY BANKS DIVERSIFIED FINANCIALS INSURANCE REAL ESTATE SOFTWARE & SERVICES TECHNOLOGY HARDWARE & EQUIPMENT SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENTS TELECOMMUNICATION UTILITIES
* POSITIVE PERCENTAGE CHANGE DENOTES APPRECIATION VERSUS THE US DOLLAR. ** BASED ON 10 GICS SECTORS; EXPRESSED IN LOCAL CURRENCY TERMS; SOURCE: MSCI INC. (SEE LAST PAGE).
1-WEEK (%)
0.1 -1.3 -0.5 -0.3 1.7 -0.4 -2.2 0.3 -0.1 1.4 -0.5 -1.3 0.3 0.8 2.9 2.6 0.2 -0.1 -0.9 0.4 -3.4 0.5 -0.7
1-MONTH (%)
3.0 1.8 3.1 3.0 6.6 3.5 -0.2 6.2 4.3 4.5 1.0 0.5 3.0 3.7 6.4 7.3 5.2 0.4 4.7 -0.5 0.8 3.5 2.1
YEAR-TO-DATE (%)
0.1 -1.3 -0.5 -0.3 1.7 -0.4 -2.2 0.3 -0.1 1.4 -0.5 -1.3 0.3 0.8 2.9 2.6 0.2 -0.1 -0.9 0.4 -3.4 0.5 -0.7
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European Asset Performance

COUNTRY EQUITY PERFORMANCE - LARGE CAP*
U.K. SWITZERLAND FRANCE GERMANY NETHERLANDS AUSTRIA ITALY SPAIN PORTUGAL IRELAND BELGIUM FINLAND DENMARK NORWAY SWEDEN
1-WEEK CHANGE (%)

-0.1 1.4 -0.8 -0.5 -0.1 3.9 2.7 2.5 2.1 4.6 -0.5 0.5 3.8 -0.1 -0.4
1-MONTH CHANGE (%)

2.5 3.2 3.3 3.4 3.8 4.3 6.3 6.8 2.8 8.9 3.3 1.8 6.7 1.5 3.4
YEAR-TO-DATE CHANGE (%)

-0.1 1.4 -0.8 -0.5 -0.1 3.9 2.7 2.5 2.1 4.6 -0.5 0.5 3.8 -0.1 -0.4
COUNTRY EQUITY PERFORMANCE - SMALL CAP*

U.K. SWITZERLAND FRANCE GERMANY NETHERLANDS AUSTRIA ITALY SPAIN PORTUGAL IRELAND BELGIUM FINLAND DENMARK NORWAY SWEDEN
* EXPRESSED IN LOCAL CURRENCY TERMS; SOURCE: MSCI INC. (SEE LAST PAGE).
1-WEEK CHANGE (%)

0.4 1.9 1.6 1.8 1.5 3.4 3.2 4.6 8.2 0.6 0.0 -0.2 5.4 -0.6 0.8
1-MONTH CHANGE (%)

5.5 5.8 3.1 4.0 5.1 3.8 6.9 10.1 14.0 6.2 3.4 3.1 9.7 3.2 4.2
YEAR-TO-DATE CHANGE (%)

0.4 1.9 1.6 1.8 1.5 3.4 3.2 4.6 8.2 0.6 0.0 -0.2 5.4 -0.6 0.8
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Indicators To Watch - Bond Yields

% 22 20 18 16 14 12 10 8 6 4 2 0
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% 2-YEAR GOVERNMENT BOND YIELD: GERMANY PORTUGAL IRELAND 22 20 18 16 14 12 10 8 6 4 2 0

JAN JUL JAN JUL JAN
% 8 7 6 5 4 3 2 1 0 2-YEAR GOVERNMENT BOND YIELD: GERMANY BELGIUM SPAIN ITALY
% 8 7 6 5 4 3 2 1 0
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% 2-YEAR GOVERNMENT BOND YIELD: GERMANY FRANCE NETHERLANDS
% 2-YEAR GOVERNMENT BOND YIELD: GERMANY FINLAND (3-YEAR) AUSTRIA
2.5
2.5
2.5
2.5
2.0
2.0
2.0
2.0
1.5
1.5
1.5
1.5
1.0
1.0
1.0
1.0
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Indicators To Watch - Interest Rate Expectations

% 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 0 INTEREST RATE EXPECTED IN JUNE 2014*: U.S. U.K. EURO AREA SWITZERLAND % 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 0 % 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 0 INTEREST RATE EXPECTED IN DECEMBER 2014*: U.S. U.K. EURO AREA SWITZERLAND % 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 0
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JUL OCT JAN APR JUL OCT JAN APR JUL OCT JAN APR
2011
2012
2013
2011
2012
2013
* BASED ON JUNE 2014 EURODOLLAR, SHORT STERLING, EURIBOR AND EUROSWISS FUTURES CONTRACTS. SOURCE: BLOOMBERG.
* BASED ON DECEMBER 2014 EURODOLLAR, SHORT STERLING, EURIBOR AND EUROSWISS FUTURES CONTRACTS. SOURCE: BLOOMBERG.
% 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 0 INTEREST RATE EXPECTED IN JUNE 2015*: U.S. U.K. EURO AREA SWITZERLAND
% 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 0
% 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 0 INTEREST RATE EXPECTED IN DECEMBER 2015*: U.S. U.K. EURO AREA SWITZERLAND
% 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 .5 0
BCA Research 2014
BCA Research 2014
2011
2012
2013
2011
2012
2013
* BASED ON JUNE 2015 EURODOLLAR, SHORT STERLING, EURIBOR AND EUROSWISS FUTURES CONTRACTS. SOURCE: BLOOMBERG.
* BASED ON DECEMBER 2015 EURODOLLAR, SHORT STERLING, EURIBOR AND EUROSWISS FUTURES CONTRACTS. SOURCE: BLOOMBERG.
13 247886
BCA RESEARcH INc.
Archive Of Previous Reports

Please click on the links below to view reports: 1. 2014: Now Here Comes The Hard Part... - December 19, 2013 2. Three Surprising Facts From Europe - December 12, 2013 3. U.K. Recovery: Not What You Think - December 5, 2013 4. Dont Ignore Doctor Copper - November 28, 2013 5. 10 Important Charts: The Update - November 21, 2013 6. The Return Of The D-Word - November 14, 2013 7. Look East - November 7, 2013 8. Is The Euros Strength Hurting? - October 31, 2013 9. Credit And Growth, Chicken And Egg - October 24, 2013 10. The Unloved Bargain - October 17, 2013 11. The Price Is Wrong - October 10, 2013 12. The Signal And The Political Noise - October 3, 2013 13. The 10-Year Profit Warning - September 19, 2013 14. Defragmentation - September 12, 2013 15. Will The Grinch Steal Christmas? - September 5, 2013 16. Taper Risk: 3 Surprising Results - August 29, 2013 17. 10 Charts To Watch Closely - August 15, 2013 18. Where Are All The Bargains? - August 8, 2013 19. The Ugly Contest - August 1, 2013 20. German Assets To Sell... And To Buy - July 25, 2013 21. Reassessing Europes Solvency - July 18, 2013 22. Solving The U.K. Productivity Puzzle - July 11, 2013 23. Avoiding The Landmines - July 4, 2013 24. The 2013 Oddity - June 27, 2013 25. Meeting With A Devils Advocate - June 20, 2013 26. Embrace Deflation...Its The Norm - June 13, 2013 27. The Big Battle: Credit Versus Money - June 6, 2013 28. Europe And The Three Tail-Risks - May 30, 2013 29. Are The Prices Right?, May 23, 2013 30. Follow The Money Impulse - May 16, 2013
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EUROPEAN INVESTMENT STRATEGY WEEKLY REPORT

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editor@bcaresearch.com TEL 514.499.9550

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editor@bcaresearch.com TEL 514.499.9550

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