Week of November 22, 2015

“The U.S. economy seems still to be chugging along with modestly above-

trend growth. We’ve certainly seen continued improvement in the labor

market, but the environment for inflation is still one where there is still

a lot of uncertainty.”

Daniel Tarullo Federal Reserve Governor

MARKET OVERVIEW This past week, stock markets showed a general positive upward trend as investors regained confidence following the Paris attacks. The Dow Jones Industrial Average jumped 91.06 points, or 0.5%, to reach 17823.81 on Friday. It rose by a total of 3.4% for the week. Meanwhile, the S&P 500 added 7.93 points, or 0.4%, to 2089.17, which is its highest gain in nearly a year, buoyed by the growth in health-care and technology sectors. The NASDAQ composite rose 31.28 points, or 0.6%, to 5104.92. While there is some concern over the effects of an impending Fed rate hike, there is also strong belief that the hikes will be gradual and slow, which may explain why the markets are also edging upward slowly. Despite a small recovery in oil prices, energy stocks have continued to drop in the face of negative future outlook. US-traded oil was priced at $41.90 a barrel on Friday, with the broad selloff in general commodities severely affecting the energy companies. Over the week, Europe and Asia saw a mild improvement in their markets, with the Stoxx Europe 600 up 3.3%, the Nikkei Stock Average up 1.4%, and the Shanghai Composite Index up 1.4%. In the foreign exchange market, the euro fell against the dollar to $1.07395.

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US Treasury Yield Curve

Year Month

Week Present

1m 3m 6m 1y 2y 3y 5y 10y 30y

Nov-16 0.05 0.15 0.33 0.5 0.88 1.18 1.66 2.27 3.07

Nov-20 0.05 0.12 0.31 0.49 0.93 1.23 1.7 2.26 3.02

MACROECONOMIC OVERVIEW While the economic outlook in the US is improving, existing home sales fell 3.4% in October to an approximate 5.36M annualized. Some of the main barriers include the rapidly rising housing prices and the limited supply of available properties. The median housing price rose 5.8% from October 2014 to $219,600. However, there are strong headwinds, such as steady employment growth and low borrowing costs, which have created a strong platform for future growth in the real estate market. The labor market has been gradually improving, with a payroll surge of 271,000 in October, boosting the 2015 average to 206,000. This continuing increase in wages is expected to bolster the housing market and prepare the economy for a Fed rate hike. Overall, the domestic outlook for US has been quite upbeat. One concern is that the strong dollar has negatively impacted exports as US goods become more expensive for foreign countries. In terms of core inflation, the Federal Reserve Governor, Lael Brainard, remarked that it is still below the target range, which is a major reason why the Fed is still apprehensive about raising interest rates. While most economists believe that the Fed will most certainly hike rates in the December meeting, there is still anxiety over the actual economic impact that will follow the changes in monetary policy.

FIXED INCOME OVERVIEW The US Treasury Department announced on Friday that it is conducting a comprehensive review of the government bond market to better monitor the $12.8 trillion market. Mr. Weiss suggests that they will be working with regulators to implement necessary changes to ensure that the Treasurys remain “the deepest and most liquid securities market in the world.” On Friday, the US two-year government debt yield rose to its highest peak in five years, indicating investors’ expectations for the Fed to increase rates in December. The yield increased from 0.858% last week to 0.912% on late Friday. Since late October, investors have been shifting away from short-term US government debt towards long-term bonds. In comparison, the benchmark 10-year note is at 2.264%. The yields on long-term Treasury bonds are mostly influenced by inflation, and is expected to remain generally flat. One concern with the Fed rate hike is that it could impede demand for the long-term Treasury debt since inflation is already quite low, as are commodity prices. The 10-year Treasury note has a yield premium of 1.35 percentage points over the two-year note. This yield gap has continued to shrink over the past three tightening cycles, which suggests a bearish outlook for US economic growth.

TRANSACTION HIGHLIGHTS Marriott to Buy Starwood with $12.2 Billion Marriott International Inc. announced on Monday that it would acquire Starwood Hotels & Resorts Worldwide Inc. , which owns the Westin, Sheraton, and W hotel chains, for $12.2 billion. The deal would create the world’s largest hotel company, which will operate more than 5,500 hotels with 1.1 million rooms worldwide. It is the largest takeover in the hotel sector since Blackstone bought out Hilton Hotels for $26 billion in 2007. Starwood’s share price has been increasing on expectation of a deal since April, when the company said it was undertaking a strategic review. Up till recently, Starwood has been reported to be in advanced discussions about a deal with Hyatt. InterContinental Hotels and some Chinese leisure groups have also expressed interest in acquiring Starwood. Marriott would acquire Starwood for $11.9 billion in stock and $340 million in cash, which is equivalent to $2 a share in cash and 0.92 of its own stock. The agreement represented a 6 percent premium of the average of where Starwood’s stock had traded in the 20 days before Monday. Starwood’s shares fell 3.6 percent and Marriott’s shares gained 1.4 percent on Monday as investors were disappointed by the premium that is lower than expected given the competitive bid process. The consolidation can improve back-office and operational efficiencies and is expected to deliver $200 annual cost savings within two years of the deal closing. Economies of scale is beneficial in the hotel sector because higher volumes on the reservation system can drive business to less-occupied properties and improve both occupancy and rate, which in turn helps cash flow and operating margin. Lazard and Citigroup provided financial advice to Starwood, while Deutsche Bank advised Marriott Pfizer and Allergan Said to Agree on $150 Billion Merger Pfizer Inc. is in advanced talks to buy Allergan, a rival drug maker. The price being discussed is $370 to $380 per share, which would value Allergan at as high as $150 million, making this the largest transaction announced so far in 2015 in any industry. $380 per share would represent a premium of more than 22 percent over Allergan’s closing price on Wednesday. The companies have agreed that Pfizer CEO Ian Read will be CEO of the combined company, while Allergan CEO Brent Saunders will have another very senior role. The companies may announce an agreement as soon as Monday. Allergan’s market value of $119 billion would allow Pfizer to transfer its headquarters to Europe. When an American company buys a foreign target, and if certain conditions are met, the buyer can then change the country it calls its legal home. Such a case is called corporate inversion. As Allergan’s legal domicile is in Dublin, the deal would help Pfizer move its tax base to Europe and escape U.S. tax bills on more than $128 billion profit earned overseas. Pfizer’s tax rate last year was 26.5% while that of Allergan was only 4.8%.

However, the U.S. Treasury Department’s announcement on Thursday to crack down tax inversion deals may delay the final agreement and terms of the transaction. The Treasury’s plans aim to reduce the benefits of inversions by limiting the ability of an inverted company to transfer its foreign operations to the new foreign parent without paying U.S. taxes, and the actions would apply to inversions completed on or after September 22, 2014. The transaction would create a company with annual sales of almost $53 billion. It would also fit Pfizer’s long-contemplated split of the company, which one business would focus on soon-to-be generic drugs, while the other would develop and market new products. Guggenheim and Goldman Sachs are advising Pfizer while J.P. Morgan and Morgan Stanley are advising Allergan.

DATA & INDICATORS

UPCOMING RELEASES

Date Time (ET) Statistic For Market Expects Prior

16-Nov 8:30 AM Empire Manufacturing Nov -6 -11.4

17-Nov 8:30 AM CPI Oct 0.20% -0.20%

17-Nov 8:30 AM Core CPI Oct 0.20% 0.20%

17-Nov 9:15 AM Industrial Production Oct 0.10% -0.20%

17-Nov 9:15 AM Capacity Utilization Oct 77.50% 77.50%

17-Nov 10:00 AM NAHB Housing Market Index Nov 64.5 64

17-Nov 4:00 PM Net Long-Term TIC Flows Sep NA $20.4B

18-Nov 7:00 AM MBA Mortgage Index 14-Nov NA -1.30%

18-Nov 8:30 AM Housing Starts Oct 1173K 1206K

18-Nov 8:30 AM Building Permits Oct 1137K 1103K

18-Nov 10:30 AM Crude Inventories 14-Nov NA 4.22M

18-Nov 2:00 PM FOMC Minutes 28-Oct - -

19-Nov 8:30 AM Initial Claims 14-Nov 272K 276K

19-Nov 8:30 AM Continuing Claims 7-Nov 2164K 2174K

19-Nov 8:30 AM Philadelphia Fed Nov -1 -4.5

19-Nov 10:00 AM Philadelphia Fed Nov NA -4.5

19-Nov 10:00 AM Leading Indicators Oct 0.60% -0.20%

19-Nov 10:30 AM Natural Gas Inventories 14-Nov NA 49 bcf

Date Time (ET) Statistic For Actual Market Expects Prior

23-Nov 10:00 AM Existing Home Sales Oct 5.36M 5.50M 5.55M

24-Nov 8:30 AM GDP - Second Estimate Q3 - 2.00% 1.50%

24-Nov 8:30 AM GDP Deflator - Second Estimate Q3 - 1.20% 1.30%

24-Nov 9:00 AM Case-Shiller 20-city Index Sep - 5.20% 5.10%

24-Nov 10:00 AM Consumer Confidence Nov - 99.6 97.6

25-Nov 7:00 AM MBA Mortgage Index 21-Nov - NA 6.20%

25-Nov 8:30 AM Initial Claims 21-Nov - 272K 271K

25-Nov 8:30 AM Continuing Claims 14-Nov - 2164K 2175K

25-Nov 8:30 AM Personal Income Oct - 0.40% -0.10%

25-Nov 8:30 AM Personal Spending Oct - 0.30% 0.10%

25-Nov 8:30 AM PCE Prices - Core Oct - 0.20% 0.10%

25-Nov 8:30 AM Durable Orders Oct - 1.50% -1.20%

25-Nov 8:30 AM Durable Goods -ex transportationOct - 0.50% -0.60%

25-Nov 9:00 AM FHFA Housing Price Index Sep - NA 0.30%

25-Nov 10:00 AM Michigan Sentiment - Final Nov - 93.1 93.1

25-Nov 10:00 AM New Home Sales Oct - 504K 468K

25-Nov 10:30 AM Crude Inventories 21-Nov - NA 0.252M

25-Nov 12:00 PM Natural Gas Inventories 21-Nov - NA 15 bcf

OPINIONS “Consumers are definitely more conservative financially than they were 10 years ago. They’ve seen that house prices can be volatile.”

Doug Duncan Chief Economist

Fannie Mae “Emerging markets are under pressure as U.S. raising interest rates in December is a done deal. The dollar will get stronger while China’s economic fundamentals haven’t shown any signs of improvement.”

Kenix Lai Foreign Exchange Analyst

Bank of East Asia

"The negative impact from lower energy prices shouldn't weigh on earnings growth next year as oil prices are set to stabilize. Since the downside in earnings came from lower oil prices and cheaper energy, this is not likely to happen again, unless you think crude is going to $25 a barrel.”

Paul Choi Equity Trading Strategist

Citibank “A strong dollar is a burden for the price development of commodities.”

Christian Stocker Strategist

UniCredit Bank AG