Week of December 6, 2015

“The economy has come a long way toward the FOMC’s objectives of maximum employment and price

stability,”

Janet Yellen Chair of the Federal Reserve

MARKET OVERVIEW Stocks posted modest gains for the week, after a strong rally on Friday helped recovered some sharp downturns over the past few days. The Dow Jones Industrial Average gained 49 points to end the week at 17,848, up 0.3%, while the S&P 500 gained 2 points to end at 2,092, up 0.1%. This week’s movement was primarily driven by the economic data released and the European Central Bank policy announcement. Stocks rallied on Tuesday as the manufacturing sector had contracted in November, which led to speculation that the Federal Reserve may delay its decision to raise interest rate. The European Central Bank announced on Thursday that it would extend its quantitative easing program through March 2017, but it disappointed the market by holding the monthly bond buying amount constant at 60 billion euros, rather than increasing it as expected. It led to the sharpest sell-off in the stock market since the end of September. However, the solid jobs report released on Friday suggested that the strong job growth is supporting further economic growth, and stock rallied to the news. With the strong payrolls report, the market now believes that the Federal Reserve is very likely to raise rate in the upcoming FOMC meeting on December 16.

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US Treasury Yield Curve

Year Month

Week Present

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

Dec-02 0.19 0.21 0.42 0.52 0.94 1.23 1.63 2.18 2.91

Dec-09 0.19 0.26 0.53 0.72 0.93 1.22 1.64 2.22 2.97

MACROECONOMIC OVERVIEW The strong November employment report further indicates that the U.S. labor market is continuously improving, which set the Federal Reserve on track to tighten the monetary policy at its December meeting. The rate hike is well expected by the market, with market-based odds of a hike approaching 90%. Nonfarm payrolls grew 211,000 in November, and revisions added a total of 35,000 jobs to the September and October numbers. The unemployment rate stayed flat at 5.0%. Jobless claims remained near 40-year lows as the four-week moving average decreased to 269,250. Average hourly earnings rose 2.3% from a year ago. On the other hand, U.S. manufacturing sector contracted for the first time since 2012. The Institute for Supply Management’s gauge of U.S. manufacturing activity has fallen from 50.1 in October to 48.6 in November, posting the weakest reading since 2009. Nevertheless, the U.S. service sector has grown monthly for almost six years. As for overseas market, the International Monetary Fund decided to include China’s renminbi as an international reserve currency starting from October 2016. Currently, only the U.S. dollar, British pound sterling, euro and Japanese are yen are included as international reserve currencies. The move reflects the growing role of yen in global markets and also recognized reform efforts made by the government. China’s Market manufacturing PMI has shrank even more to 48.6 in November, which was the lowest in three years, indicating a week demand for China’s products.

FIXED INCOME OVERVIEW The European Central Bank announced on Thursday that it would cut its deposit rate by only 10 basis points, from -0.2% to -0.3%, and left the size of quantitative easing program unchanged. As a result, the markets reacted negatively and the yield of the benchmark 10-year German Bund rose by 22 basis points. Treasury prices fell as U.S. yields followed European yields higher, moving by over two standard deviations from its intraday norm in one day. The market recovered a little by Friday as the job report was better than expected, which made interest rate hike in December seem more likely. Bond prices ended lower on the week, pushing the U.S. 10-year Treasury bond yield higher to end at 2.27%. As for corporate bonds, the primary market had issued $30 billion of bonds. The largest deal of the week was brought by McDonald’s, which issued a $6 billion supersized deal. There was a strong demand and the deal was priced 30 basis points inside of initial price talk. Global bond markets sold off this week as markets were largely underwhelmed by the ECB’s decision. Euro rose sharply on Thursday, and euro-linked currencies like the Hungarian forint and Romanian leu gained against the dollar.

TRANSACTION HIGHLIGHTS Yahoo weighs the sale of its core business Yahoo Inc. (YHOO.O) is contemplating a sale of its core Internet business and its stake in Chinese e-commerce firm Alibaba Group Holding Ltd (BABA.N). The board is weighing its options and it is unclear where the direction of the company is going in the future under Marissa Mayer’s leadership. Although Yahoo has been one of the biggest names in the Internet business, it has introduced no major innovative products or services recently. Although Marissa Mayer, Yahoo’s chief executive, is widely accredited for stabilizing the company during the messy times, the sales talks of its core business and its stake in Alibaba will speak to her managerial abilities. Yahoo's core business consists of the search engine, ads on its popular news and sports sites, email service and products like Tumblr and Polyvore. As hundreds of millions of people still use Yahoo, its core business could have potential value to prospective private equity, media and Internet firms. According to CNBC, the estimated value could fall anywhere between $2 billion and $8 billion, based on analysts’ estimates. On Monday, the Chief Financial Officer of Verizon Communications Inc (VZ.N) said that it could look at buying Yahoo's core business, but made no comment on the price. The sale of the company's core Internet business would effectively mean that Yahoo would lose its key role as a tech giant, and that Mayer’s efforts to revive the company by focusing on mobile and social media ads have gone widely unsuccessful. Yahoo did not make an immediate comment. Its shares rose more than 2 percent in after-hours trading on Tuesday. Alibaba's shares rose 1.3 percent as well. Yahoo owns 35 percent of Alibaba, worth about $24 billion at current exchange rates. Anthem and Cigna shareholders vote on merger After going through numerous class-action lawsuits, the shareholder of Anthem (NYSE: ANTM) and Cigna (NYSE: CI) voted on Thursday to approve of the merger of the two companies, bringing the creation of the nation’s largest health insurer one step closer. Previously announced in July, Blue Cross-Blue Shield coverage provider Anthem offered to pay $103.40 and some of its stock for each Cigna share. This $54 Billion deal, if completed by the second half of 2016 as expected, would create a company that covers more than 50 million people. Now it faces one more hurdle: intense scrutiny among federal and state regulators. In the meantime, the insurer industry sees a possibility of a consolidation among the big players. The deal announced between Aetna and Humana, along with the merger between Anthem and Cigna might combine the five largest U.S. insurers into three.

Upcoming Releases

Date Time (ET) Statistic For Market Expects Prior

7-Dec 3:00 PM Consumer Credit Oct $18.6B $28.5B

8-Dec 10:00 AM JOLTS - Job Openings Oct NA 5.53M

9-Dec 7:00 AM MBA Mortgage Index 5-Dec NA -0.20%

9-Dec 10:00 AM Wholesale Inventories Oct 0.10% 0.50%

9-Dec 10:30 AM Crude Inventories 5-Dec NA 1.177M

10-Dec 8:30 AM Initial Claims 5-Dec 269K 269K

10-Dec 8:30 AM Continuing Claims 5-Dec 2167K 2161K

10-Dec 8:30 AM Export Prices ex-ag. Nov NA -0.30%

10-Dec 8:30 AM Import Prices ex-oil Nov NA -0.30%

10-Dec 10:30 AM Natural Gas Inventories 5-Dec NA -53 bcf

10-Dec 2:00 PM Treasury Budget Nov NA -$56.8B

11-Dec 8:30 AM Core PPI Nov 0.10% -0.30%

11-Dec 8:30 AM PPI Nov -0.10% -0.40%

11-Dec 8:30 AM Retail Sales Nov 0.30% 0.10%

11-Dec 8:30 AM Retail Sales ex-auto Nov 0.30% 0.20%

11-Dec 10:00 AM Business Inventories Oct 0.10% 0.30%

11-Dec 10:00 AM Mich Sentiment Dec 91.6 93.1

OPINIONS “The early stages of the Fed tightening cycle should favor non-US equities as well as a market driven more by value than by quality or growth.”

Jon Scoffin Co-head of Research

Barclays “There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate…it was not a package meant to address market expectations…the risk of deflation in the monetary area is firmly off the table.”

Mario Draghi President

European Central Bank “The more the market discounts that Draghi will move the more that it is likely the ECB will move at an accelerated pace and prove the market wrong.”

Ray Dalio Chief Executive Officer

Bridgewater Associates “With no signs of non-Opec producers such as the US and Russia cutting back, at least not voluntarily, the near-term outlook for oil remains very challenging indeed.”

Ole Hansen Head of Commodities Strategy

Saxo Bank